-----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, QA8stt93lgtoAT5NS2f5I8y9Bm7oZqF7aqV4x9WIIlDWoTbw79OAJ1ZWU7zZwBuu BOdhR6DHMcLAN5rT0HIUag== 0000950153-01-500195.txt : 20010409 0000950153-01-500195.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950153-01-500195 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADYNE COMSTREAM INC CENTRAL INDEX KEY: 0000718573 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 112569467 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11685 FILM NUMBER: 1591003 BUSINESS ADDRESS: STREET 1: 3138 E ELWOOD ST CITY: PHOENIX STATE: AZ ZIP: 85034 BUSINESS PHONE: 6024379620 MAIL ADDRESS: STREET 1: 3138 EAST ELWOOD STREET CITY: PHOENIX STATE: AZ ZIP: 85034 FORMER COMPANY: FORMER CONFORMED NAME: RADYNE CORP DATE OF NAME CHANGE: 19920703 10-K 1 p64754e10-k.txt 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED COMMISSION FILE DECEMBER 31, 2000 NUMBER 0-11685 RADYNE COMSTREAM INC. (Exact name of Registrant as specified in its charter) DELAWARE 11-2569467 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3138 EAST ELWOOD STREET, PHOENIX, ARIZONA 85034 (Address of Principal Executive Offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (602) 437-9620 SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK, $.001 PAR VALUE COMMON STOCK PURCHASE WARRANTS Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates (deemed by the registrant to be persons, along with members of their families, known to the registrant to beneficially own, exclusive of shares subject to options, less than 5% of the outstanding shares of the registrant's common stock) of the registrant as of February 22, 2000 was approximately $36,500,000 As of December 31, 2000, there were 14,822,820 shares of the registrant's common stock outstanding. 1 2 PART I DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K, includes statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act") and Radyne ComStream claims the protection of the safe-harbor for forward-looking statements contained in the Reform Act. These forward-looking statements are often characterized by the terms "may," "believes," "projects," "expects," or "anticipates," and do not reflect historical facts. Specific forward-looking statements contained in this Annual Report on Form 10-K in the Notes to Consolidated Financial Statements and under the captions "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" include, but are not limited to: (i) continued growth in demand for satellite system ground-based equipment and satellite-delivered communications services, (ii) continued global deregulation and privatization of telecommunications carriers, (iii) continued growth in worldwide demand for Internet over Satellite connectivity and communications serves in general, (iv) an increase in total foreign sales, (v) an increase in market share and (vi) sufficient cash reserves and cash from operations to fund planned future operations and capital requirements through the end of 2001. Forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of Radyne ComStream to be materially different from those expressed or implied by such forward-looking statements. Factors that could affect Radyne ComStream's results and cause them to materially differ from those contained in the forward-looking statements include: - loss of, and failure to replace, any significant customers; - timing and success of new product introductions; - product developments, introductions and pricing of competitors; - timing of substantial customer orders; - availability of qualified personnel; - the impact of local political and economic conditions and foreign exchange fluctuations on international sales; - performance of suppliers and subcontractors; - market demand and industry and general economic or business conditions; - availability, cost and terms of capital; - the "Risk Factors" set forth in Exhibit 99.1, which is attached hereto and incorporated by reference into this Annual Report on Form 10-K; and - Other factors that Radyne ComStream is currently unable to identify or quantify, but may exist in the future. In addition, the foregoing factors may affect generally Radyne ComStream's business, results of operations and financial position. Forward-looking statements speak only as of the date the statement was made. Radyne ComStream does not undertake and specifically declines any obligation to update any forward-looking statements. ITEM 1. BUSINESS OVERVIEW We design, manufacture, install and sell equipment used in the ground-based portion of satellite communication systems to receive, and transmit data, video, audio and Internet over satellite communications links. 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 2 3 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 communication 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. - One of the world's largest private satellite broadcast network -- Reuters. - International Cablecasting Technologies -- utilizing 40,000 digital audio broadcast receivers. - First major Internet over Satellite network with 300 terminals deployed in the Dominican Republic for a distance learning application. - Major private audio network in Mexico and Central America for a department store chain which transmits music, advertising and product announcements to all its store locations. - Supply of major control room equipment plus engineering, installation and training at new customer service center for PanAmSat Corporation. - Broadband satellite modems and frequency converters to provide telephone and Internet connectivity for VSNL, the largest international telecommunications provider in India. - High-Speed DVB Modulators for Hughes Direct to PC network. - First Internet broadcast network in the Republic of Myanmar. - Major expansion of US Government Satellite Communications Network. 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 3 4 under-served 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 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. A Merrill Lynch Study "Global Satellite Marketplace 2000" estimated the global market for satellite ground equipment and integration services was $30 billion in 2000, of which our management estimates $1 billion was for the type of equipment and systems 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 Merrill Lynch report, total revenues for providers of satellite communications equipment and services will grow at a compound rate of 20% to almost $115 Billion by 2007. We believe that future growth in satellite communications services will be driven principally by the following major factors: - Continued global deregulation and privatization of government-monopolized telecommunications carriers, which will stimulate growth in the communications industry in general. - Growing worldwide demand for Internet over Satellite connectivity. Approximately 80% of the World Wide Web sites reside in North America and high-speed access to the web will continue to be a major issue over the next 3-5 years. - Growing worldwide demand for communications services in general, including data communications services, high-speed digital television 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. - Lack of global terrestrial infrastructure to support increased demand for Broadband and Internet applications and services. 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 4 5 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 recent technological developments such as bandwidth on demand, digital television compression technology, and signal processing methods will continue to stimulate 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 of 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 5 6 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. 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. 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. DTT Consulting estimates there were 1,763 satellite ISP links in operation in December 2000, up from 222 in January 1998. Satellite capacity is being used for ISP links primarily where fiber cable is prohibitively expensive or non-existent, such is the case in many underdeveloped or emerging countries. 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 more than one in ten ISPs worldwide use satellite capacity to link with an Internet server for point-to-point traffic. 6 7 INTERNET SERVICE PROVIDERS CONNECTIONS BY REGION AS OF DECEMBER 2000
% ISPS GEOGRAPHIC AREA NO. OF ISPS NO. SATELLITE LINKS CONNECTED VIA SATCOMS* --------------- ----------- ------------------- --------------------- Western Europe ........ 3,857 39 1.0% CEE and CIS** ......... 1,404 265 19.0% Africa ................ 308 145 47.0% Latin America ......... 1,173 777 66.0% Middle East ........... 223 97 43.0% Asia .................. 1,766 126 7.0% Australasia & Oceania . 969 253 26.0% North America ......... 5,800 61 1.0% ------ ------ ---- Total ........ 15,500 1,763 11.3% ====== ====== ====
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. 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 renewed our strategic relationship with Harmonic Inc. (formerly DiviCom Inc.), a major producer of compressed digital television systems. Under this arrangement, our strategic partner will utilize our products in cable 7 8 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 and increase our profitability. PRODUCTS AND SERVICES We offer the following product families: - Satellite modems and earth stations. - Internet via Satellite terminal equipment - Frequency converters. - Data, audio, and video broadcast equipment. - Digital video broadcast (DVB) and high-speed modems. - Cable and microwave modems. We offer the following services: - Design of satellite ground based communication systems. - Integration and installation of turnkey communication systems. 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. We've recently introduced a major addition to our satellite modem line, the Turbo forward error correction codec. The turbo product provides customers with greatly improved satellite and bandwidth performance, which directly translates to space segment cost savings. This product also affords our installed base of customers (in excess of 10,000 modems) the opportunity to improve their performance at a significant operational cost saving. 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. 8 9 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 equipment connected to the modems and earth stations, collection of network status and alarm information, remote channel monitoring, and dial-up control. 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 stories or image files of weather information and database updates from a central location to many remote outlets. Recently the Ministry of Radio & Television in the Republic of Myanmar has also adopted our IntelliCast Digital Data Broadcast Receiver as the standard for their distance learning network. 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. TWO-WAY INTERNET SATELLITE TERMINAL EQUIPMENT Our IPSat Internet Satellite Terminal is designed as a fully integrated modular system capable of receive only, transmit only or full duplex satellite connectivity to the Internet anywhere in the world. Utilizing the IPSat's modularity and integrated routing capabilities end users can take advantage of hybrid configurations in situations where terrestrial return resources such as telephone, cable or other "upstream" technologies are available to be used in conjunction with satellite broadcasting. Where such return resources are not available, or too expensive, the IPSat system can support the return channel over satellite. The IPSat can offer the most flexible, cost efficient performance for high-speed satellite downloads from the World Wide Web for ISP's, Corporations, Educational Institutions and Government Agencies. 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 9 10 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, 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 and microwave 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 $9.3 million for the year ended December 31, 2000, $9.1 million for the year ended December 31, 1999, and $4.3 million for the year ended December 31, 1998. A number of new products were either launched or reached an advanced stage of development during these periods. We intend to use a significant portion of the proceeds obtained through the February 2000 public offering of our common stock to fund our research into Internet-related products for Internet over Satellite links, and other new telecommunications products. We also plan to target our research and development activities at digital audio, video, and data products. However, there is no assurance that we will continue to have access to sufficient capital to fund the necessary research and development or that such efforts, even if adequately funded, will prove successful. 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 (www.RadyneComStream.com) (reference to our Web site is intended to be an inactive textual reference). 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. CUSTOMERS 10 11 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 year ended December 31, 2000 one customer represented 12.4% of our net sales. During the years ended December 31, 1999 and 1998, no single customer represented more than 10% of our net sales. Because of the nature of our business, we anticipate that any 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 principal foreign markets for the periods indicated consisted of the following percentages of total sales.
REGION YEAR ENDED YEAR ENDED YEAR ENDED ------ 12-31-00 12-31-99 12-31-98 ---------- ---------- ---------- Asia 25% 25% 7% Africa/Middle East 2% 4% 8% Latin America 3% 4% 9% Europe 13% 21% 23% Canada 1% 2% 3% -- -- -- Total Foreign Sales 44% 56% 50%
The one customer who accounted for 12.4% of our total sales was classified as a domestic customer. However, the products purchased by the customer were used to complete Internet over satellite circuits from the U.S. to foreign (principally Latin American) countries. Likewise, we believe that as much as 60% of our domestic sales are ultimately destined for foreign use. We believe that foreign sales will continue to make up the bulk of our total sales 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 Comtech EFData 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:
DIGITAL VIDEO SATELLITE MODEMS & BROADCAST & GOVERNMENT & DATA, AUDIO & COMPETITOR EARTH STATIONS HIGH-SPEED MODEMS MILITARY MODEMS VIDEO BROADCAST - ---------- -------------- ----------------- --------------- --------------- Comtech/EF Data 20% 30% 35% * Hughes Network Systems 20 * * * Paradise Datacom 10 * * * NEC 25 * * * Wegener * * * 25 IDC * * * 25 Radyne ComStream 10 35 20 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. 11 12 We compete by concentrating our sales efforts in the international market and emphasizing our product features, quality and after-sales service. 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 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. MANUFACTURING We assemble and test certain 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. During 1999 and 2000, our Phoenix and San Diego facilities were 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. 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 narrow protection that may not prevent competitors from 12 13 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 December 31, 2000, we had 230 full-time employees, including four executive officers, 136 in engineering and manufacturing, 35 in sales and marketing, 28 in installation and customer service and 27 in administration. These figures include 24 employees who are based outside the United States. A union does not represent our employees in their collective bargaining with us. We believe that our relationships with our employees are satisfactory. ITEM 2. PROPERTIES We currently have 76,000 square feet available in Phoenix, 16,000 square feet in Chandler and 66,000 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. The lease for our Chandler facility expires in October 2008 and we have an option to renew for five years. We expect these facilities will be adequate for meeting our needs in the immediate future. We also have regional sales and service offices in Boca Raton, Beijing, Singapore, London, Jakarta, and Amsterdam. All of these facilities are leased and provide adequate space for our operations in these locations. ITEM 3. LEGAL PROCEEDINGS From time to time, we are party to certain legal proceedings incidental to the conduct of our business. We believe that the outcome of pending legal proceedings will not, either individually or in the aggregate, have a material adverse effect on our business, financial position, results of operations, cash flows or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of securities holders during the three months ended December 31, 2000. 13 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock was traded on the OTC Bulletin Board under the symbol "RADN" as of December 31, 1999. As a result of our public offering, which became effective February 7, 2000, our common stock and warrants now trade on the Nasdaq National Market under the symbols "RADN" and "RADNW," respectively. The following table sets forth the range of high and low trading prices as reported by the OTC Bulletin Board and Nasdaq National Market for the periods indicated. At December 31, 2000, we had approximately 500 stockholders of record and approximately 5000 beneficial owners of our common stock.
HIGH $ LOW $ ------ ----- 1998: First Quarter.............. 5 1/4 2 1/8 Second Quarter............. 5 2 3/4 Third Quarter.............. 4 15/16 3 1/4 Fourth Quarter............. 5 2 1/2 1999: First Quarter.............. 4 1/4 2 1/4 Second Quarter............. 3 3/4 2 1/2 Third Quarter.............. 3 9/16 2 1/4 Fourth Quarter............. 8 1/2 2 3/4 2000: First Quarter.............. 35 6 1/2 Second Quarter............. 23 3/8 11 1/8 Third Quarter.............. 17 9/16 7 13/16 Fourth Quarter............. 10 1/8 3 31/32
We have not paid dividends on the Common Stock since inception and we do not intend to pay any dividends to our stockholders in the foreseeable future. The Company currently intends to reinvest earnings, if any, in the development and expansion of its business. The declaration of dividends in the future will be at the election of the Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors. 14 15 ITEM 6. SELECTED FINANCIAL DATA The following selected statement of operations data for the years ended December 31, 2000, 1999, 1998, 1997, the six months ended December 31, 1996, and the year ended June 30, 1996, 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 years ended December 31, 2000, 1999 and 1998) and Deloitte & Touche LLP (in the case of the year ended December 31, 1997, the six months ended December 31, 1996, and the year ended June 30, 1996). 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 10-K Annual Report. 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. Prior to August 1996, our fiscal year ended on June 30th. We 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. 15 16 STATEMENT OF OPERATIONS DATA:
YEARS ENDED DECEMBER 31, 6 MONTHS YEAR (in thousands except share data) ENDED ENDED 2000 1999 1998 1997 12/31/96 6/30/96 ----------- ---------- ---------- ---------- ---------- ---------- Net sales ................................. $ 70,107 $ 55,840 $ 21,112 $ 13,447 $ 4,905 $ 3,830 Cost of sales ............................. 38,280 29,971 15,808 8,022 4,052 2,559 ----------- ---------- ---------- ---------- ---------- ---------- Gross profit .............................. 31,827 25,869 5,304 5,425 853 1,271 ----------- ---------- ---------- ---------- ---------- ---------- Selling, general and administrative expense 13,573 12,355 5,531 4,242 1,438 1,844 Research and development expense .......... 9,317 9,127 4,296 2,262 808 1,795 Stock option compensation expense ......... -- 350 1,566 -- -- -- In-process research and development expense -- -- 3,909 -- -- -- Restructuring costs ....................... -- -- 3,100 -- -- -- Asset impairment charges(1) ............... -- -- 263 -- 421 -- ----------- ---------- ---------- ---------- ---------- ---------- Total operating expenses .................. 22,890 21,832 18,665 6,504 2,667 3,639 ----------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) from operations ........... 8,937 4,037 (13,361) (1,079) (1,814) (2,368) Interest expense .......................... 492 1,910 1,199 677 256 257 Interest income ........................... (1,076) (76) (23) -- -- -- ----------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) before income taxes and extraordinary item .................... 9,522 2,203 (14,537) (1,756) (2,070) (2,625) Income taxes .............................. (2,919) 85 -- -- -- -- ----------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) before extraordinary item . 12,441 2,118 (14,537) (1,756) (2,070) (2,625) Extraordinary item ........................ -- 188 -- -- -- -- ----------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) ....................... $ 12,441 $ 2,306 $ (14,537) $ (1,756) $ (2,070) $ (2,625) =========== ========== ========== ========== ========== ========== Basic earnings (loss) per share: Earnings (loss) before extraordinary item $ 0.89 $ 0.30 $ (2.45) $ (0.35) $ (0.55) $ (0.70) Extraordinary item ...................... 0.00 0.02 0.00 0.00 0.00 0.00 ----------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) ..................... $ 0.89 $ 0.32 $ (2.45) $ (0.35) $ (0.55) $ (0.70) =========== ========== ========== ========== ========== ========== Diluted earnings (loss) per share: Earnings (loss) before extraordinary item $ 0.81 $ 0.28 $ (2.45) $ (0.35) $ (0.55) $ (0.70) Extraordinary item ...................... 0.00 0.02 0.00 0.00 0.00 0.00 ----------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) ..................... $ 0.81 $ 0.30 $ (2.45) $ (0.35) $ (0.55) $ (0.70) =========== ========== ========== ========== ========== ========== Weighted average shares used in computation Basic .................................... 13,972,078 7,111,777 5,931,346 5,012,664 3,750,699 3,742,227 =========== ========== ========== ========== ========== ========== Diluted .................................. 15,426,297 7,571,425 5,931,346 5,012,664 3,750,699 3,742,227 =========== ========== ========== ========== ========== ========== EBITDA(2) ................................. $ 11,164 $ 6,948 $ (12,297) $ (625) $ (1,637) $ (2,091) BALANCE SHEET DATA: Cash and cash equivalents ................. $ 16,245 $ 2,948 $ 255 $ 570 $ 186 $ 1 Working capital (deficit) ................. 33,858 (2,555) (8,804) 1,655 (5,852) (4,083) Total assets .............................. 51,844 28,236 29,191 10,232 6,573 273 Long-term liabilities ..................... 769 760 16,862 4,649 162 130 Total liabilities ......................... 10,030 23,909 44,428 11,382 11,020 5,669 Stockholders' equity (deficiency) ......... 41,814 4,327 (15,237) (1,150) (4,447) (2,397)
(1) Consists of the writedown of designs and drawings in light of the introduction of replacement products. (2) Earnings before interest, taxes, depreciation and amortization 16 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL 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 ("Spar"), 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. The combined annual revenue of Radyne ComStream for fiscal 2000 and 1999 was approximately $70 million and $56 million, respectively, versus Radyne Corp.'s 1998 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. 3. While we viewed ComStream's gross margins as excellent, its profitability had suffered from extremely high expenses. During 1999, we 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 was recorded as goodwill, which is being amortized over ten years. As a result of the settlement with Spar, the amount of goodwill recorded in the transaction was reduced by $516,000 to $1.5 million (after amortization of $254,000) in the year ended December 31, 1999. We have included ComStream's results in our combined statements of operations from the acquisition date. On December 8, 2000, the Company completed the acquisition of all of the outstanding shares of common stock of Armer Communications Engineering Services, Inc. ("Armer") for an aggregate purchase price of $1,926,940 million consisting of $1,200,000 million in cash and 130,680 shares of common stock of the Company. The fair value of the stock was determined based on the average market price of the stock over a reasonable period of time before and after the terms of the acquisition were agreed to and announced. Armer specializes in innovative solutions for the integration and installation of turnkey satellite communications systems. This acquisition has been recorded in accordance with the "purchase method" of accounting and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $1,943,892 and has been recorded as goodwill, which is being amortized on a straight-line basis over twelve years. The results of operations of the acquired operations have been included in the accompanying statement of operations from the acquisition date. 17 18 RESULTS OF OPERATIONS THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 The Company's net sales increased 26% to $70,107,000 during the year ended December 31, 2000 from $55,840,000 during the year ended December 31, 1999. This increase is primarily attributable to our introduction of a number of new products into our traditional markets, which resulted in an increase in market share. The Company's cost of sales as a percentage of net sales increased to 54.6% during the year ended December 31, 2000 from 53.7% for the year ended December 31, 1999. The change in costs as a percent of sales is primarily due to changes in the mix of products shipped. Selling, general and administrative costs increased to $13,573,000 (19% of sales) during the year ended December 31, 2000 from $12,355,000 (22% of sales) for the year ended December 31, 1999. The increase in expenses during the year is primarily attributed to an increase in commissions (and other selling expenses) due to the increase in sales compared to the prior year and an increased focus on our marketing strategies. The decrease of SG&A expenses in terms of percentage of sales is primarily due to the Company being able to increase sales at a faster rate than expenses. Research and development expenditures increased to $9,317,000 or 13% of sales during the year ended December 31, 2000 from $9,127,000 or 16% of sales during the year ended December 31, 1999. The increase in expense reflects 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. Our research and development personnel concentrate on technology for the satellite and microwave communications, telecommunications, and cable television industries. It is anticipated that the Company will continue to experience high research and development expenses as it positions itself, through the introduction of new products, to gain market share. As a result of the increase in our gross profit and our lower operating costs as a percentage of sales (33% in 2000 compared to 39% in 1999) we recorded earnings from operations of $8,937,000 during 2000 compared to $4,037,000 in 1999. Interest expense decreased to $492,000 or 0.1% of sales in 2000 from $1,910,000 or 3.4% of sales in 1999 due to the payoff of our credit line during the current year. Interest income increased to $1,076,000 or 1.5% of sales in 2000 from $76,000 or 0.1% of sales in 1999. The increase is due to the increase in our overall cash levels in 2000 compared to 1999. As discussed below, cash increased primarily as a result of a public offering in February 2000. We recorded a net income tax benefit in 2000 of $2,919,000 primarily due to a one-time tax benefit of $4.3 million in the third quarter resulting from the reduction of the valuation allowance pertaining to our net operating loss carryforward. Based on all of the above, we recorded net earnings of $12,441,000 or $0.81 per diluted weighted average share outstanding during 2000 as compared to $2,306,000 or $0.30 per diluted weighted average share outstanding during 1999. Our new orders booked (bookings) increased 15% to $72,088,000 for the year ended December 31, 2000 from $62,531,000 for the year ended December 31, 1999. This increase is primarily due to the introduction of new products into the market place and an increased market share in the Internet over satellite industry, in addition to increased demand for our core products. Our "backlog" of orders to be shipped (unshipped orders from the prior period plus new orders booked less orders shipped during the period) was $17,011,000 as of December 31, 2000, an increase of 17% over the $14,522,000 in backlog as of December 31, 1999. Our backlog consists of firm orders as evidenced by written contracts and/or purchase orders from customers. 18 19 RESULTS OF OPERATIONS THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 The Company's net sales increased 164% to $55,840,000 during the year ended December 31, 1999 from $21,112,000 during the year ended December 31, 1998. This increase is primarily attributable to the increased product sales resulting from our acquisition and integration of ComStream in October 1998 and new product development. The Company's cost of sales as a percentage of net sales decreased to 54% during the year ended December 31, 1999 from 75% for the year ended December 31, 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 1998 to write off these costs and to increase our provision for obsolescence; we anticipate that neither of these adjustments will have an impact on our future results of operations. In addition, we were able to realize certain synergies in our operations as a result of the acquisition and integration of ComStream, which enabled us to significantly increase our margins on product sales. Selling, general and administrative costs increased to $12,355,000 or 22% of sales during the year ended December 31, 1999 from $5,531,000 or 26% of sales for the year ended December 31, 1998. The increase in real costs and the reduction, in terms of percentage of sales, was primarily a result of higher expense levels and sales amounts due to our acquisition and integration of ComStream into our operations. Research and development expenditures increased to $9,127,000 or 16% of sales from $4,296,000 or 20% of sales during the year ended December 31, 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. It is anticipated that the Company will continue to experience high research and development expenses as it positions itself, through the introduction of new products, to gain market share. Interest expense increased to $1,910,000 or 3% of sales in 1999 from $1,199,000 or 6% of sales in 1998 due to our increased level of debt for the first three quarters of 1999. We recorded extraordinary income of $188,000 during 1999 as a result of negotiated forgiveness of previously recorded and accrued interest expense in connection with a note payable related to the ComStream acquisition. We recorded income tax expense in 1999 of $85,000, which related solely to the alternative minimum tax. The effective tax rate is 3.6%, which is significantly below statutory income tax rates because of the utilization of net operating loss carryforward. Our new orders booked (bookings) increased 151% to $62,531,000 for the year ended December 31, 1999 from $24,904,000 for the year ended December 31, 1998. This increase was primarily a result of our acquisition and integration of ComStream into our operations in addition to new product development and enhancement. Our "backlog" of orders to be shipped (unshipped orders from the prior period plus new orders booked less orders shipped during the period) was $14,522,000 as of December 31,1999, an increase of 69% over the $8,606,000 in backlog as of December 31, 1998. Our backlog consists of firm orders as evidenced by written contracts and/or purchase orders from customers. 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. As of the year ended December 31, 1999, 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. The nature, amount, and timing of the costs required to complete the in-process technology are presented in the following chart: 19 20
TOTAL PRODUCT COST AT BASE LINE STARTED COMPLETION COMPLETION DESCRIPTION TECHNOLOGY APPLICABILITY (MONTH - YEAR) DATE $000'S - ----------- ---------- ------------- -------------- ---- ------ 2 MB Card QPSK, FEC Coding Modems 01 - 98 11 - 99 $ 1,820* "CM 601" Low Coding Modulation Modems 05 - 97 03 - 99 1,400** Cost 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 Packet Protocol Receiver "ABR 202" Audio L-Band Receivers Broadcast Audio 03 - 98 12 - 98 750 Receiver Multiplexing Set Top Box DTH Television Satellite 03 - 97 07 - 99 1,600 Receiver 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. LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $33,858,000 at December 31, 2000, which represents an increase in our working capital of $36,113,000 from our working capital deficit of $2,255,000 at December 31, 1999. Our working capital increased primarily as a result of an increase in cash of $13,297,000 and a payoff of short-term notes payable of $12,290,000. Net cash provided by operating activities was $5,907,000 for the year ended December 31, 2000 compared to cash provided by operating activities of $2,564,000 for the year ended December 31, 1999. The change is primarily due to an increase in net earnings of $10,135,000 to $12,441,000 partially offset by an increase in accounts receivable of $2,097,000 as a result of our high volume of sales during the fourth quarter of 2000. The Company's inventory balances also increased by $2,874,000 as a result of our increased backlog compared to the prior year. Accounts payable and accrued expenses decreased by $1,915,000 and $410,000, respectively due to the timing of vendor payments. In addition, the Company recorded a net tax benefit of $2,919,000 as a result of the reduction of the valuation allowance pertaining to our net operating loss carryforward. Net cash provided by operating activities was $2,564,000 for the year ended December 31, 1999 compared to cash used in operating activities of $3,850,000 for the year ended December 31, 1998. Cash used in investing activities was $2,820,000 for the year ended December 31, 2000 compared to cash used in investing activities of $279,000 for the year ended December 31, 1999, and $10,551,000 for the year ended December 31, 1998. The increase of $2,541,000 from $279,000 in 1999 to $2,820,000 in 2000 is primarily due to assets, net of cash, acquired from Armer Communications in the amount of $1,092,000. In addition, the Company had current year additions to fixed assets of $1,228,000 as compared to $279,000 during 1999. The decrease of $10,272,000 from $10,551,000 in 1998 to $279,000 in 1999 is due to the purchase of ComStream in October 1998. The Company has no material commitments to make capital expenditures in 2001 or thereafter. 20 21 The Company derived net cash from financing activities of $10,210,000, $408,000 and $13,866,000 during the years ended December 31, 2000, 1999, and 1998, respectively. During the year ended December 31, 2000, net cash from financing activities was generated primarily through a public offering which generated cash of $16,340,453, net of offering costs. The exercise of warrants, which were issued in connection with the public offering, provided additional proceeds of $5,394,000. In addition, the exercise of stock options and stock purchased through our Employee Stock Purchase Plan provided proceeds of $1,464,000. These proceeds were partially offset by payments made on our line of credit of $12,290,000. During 1999, net cash from financing activities was composed primarily of $17,173,000 from proceeds obtained through the sale of common stock and $4,920,000 from line of credit borrowings, offset by $15,618,000 in repayments of loans from affiliates and $5,963,000 in repayments of other notes. We believe that current cash levels and cash from operations should be sufficient to fund our planned future operations and capital requirements for continued growth through the end of 2001. In addition, we have secured a committed line of credit with a bank in the amount of $10,000,000. As of December 31, 2000, there was no outstanding balance on the line of credit. 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 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This statement requires recognition of all derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at fair value. Changes in fair value of derivatives are recorded each period in current earnings or other comprehensive income (loss). Proper accounting for changes in fair value of derivatives held is dependent on whether the derivative transaction qualifies as an accounting hedge and on the classification of the hedge transaction. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133." This statement amended the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. Management does not expect the adoption of SFAS No. 133 to have a material impact on the Company. The Financial Accounting Standards Board issued a Proposed Statement of Accounting Standards, "Business Combinations and Intangible Assets - Accounting for Goodwill." The proposed Statement would prohibit goodwill amortization and establish a new method of testing goodwill for impairment. The proposed statement would also prohibit the pooling of interest method of accounting for business combinations and establish a new accounting standard for goodwill acquired in a business combination. The provisions of the proposed Statement would be effective for fiscal quarters beginning after the issuance of the final Statement. The impact of the Statement may be significant if it is issued as currently proposed, as we would be required to test our goodwill for impairment under new standards and would no longer recognize goodwill amortization expense. This would have the effect of reducing our operating expenses. In 2000, we incurred $1.9 million in goodwill amortization expense. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk on our financial instruments from changes in interest rates. We do not use financial instruments for trading purposes or to manage interest rate risk. As of December 31, 2000, a 1% change in interest rates would, over a year's period, have a potential pretax impact of $162,000 which is immaterial to our consolidated financial statements. 21 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report.................................................................................... F-1 Consolidated Balance Sheets as of December 31, 2000 and 1999.................................................... F-2 Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998...................... F-3 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998.................................................................................................... F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and and 1998.................................................................................................... F-5 Notes to Consolidated Financial Statements...................................................................... F-6
23 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Radyne ComStream Inc.: We have audited the accompanying consolidated balance sheets of Radyne ComStream Inc. and subsidiaries (the Company) (a majority-owned subsidiary of Singapore Technologies Pte Ltd) as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Phoenix, Arizona March 9, 2001 F-1 24 RADYNE COMSTREAM INC. Consolidated Balance Sheets
DECEMBER 31, ---------------------------------- ASSETS 2000 1999 ------------ ------------ Current assets: Cash and cash equivalents $ 16,244,591 2,947,660 Accounts receivable - trade, net of allowance for doubtful accounts of $1,014,813 and $791,746, respectively 11,019,149 8,678,153 Inventories, net 11,330,565 8,339,112 Prepaid expenses 670,726 929,076 Deferred tax assets 3,854,418 -- ------------ ------------ Total current assets 43,119,449 20,894,001 ------------ ------------ Property and equipment, net 3,288,867 3,595,168 Other assets: Purchased technology, net of accumulated amortization of $905,000 and $505,000 at December 31, 2000 and 1999, respectively 1,595,000 1,995,000 Goodwill, net of accumulated amortization of $442,748 and $253,530 at December 31, 2000 and 1999, respectively 3,299,536 1,544,861 Deposits and other intangibles 540,693 207,032 ------------ ------------ Total other assets 5,435,229 3,746,893 ------------ ------------ $ 51,843,545 28,236,062 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable under line of credit agreement $ -- 12,920,000 Current installments of obligations under capital leases 78,056 44,332 Accounts payable, trade 2,225,363 3,911,742 Accrued expenses 5,485,061 5,043,391 Taxes payable 280,000 684,382 Customer advance payments 1,192,235 545,218 ------------ ------------ Total current liabilities 9,260,715 23,149,065 Deferred rent 178,190 -- Obligations under capital leases, excluding current installments 85,712 64,652 Accrued stock option compensation 505,413 695,433 ------------ ------------ Total liabilities 10,030,030 23,909,150 ------------ ------------ Stockholders' equity: Common stock; $.001 par value - authorized, 20,000,000 shares; issued and outstanding, 14,822,820 and 10,739,382 shares at December 31, 2000 and 1999, respectively 14,823 10,739 Additional paid-in capital 49,249,999 23,364,055 Deferred compensation (844,032) -- Accumulated deficit (6,607,275) (19,047,882) ------------ ------------ Total stockholders' equity 41,813,515 4,326,912 Commitments and contingent liabilities (note 7, 8, 9, 11, 13, 15, 17 and 18) ------------ ------------ $ 51,843,545 28,236,062 ============ ============
See accompanying notes to consolidated financial statements. F-2 25 RADYNE COMSTREAM INC. Consolidated Statements of Operations
YEARS ENDED DECEMBER 31, ----------------------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Net sales $ 70,107,080 55,839,792 21,111,704 Cost of sales 38,279,830 29,970,560 15,808,459 ------------ ------------ ------------ Gross profit 31,827,250 25,869,232 5,303,245 ------------ ------------ ------------ Operating expenses: Selling, general and administrative 13,573,460 12,355,188 5,531,213 Research and development 9,316,633 9,126,545 4,296,268 Stock option compensation expense -- 350,000 1,566,075 In-process research and development -- -- 3,909,000 Restructuring costs -- -- 3,100,000 Asset impairment charge -- -- 262,935 ------------ ------------ ------------ Total operating expenses 22,890,093 21,831,733 18,665,491 ------------ ------------ ------------ Earnings (loss) from operations 8,937,157 4,037,499 (13,362,246) Other (income) expense: Interest expense 491,717 1,910,422 1,198,777 Interest income (1,076,432) (76,045) (23,480) ------------ ------------ ------------ Earnings (loss) before income taxes (benefit) and extraordinary item 9,521,872 2,203,122 (14,537,543) Income taxes (benefit) (2,918,735) 85,000 -- ------------ ------------ ------------ Earnings (loss) before extraordinary item 12,440,607 2,118,122 (14,537,543) Extraordinary item -- 188,182 -- ------------ ------------ ------------ Net earnings (loss) $ 12,440,607 2,306,304 (14,537,543) ============ ============ ============ Basic net earnings (loss) per share: Earnings (loss) before extraordinary item $ 0.89 0.30 (2.45) Extraordinary item -- 0.02 -- ------------ ------------ ------------ Net earnings (loss) $ 0.89 0.32 (2.45) ============ ============ ============ Diluted net earnings (loss) per share: Earnings (loss) before extraordinary item $ 0.81 0.28 (2.45) Extraordinary item -- 0.02 -- ------------ ------------ ------------ Net earnings (loss) $ 0.81 0.30 (2.45) ============ ============ ============ Weighted average number of common shares outstanding - basic 13,972,078 7,111,777 5,931,346 ============ ============ ============ Weighted average number of common shares outstanding - diluted 15,426,297 7,571,425 5,931,346 ============ ============ ============
See accompanying notes to consolidated financial statements. F-3 26 RADYNE COMSTREAM INC. Consolidated Statements of Stockholders' Equity Years ended December 31, 2000, 1999 and 1998
ADDITIONAL COMMON STOCK PAID-IN DEFERRED ACCUMULATED SHARES AMOUNT CAPITAL COMPENSATION DEFICIT ----------- ----------- ----------- ----------- ----------- Balances, January 1, 1998 5,931,346 $ 11,862 5,694,806 -- (6,816,643) Adjustment of par value -- (5,931) 5,931 -- -- Payments received on promissory notes -- -- -- -- -- Stock option plan -- -- 410,598 -- -- Net loss -- -- -- -- (14,537,543) ----------- ----------- ----------- ----------- ----------- Balances, December 31, 1998 5,931,346 5,931 6,111,335 -- (21,354,186) Issuance of common stock for cash 4,520,264 4,520 16,424,759 -- -- Exercise of stock options 287,772 288 743,866 -- -- Tax benefit of stock options exercised -- -- 84,095 -- -- Net earnings -- -- -- -- 2,306,304 ----------- ----------- ----------- ----------- ----------- Balances, December 31, 1999 10,739,382 10,739 23,364,055 -- (19,047,882) Issuance of common stock for cash 2,828,220 2,828 16,729,599 -- -- Exercise of stock options 338,755 339 1,071,509 -- -- Exercise of stock warrants 616,463 617 5,393,434 -- -- Tax benefit of stock options exercised -- -- 1,044,000 -- -- Common stock issued in acquisition 300,000 300 1,647,402 -- -- Deferred compensation -- -- -- (920,762) -- Amortization of deferred compensation -- -- -- 76,730 -- Net earnings -- -- -- -- 12,440,607 ----------- ----------- ----------- ----------- ----------- Balances, December 31, 2000 14,822,820 $ 14,823 49,249,999 (844,032) (6,607,275) =========== =========== =========== =========== ===========
NOTES RECEIVABLE FROM TOTAL STOCKHOLDERS (DEFICIENCY) ------------ ----------- Balances, January 1, 1998 (40,086) (1,150,061) Adjustment of par value -- -- Payments received on promissory notes 40,086 40,086 Stock option plan -- 410,598 Net loss -- (14,537,543) ----------- ----------- Balances, December 31, 1998 -- (15,236,920) Issuance of common stock for cash -- 16,429,279 Exercise of stock options -- 744,154 Tax benefit of stock options exercised -- 84,095 Net earnings -- 2,306,304 ----------- ----------- Balances, December 31, 1999 -- 4,326,912 Issuance of common stock for cash -- 16,732,427 Exercise of stock options -- 1,071,848 Exercise of stock warrants -- 5,394,051 Tax benefit of stock options exercised -- 1,044,000 Common stock issued in acquisition -- 1,647,702 Deferred compensation -- (920,762) Amortization of deferred compensation -- 76,730 Net earnings -- 12,440,607 ----------- ----------- Balances, December 31, 2000 -- 41,813,515 =========== ===========
See accompanying notes to consolidated financial statements. F-4 27 RADYNE COMSTREAM INC. Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31, -------------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Cash flows from operating activities: Net earnings (loss) $ 12,440,607 2,306,304 (14,537,543) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Forgiveness of interest -- (188,182) -- Loss on disposal of assets 30,306 -- 961,069 Depreciation and amortization 2,330,894 2,835,024 1,041,088 Asset impairment charge -- -- 262,935 Deferred tax provision (2,810,418) -- -- 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 (2,096,621) (142,421) (915,154) Prepaid expenses and other current assets 258,350 (338,915) 20,069 Inventories (2,874,353) 1,041,366 2,833,811 Deposits and other 176,870 15,410 242,787 Accounts payable, trade (1,915,151) 286,550 (985,095) Accounts payable, affiliate -- (8,150) 113,682 Accrued expenses 135,229 (2,853,265) 1,932,071 Customer advance payments 647,017 -- -- Taxes payable (404,382) 70,010 (94,581) Deferred rent 178,190 -- -- Accrued stock option compensation (190,020) (460,044) -- ------------ ------------ ------------ Net cash provided by (used in) operating activities 5,906,518 2,563,687 (3,649,786) ------------ ------------ ------------ Cash flows from investing activities: Capital expenditures (1,227,811) (279,048) (543,630) Proceeds from disposal of assets 200 -- -- Investment in non-compete agreement (500,000) -- -- Acquisitions, net of cash acquired (1,092,453) -- (10,007,369) ------------ ------------ ------------ Net cash used in investing activities (2,820,064) (279,048) (10,550,999) ------------ ------------ ------------ Cash flows from financing activities: Net borrowings (payments) from notes payable under line of credit (12,920,000) 4,920,000 (1,500,000) Payment on note payable -- (5,962,561) -- Proceeds from notes payable to affiliates -- -- 15,618,272 Payments on note payable to affiliate -- (15,618,272) -- Payment of debt issuance costs on line of credit -- -- (200,000) Net proceeds from sale of common stock 16,340,453 16,429,279 -- Net proceeds from sale of common stock through employee stock purchase plan 391,974 -- -- Exercise of stock options 1,071,848 744,154 -- Exercise of stock warrants 5,394,051 -- -- Payments received on promissory notes issued in connection with common stock -- -- 40,086 Principal payments on capital lease obligations (67,849) (104,535) (72,309) ------------ ------------ ------------ Net cash provided by financing activities 10,210,477 408,065 13,886,049 ------------ ------------ ------------ Net increase (decrease) in cash 13,296,931 2,692,704 (314,736) Cash and cash equivalents, beginning of year 2,947,660 254,956 569,692 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 16,244,591 2,947,660 254,956 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid for interest $ 810,847 2,090,298 568,812 ============ ============ ============ Cash paid for taxes $ 475,036 22,000 -- ============ ============ ============ Supplemental schedule of noncash investing and financing activities: Negotiated write-down of note payable $ -- 515,940 -- ============ ============ ============ Acquisitions through issuance of stock and assumption of liabilities $ 1,384,786 -- 7,000,000 ============ ============ ============ Deferred compensation $ 920,762 -- -- ============ ============ ============ Tax benefit of stock option exercise $ 1,044,000 84,095 -- ============ ============ ============
See accompanying notes to consolidated financial statements. F-5 28 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 (1) ORGANIZATION AND ACQUISITION 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. 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. Radyne Corp., a Delaware corporation, (Radyne) was incorporated on November 25, 1980. On August 12, 1996, Radyne became a 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. In March 1999, Radyne changed its name to Radyne ComStream Inc. During 2000, the Company changed its state of incorporation from New York to Delaware and changed the par value of its common stock from $.002 to $.001. This change has been reflected in the consolidated statements of stockholders' equity. DESCRIPTION OF ACQUISITIONS On December 8, 2000, the Company completed the acquisition of all of the outstanding shares of common stock of Armer Communications Engineering Services, Inc. ("Armer") for an aggregate purchase price of $1,926,940 million consisting of $1,200,000 million in cash and 130,680 shares of common stock of the Company. The fair value of the stock was determined based on the average market price of the stock over a reasonable period of time before and after the terms of the acquisition were agreed to and announced. Armer specializes in the integration and installation of ground segment equipment and networks for a wide range of satellite-based telecommunications systems and applications. This acquisition has been recorded in accordance with the "purchase method" of accounting and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $1,943,892 and has been recorded as goodwill, which is being amortized on a straight-line basis over twelve years. The results of operations of the acquired operations have been included in the accompanying statement of operations from the acquisition date. Certain Armer stockholders were issued 169,320 shares of restricted common stock. These shares are subject to immediate forfeiture in the event the holder terminates employment with Armer or Radyne within one year from the effective date of the merger. The Company recorded deferred compensation of $920,762 based upon the fair value of the stock at the date of issuance, which is being amortized on a straight-line basis over one year. Concurrent with the close of this transaction, six key employees of Armer entered into two-year non-disclosure and non-compete agreements with the Company. The cost of these agreements was $500,000, and is being amortized using the straight-line method over the term of the agreements. F-6 (Continued) 29 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 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, 1999. 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, 1999 (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31, 2000 1999 ---- ---- Net sales $ 72,893 60,549 ======== ====== Other income $ 1,076 76 ======== ====== Total revenues $ 73,969 60,625 ======== ====== Net earnings $ 10,841 1,023 ======== ====== Basic earnings per share $ .78 .14 ======== ====== Diluted earnings per share $ .70 .14 ======== ======
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. In addition, the Company accrued $1.6 million of severance costs as a result of the acquisition. 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 was recorded as goodwill, which is being amortized over ten years. The results of operations of ComStream have been included in the accompanying consolidated statements of operations from October 15, 1998. The Company negotiated a reduction in the note balance due to the former owner of ComStream 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). F-7 (Continued) 30 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 The allocation to in-process research and development, 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. All of the products were completed by December 31, 1999. 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 for all products during 1998 or 1999. It was determined that there was no alternative future use for the in-process technology as of the acquisition date. Consideration was given to possible other projects in which the hardware and software products could have been put to use, but none of these projects had yet attained "technological feasibility", and so they themselves were considered to be in-process technology. The discounted cash flow method began with estimates of future cash flow using ComStream management's forecasts. In deriving these cash flows, estimates of ComStream's future revenues, cost of goods sold, sales and marketing, general and administrative, and research and development expenses on a stand-alone basis were used to estimate a baseline measure of earnings attributable to the products. By adding back non-cash charges and deducting projected capital expenditures, a measure of debt-free cash flow, useful for valuing ComStream's in-process technology, was derived. From the debt-free cash flow forecasts, which represent the cash flow return on all of ComStream's assets, returns were deducted for the use of certain other assets: developed technology, net fixed assets, working capital, and assembled workforce and goodwill. For this purpose, the annual charge for core technology included in the products under development was calculated by multiplying the unamortized book value of the developed technology for that year by the required rate of return on developed technology. The opening value of core technology was calculated using a residual income approach similar to the methodology employed to calculate the value of in-process research and development. The remaining book value of the developed technology was calculated by amortizing its opening fair value over 6.25 years. The total charge was allocated to the in-process technology based on the in-process technology projects' share of total revenue. F-8 (Continued) 31 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 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. The Company allocated the aggregate revenues to developed, in-process and future technology, in a manner which is believed reasonable. The Company has determined that no changes to the original assumptions were deemed necessary as a result of completing the in-process technologies. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 sales and warranty returns. Actual results could differ from those estimates. (B) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in the consolidation. (C) CASH EQUIVALENTS The Company considers all money market accounts with a maturity of 90 days or less to be cash equivalents. (D) REVENUE RECOGNITION The Company recognizes revenue upon transfer of ownership and shipment of product. F-9 (Continued) 32 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 (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) INTANGIBLE ASSETS Intangible assets consist of 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. Goodwill acquired as a result of the purchase of Armer is being amortized on a straight-line basis over 12 years. Intangible assets also consist of covenants not to compete which are being amortized on a straight-line basis over the contractual term of the covenants of three years. (H) PURCHASED TECHNOLOGY In connection with the acquisition of ComStream in 1998, 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. (I) 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. 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. (J) 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-10 (Continued) 33 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 (K) RESEARCH AND DEVELOPMENT The cost of research and development is charged to expense as incurred. (L) 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. (M) 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. Periodically during the year, the Company maintains cash in financial institutions in excess of the amounts insured by the federal government. (N) NET EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing earnings (loss) available to stockholders by the weighted-average number of shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or contracts to issue common stock were exercised or converted to stock or resulted in the issuance of stock that then shared in the earnings or loss of the Company. (O) 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. F-11 (Continued) 34 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 (P) 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. (Q) SEGMENT REPORTING The Company has only one operating business segment, the sale of equipment for satellite and cable communications networks. (R) RECLASSIFICATIONS Certain reclassifications have been made to the prior years' consolidated financial statement amounts to conform to the current year presentation. (3) INVENTORIES Inventories at December 31 consist of the following:
2000 1999 -------------- --------- Raw materials and components $ 9,593,022 5,550,279 Work-in-process 3,959,419 3,724,908 Finished goods 1,371,973 863,154 -------------- --------- 14,924,414 10,138,341 Obsolescence reserve (3,593,849) (1,799,229) -------------- --------- $ 11,330,565 8,339,112 ============== =========
(4) PROPERTY AND EQUIPMENT Property and equipment at December 31 consist of the following:
2000 1999 ------------ --------- Machinery and equipment $ 3,265,723 3,674,803 Furniture and fixtures 2,587,068 2,048,976 Leasehold improvements 713,301 445,127 Computers and software 1,365,077 462,042 ------------ --------- 7,931,169 6,630,948 Less accumulated depreciation and amortization (4,642,302) (3,035,780) ------------ --------- Property and equipment, net $ 3,288,867 3,595,168 ============ =========
F-12 (Continued) 35 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 (5) ACCRUED EXPENSES Accrued expenses at December 31 consist of the following:
2000 1999 ------------- --------- Wages, vacation and related payroll taxes $ 1,100,503 788,559 Interest -- 303,205 Professional fees 544,416 630,650 Warranty reserve 1,622,644 924,928 Lease buyout -- 172,511 Other 2,217,498 2,223,538 ------------- --------- Total accrued expenses $ 5,485,061 5,043,391 ============= =========
(6) NOTES PAYABLE The Company had a $20,500,000 credit agreement with a bank which expired September 29, 2000. STPL had issued a nonbinding letter of awareness in connection with this credit agreement. Borrowings under the line of credit bear interest equal to LIBOR or the bank's Quoted Rate plus 1 percent per annum at the time of draw. The interest rates on the borrowings ranged from 6.59% to 7.37% during 2000 and 6.59% to 6.94% on the December 31, 1999 borrowings. At December 31, 1999, outstanding borrowings against the line were $12,920,000, plus accrued interest. The Company has arranged for a new line of credit facility with a new bank as of January 15, 2001. The new facility consists of a committed line of $10 million and an uncommitted line of $10 million. This new line will save the Company some interest expenses because the facility fee is based only upon the committed portion of the facility. The replaced facility was all uncommitted and the fee was based on the entire facility. At December 31, 2000, there were no outstanding borrowings against the lines of credit. In connection with the purchase of ComStream, the Company executed a $7,000,000 note payable to the former owner of ComStream. 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 (note 1). The note was paid during the quarter ended September 30, 1999. (7) OBLIGATIONS UNDER CAPITAL LEASES The Company leases machinery and equipment under capital leases. The cost and accumulated depreciation of the equipment was $294,382 and $155,020, respectively, at December 31, 2000 and $289,558 and $132,531, respectively, at December 31, 1999, and is included in property and equipment in the accompanying consolidated balance sheets and is being depreciated over the estimated useful lives of the machinery and equipment. F-13 (Continued) 36 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 Payments on capital lease obligations due after December 31, 2000 are as follows: 2001 $ 90,140 2002 78,990 2003 11,329 2004 6,941 2005 -- ------------ Total minimum lease payments 187,400 Less amount representing interest at rates of 2.26% to 12.96% (23,632) ------------ Present value of minimum lease payments 163,768 Less current installments (78,056) ------------ Capital lease obligations due after one year $ 85,712 ============
(8) COMMITMENTS Rent expense was approximately $1,883,743, $1,790,248 and $517,853 for the years ended December 31, 2000, 1999 and 1998, respectively. Future minimum rentals under leases after December 31, 2000 are as follows: 2001 $ 1,957,829 2002 1,933,637 2003 1,906,021 2004 1,784,999 2005 945,425 Thereafter 2,200,983 ------------ $ 10,728,894 ============
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 $2,000,000 cash buyout was paid in two equal installments of $1,000,000 on March 1, 1999 and September 1, 1999. F-14 (Continued) 37 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 The Company generally has commitments with certain suppliers and subcontract manufacturers to purchase certain components and estimates its non-cancelable obligations to be approximately $5,500,000 at December 31, 2000. (9) INCOME TAXES Income tax expense (benefit) amounted to ($2,918,735), $85,000 and $0 for the years ended December 31, 2000, 1999 and 1998, respectively. The actual tax expense (benefit) for these periods differs from the "expected" tax expense for those periods as follows:
YEARS ENDED DECEMBER 31, 2000 1999 1998 Computed "expected" tax expense $ 3,237,436 749,061 (4,943,000) State tax expense 476,094 190,158 (541,000) Change in valuation allowance (7,790,223) (1,080,360) 5,190,000 Stock option exercises 1,044,000 -- -- Other adjustments 113,958 226,141 294,000 ------------- ----------- ------------ Total $ (2,918,735) 85,000 -- ============= ============= =============
Components of income tax expense (benefit) for 2000 follows: CURRENT DEFERRED TOTAL ------------ ---------- ---------- 2000: Federal $ (273,278) (2,295,202) (2,568,480) State 26,550 (376,805) (350,255) ------------ ---------- ---------- Total $ (246,728) (2,672,007) (2,918,735) ============ ========== ==========
Current federal income tax totaled $85,000 for the year ended December 31, 1999. There was no current or deferred income tax expense for the year ended December 31, 1998. Deferred tax assets at December 31 consisted of the following:
2000 1999 -------------- ------------- Deferred tax assets: Cumulative tax effect of net operating loss carryforwards $ 6,634,448 9,316,187 Tax credits 165,444 552,846 Temporary differences 3,071,325 3,937,989 Valuation allowance (6,016,799) (13,807,022) -------------- ------------- $ 3,854,418 -- ============== =============
F-15 (Continued) 38 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 The net change in the total valuation allowance for the years ended December 31, 2000 and 1999 was a decrease of $7,790,223 and an increase of $1,459,022, respectively. At December 31, 2000, the Company has net operating loss carryforwards of approximately $15,000,000 expiring in various years through 2020, and federal AMT credit of $171,850 for utilization against taxable income/taxes payable of future periods, if any. Management believes that its ability to utilize certain of its 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. During the quarter ended September 2000, the Company evaluated the likelihood that it would utilize a portion of its net operating loss carryforwards. The Company reduced the valuation allowance relating to net operating loss carryforwards it expects to utilize creating a tax benefit of $4.332 million for the quarter ended September 30, 2000. A 100 percent valuation allowance has been recorded against the net deferred tax assets as of December 31, 1999. (10) SIGNIFICANT CUSTOMERS AND FOREIGN AND DOMESTIC SALES During 1999 and 1998, no customers represented greater than 10 percent of net sales. During 2000, one customer represented 12.4% of net sales. Our sales in principal foreign and domestic markets as a percentage of total sales for the years ended December 31, 2000, 1999 and 1998 follow:
YEARS ENDED DECEMBER 31, 2000 1999 1998 ----------- ----------- ----------- Asia 25% 25% 7% Africa/Middle East 2 4 8 Latin America 3 4 9 Europe 13 21 23 Canada 1 2 3 ----------- ----------- ----------- Total foreign 44 56 50 Domestic 56 44 50 ----------- ----------- ----------- 100% 100% 100% =========== =========== =========== Foreign assets $ 372,000 333,000 385,000 =========== =========== ===========
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 63.5% of 2000, 54% of 1999, and 75% of 1998 net sales, respectively. (11) STOCKHOLDERS' EQUITY In February 2000, the Company completed an offering of 2,400,000 units, each consisting of one share of common stock and one five-year common stock purchase warrant, plus an additional 360,000 units sold pursuant to the underwriters' over-allotment option, for a total of approximately $16,340,000 cash, net of issuance costs. Each warrant is exercisable to purchase one share of common stock at a price of $8.75, subject to adjustment in certain circumstances, at any time after the warrants are issued until February 7, 2005. Commencing February 7, 2001, the Company may redeem the warrants for $0.01 per warrant upon F-16 (Continued) 39 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 no less than 30 days or more than 60 days notice mailed within five days after the closing sales price of the common stock has equaled or exceeded $10.9375 for each of 20 consecutive trading days. In December 1999, the Company completed a rights offering of 4,520,264 shares of common stock to existing shareholders for a total of approximately $16,429,000, net of issuance costs. The Company used $15,618,272 of the proceeds from the partial exercise by ST to pay the total amount of debt owed to ST. The Compensation Committee and the Board of Directors resolved to permit senior management to borrow funds from the Company for the purpose of exercising stock options. In October and November 1999, the chief executive officer, chief technology officer, and chief financial officer borrowed $200,000, $100,000 and $50,000, respectively, for the purpose of exercising stock options. The Company recorded the $350,000 in forgivable loans made as compensation expense in 1999. (12) EARNINGS (LOSS) PER SHARE A summary of the reconciliation from basic earnings (loss) per share to diluted earnings (loss) per share follows:
YEARS ENDED DECEMBER 31, ------------------------------------------------------ 2000 1999 1998 ------------- ------------- ------------- Earnings (loss) available to common stockholders $ 12,440,607 2,306,304 (14,537,543) ============= ============= ============= Basic EPS-weighted average shares outstanding 13,972,078 7,111,777 5,931,346 ============= ============= ============= Basic earnings (loss) per share: Earnings (loss) before extraordinary item $ 0.89 0.30 (2.45) Extraordinary item -- 0.02 -- ------------- ------------- ------------- Net earnings (loss) $ 0.89 0.32 (2.45) ============= ============= ============= Basic EPS-weighted average shares outstanding 13,972,078 7,111,777 5,931,346 Effect of dilutive securities 1,454,219 459,648 -- ------------- ------------- ------------- Dilutive EPS-weighted average shares outstanding 15,426,297 7,571,425 5,931,346 ============= ============= ============= Diluted earnings (loss) per share: Earnings (loss) before extraordinary item $ 0.81 0.28 (2.45) Extraordinary item -- 0.02 -- ------------- ------------- ------------- Net earnings (loss) $ 0.81 0.30 (2.45) ============= ============= ============= Stock options not included in diluted EPS since antidilutive 1,452,997 -- 691,559 ============= ============= ============= Stock warrants not included in diluted EPS since antidilutive 781,675 -- -- ============= ============= =============
F-17 (Continued) 40 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 (13) 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 $172,957, $85,301 and $31,690, respectively, for the years ended December 31, 2000, 1999 and 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. During the years ended December 31, 1999 and 1998, we matched up to 1% of the employee's salary. During the year ended December 31, 2000, we matched 50% of each employee contribution to the plan up to a maximum annual match of $2,000. 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 $137,702, $143,487 and $30,450 for the years ended December 31, 2000 and 1999, and the period October 15, 1998 through December 31, 1998, respectively. 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. We also have a qualified contributory 401(k) plan that covers all full-time employees of our subsidiary, Armer Communications Engineering Services, Inc. who have attained the age of 18 and have completed 1,000 hours of service at the enrollment date. During the period beginning December 1, 2000 through December 31, 2000, the Company provided contributions to the plan in the amount of $30,000. 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. Company contributions are allocated to the individual accounts of qualified participants in the ratio that each qualifying participant's compensation for the plan year bears to the total compensation of all qualifying participants for the plan year. The Company is in the process of establishing a new 401(k) plan for all of the operating facilities. It is anticipated that the new plan will be in effect as of April 1, 2001 and the old plans will be rolled into the new plan. (14) STOCK OPTIONS In June 2000, the Board of Directors adopted the 2000 Long-Term Incentive Stock Options Plan (the 2000 Plan), which was approved by the stockholders on June 29, 2000. The 2000 Plan provided for the grant of options to employees of the Company to purchase 2,500,000 shares of common stock. The option price per share under the 2000 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. At December 31, 2000, the Company had 1,316,825 options outstanding at exercise prices ranging from $5.031 to $14.625 per share. 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 October 1998, the Company amended the terms of certain stock options pursuant to the Plan to accelerate vesting of the awards, thereby creating a new measurement date and, accordingly, recognized compensation costs F-18 (Continued) 41 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 amounting to $1,566,075. 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. At December 31, 2000, the Company had 2,678,266 options outstanding at exercise prices ranging from $2.50 to $14.625 per share. Of the total options, the Company had 288,689 options outstanding at an exercise price of $2.50 per share that carry the right to a cash bonus of $1.72 per purchased share, payable upon exercise. The stock option compensation accrual related to the bonus is $505,413 and $695,433 at December 31, 2000 and 1999, respectively. The Company applies APB Opinion 25 in accounting for its Plan. 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 earnings (loss) and earnings (loss) per share would have been reduced (increased) to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31, ------------------------------------------------------ 2000 1999 1998 ------------- ------------- ------------- Net earnings (loss) As reported $ 12,440,607 $ 2,306,304 (14,537,543) Pro forma (unaudited) 5,679,549 1,482,399 (15,293,957) Earnings (loss) per share - As reported .89 .32 (2.45) basic Pro forma (unaudited) .41 .21 (2.58) Earnings (loss) per share - As Reported .81 .30 (2.45) diluted Pro forma (unaudited) .37 .20 (2.58)
The full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings (loss) amounts presented above because compensation cost is reflected (increased) 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 118 percent - 184 percent, risk free interest rate of 5.27 percent - 6 percent, and expected lives of five years. The per share weighted average fair value of stock options granted under the Plan for the periods ended December 31, 2000, 1999 and 1998 were $10.65, $3.02 and $3.36, respectively, using the Black-Scholes option-pricing model and the assumptions listed above. F-19 (Continued) 42 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 A summary of the aforementioned stock plan activity follows:
WEIGHTED AVERAGE NUMBER PRICE PER SHARE ------ --------------- 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 Granted 857,000 3.60 Forfeited (239,979) 3.45 Exercised (287,772) 2.54 --------- -------- Balance, December 31, 1999 1,535,206 3.09 Granted 1,626,465 12.27 Forfeited (138,900) 6.58 Exercised (344,505) 3.16 --------- -------- Balance, December 31, 2000 2,678,266 $ 8.48 ========= ========
A summary of stock options granted at December 31, 2000 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------- --------------------------- WEIGHTED- WEIGHTED- WEIGHTED- NUMBER AVERAGE AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE EXERCISE PRICES 12/31/00 CONTRACTUAL LIFE PRICE 12/31/00 PRICE --------------- -------- ---------------- ----- -------- ----- $ 2.50 288,689 0 years $ 2.50 288,689 $ 2.50 $ 2.50 to 3.125 348,002 1 years 2.90 282,152 2.85 $ 3.00 to 4.1875 459,910 2 years 3.56 305,285 3.60 $ 5.031 to 14.625 1,581,665 3 years 12.23 644,475 12.94 --------- ------------- --------- --------- 2,678,266 $ 8.48 1,520,601 $ 7.21 ========= ============= ========= ========
(15) EMPLOYEE STOCK PURCHASE PLAN On June 15, 1999, our shareholders adopted the 1999 Employee Stock Purchase Plan (the Purchase Plan), as a means of rewarding and retaining existing employees. The purchase plan allows employees, including officers and directors who are employees, to purchase shares of our common stock at semi-annual intervals through periodic payroll deductions. The purchase price per share, in general will be 85% of the lower of the fair market value of the common stock on the participant's entry date into the offering period or 85% of the fair market value on the semi-annual purchase date. 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, 2000, 875,772 shares are authorized for issuance under the plan. The Purchase Plan was activated in the first quarter of 2000. F-20 (Continued) 43 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999 (16) RESTRUCTURING COSTS In November 1998, the Company announced a corporate restructuring cost-cutting initiative, and provided a restructuring charge of approximately $3,100,000. Included in this restructuring charge was approximately $1,100,000 in termination benefits for 38 technical, sales and administrative staff. The Company paid $412,000 of these termination benefits prior to December 31, 1998 and $688,000 was included in accrued expenses as of December 31, 1998 which was paid in 1999. The remaining $2,000,000 was comprised of $1,300,000 for the net cost of a lease buyout and $700,000 of leasehold improvements that were abandoned upon movement to a new building in San Diego, California. At December 31, 1999, the remaining balance in the accrued expenses related to the restructuring costs is comprised of remaining costs associated with the lease buyout. (17) RELATED PARTY TRANSACTIONS Sales to a subsidiary of STPL for the year ended December 31, 1998 was $50,000. Sales to Agilis Communication Technologies Pte Ltd (Agilis), an affiliate of ST, amounted to $352,048, $200,000 and $65,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Interest expense on notes payable to affiliates was $0, $765,914 and $581,000 for the years ended December 31, 2000, 1999 and 1998, respectively, of which $0 and $0 were included in accrued expenses in the accompanying consolidated balance sheets as of December 31, 2000 and 1999, respectively. During 1998, an ST affiliate made loans of $15,618,272 to the Company. The Company used the proceeds from the 1999 rights offering to pay off the ST loan (note 11). (18) CONTINGENCIES The Company is involved in litigation and claims arising in the normal course of operations. In the opinion of management based on consultation with legal counsel, losses, if any, from this litigation are covered by insurance or are immaterial; therefore, no provision has been made in the accompanying consolidated financial statements for losses, if any, that might result from the ultimate outcome of these matters. (19) SUPPLEMENTAL FINANCIAL INFORMATION A summary of additions and deductions related to the allowance for doubtful accounts and inventory obsolescence reserve for the years ended December 31, 2000, 1999 and 1998 follows:
BALANCE AT CHARGED TO BALANCE AT BEGINNING OTHER END OF YEAR OF YEAR ADDITIONS ACCOUNTS DEDUCTIONS ----------- ----------- ----------- ----------- ----------- Allowances for doubtful receivables: Years ended December 31: 2000 $ 791,746 293,033 -- 69,966 1,014,813 =========== =========== =========== =========== =========== 1999 $ 632,815 175,000 -- 16,069 791,746 =========== =========== =========== =========== =========== 1998 $ 15,000 155,000 462,815* -- 632,815 =========== =========== =========== =========== ===========
F-21 (Continued) 44 RADYNE COMSTREAM INC. Notes to Consolidated Financial Statements December 31, 2000 and 1999
BALANCE AT CHARGED TO BEGINNING OTHER BALANCE AT OF YEAR ADDITIONS ACCOUNTS DEDUCTIONS END OF YEAR ------- --------- -------- ---------- ----------- Reserve for inventory obsolescence: Years ended December 31: 2000 $ 1,799,229 5,723,647 -- 3,929,027 3,593,849 ============== ========== ======== ======== ========== 1999 $ 1,551,469 420,162 -- 172,402 1,799,229 ============== ========== ======== ======== ========== 1998 $ 291,000 1,260,469 -- -- 1,551,469 ============== ========== ======== ======== ==========
* Balance represents allowance acquired during purchase of ComStream Holdings, Inc. (20) QUARTERLY FINANCIAL DATA - UNAUDITED A summary of the quarterly data for the years ended December 31, 2000 and 1999 follows (in thousands):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- ----- 2000: Total revenues $ 16,752 17,921 17,334 18,100 70,107 ========= ====== ====== ====== ====== Gross profit $ 7,381 8,388 7,832 8,226 31,827 ========= ====== ====== ====== ====== Operating expenses $ 6,333 5,982 5,621 4,954 22,890 ========= ====== ====== ====== ====== Earnings from operations $ 1,461 2,442 2,211 2,823 8,937 ========= ====== ====== ====== ====== Net earnings $ 1,392 2,486 6,565 1,998 12,441 ========= ====== ====== ====== ====== Basic earnings per share $ .11 .17 .45 .16 .89 ========= ====== ====== ====== ====== Diluted earnings per share $ .10 .15 .41 .14 .81 ========= ====== ====== ====== ====== 1999: Total revenues $ 12,319 12,944 13,999 16,578 55,840 ========= ====== ====== ====== ====== Gross profit $ 5,546 5,921 6,704 7,698 25,869 ========= ====== ====== ====== ====== Operating expenses $ 5,308 4,956 5,605 5,963 21,832 ========= ====== ====== ====== ====== Earnings from operations $ 238 965 1,099 1,735 4,037 ========= ====== ====== ====== ====== Net earnings (loss) $ (317) 422 809 1,392 2,306 ========= ====== ====== ====== ====== Basic earnings (loss) per share $ (.05) .07 .13 .13 .32 ========= ====== ====== ====== ====== Diluted earnings (loss) per share $ (.05) .06 .13 .13 .30 ========= ====== ====== ====== ======
F-22 45 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. See our report on Form 8-K/A, filed on July 31, 1998. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES Information regarding directors and executive officers of the Company is set forth under the captions "Elections of Directors" and "Executive Officers and Compensation" in the Company's Proxy Statement relating to its 2001 Annual Meeting of Stockholders (the "2001 Proxy Statement") incorporated by reference into this Form 10-K, which has been filed with the Commission within 120 days after the end of the Company's fiscal year ended December 31, 2000. The "Compensation Committee Report on Executive Compensation," the "Report of the Audit Committee" and the "Stock Price Performance Graph" contained in the 2001 Proxy Statement are not incorporated by reference in this Form 10-K. ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION Information regarding director and executive compensation is set forth under the captions "Election of Directors" and "Executive Officers and Compensation" in the 2001 Proxy Statement, which information is incorporated by reference in this Form 10-K, which has been filed with the Commission within 120 days after the end of the Company's fiscal year ended December 31, 2000. The "Compensation Committee Report on Executive Compensation," the "Report of the Audit Committee" and the "Stock Price Performance Graph" contained in the 2001 Proxy Statement are not incorporated by reference in this Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is set forth under the caption "Security Ownership of Principal Stockholders and Management" in the 2001 Proxy Statement incorporated by reference in this Form 10-K, which has been filed with the Commission within 120 days after the end of the Company's fiscal year ended December 31, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions of management is set forth under the caption "Certain Relationships and Related Transactions" in the 2001 Proxy Statement incorporated by reference in this Form 10-K, which has been filed with the Commission within 120 days after the end of the Company's fiscal year ended December 31, 2000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) The following consolidated financial statements of Radyne ComStream Inc. and subsidiaries are included in Part II, Item 8: Independent Auditors' Reports Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements (a)(2) All financial statement schedules have been omitted because they are not applicable, not required, or the information has been disclosed in the consolidated financial statements or notes thereto or otherwise in this Form 10-K report. (a)(3) The following exhibits are included in this Form 10-K report: 46 EXHIBIT
NO. --- 2.1(1) Stock Purchase Agreement dated August 28, 1998 between Spar Aerospace Limited and Radyne Corp. 3.1(2) Restated Certificate of Incorporation 3.2(3) By-Laws, as amended and restated 10.1(4) 1996 Incentive Stock Option Plan 10.2(5) 1999 Employee Stock Purchase Plan 10.3(6) 2000 Long-Term Incentive Plan 10.4(7) Employment Agreement with Robert C. Fitting (Radyne Termsheet) 10.5(8) Lease between ADI Communication Partners, L.P. and ComStream dated April 23, 1997 10.6(8) First Amendment to lease between ADI Communication Partners L.P. and ComStream dated July 16, 1997 10.7(8) Second Amendment to Lease between Kilroy Realty, L.P. and ComStream dated November 18, 1998 10.8(8) Indemnity Agreement between Pacific Bell Corporation and ComStream dated November 18, 1998 10.9(8) Letter Agreement between Spar and Radyne Corp. dated November 18, 1998 10.10(9) Lease for facility in Phoenix, Arizona 10.11(10) Amendment to 1996 Incentive Stock Option Plan 10.12(11) Uncommitted Line of Credit Facility Letter Agreement, dated as of May 18, 1998, and amended as of September 28, 1998 and September 30, 1999 10.13(11) Stock Purchase Loan Agreement executed by Robert Fitting, dated October 8, 1999 10.14(11) Promissory Note executed by Robert Fitting, dated October 8, 1999 in the amount of $200,000 10.15(11) Stock Purchase Loan Agreement executed by Garry Kline, dated October 8, 1999 10.16(11) Promissory Note executed by Garry Kline, dated October 11, 1999 in the amount of $50,000 10.17(11) Stock Purchase Loan Agreement executed by Steven Eymann, dated November 11, 1999 10.18(11) Promissory Note executed by Steven Eymann, dated November 1, 1999 in the amount of $100,000 10.19(11) General Release and Settlement Agreement between Spar Aerospace Limited and Radyne ComStream Inc. dated September 29, 1999 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 99.1 Cautionary Statement Regarding Forward-Looking Statements and Risk Factors
- ---------- (1) Incorporated by reference from Registrant's Form 8-K filed on August 28, 1998. (2) Incorporated by reference from exhibit 3.1 to Registrant's description of capital stock on Form 8-A12G, filed on July 13, 2000. (3) Incorporated by reference from exhibit 3.2 to Registrant's description of capital stock on Form 8-A12G, filed on July 13, 2000. (4) Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on March 12, 1997 (File No. 333-23159). (5) Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on November 5, 1999 (File No. 333-90383). (6) Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on July 19, 2000 (File No. 333-41704) 47 (7) 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). (8) Incorporated by reference from Registrant's Registration Statement on Form S-2, filed January 11, 1999 (File No. 333-70403). (9) Incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. (10) Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on November 18, 1998 (File No. 333-67469). (11) Incorporated by reference from Registrant's amended Registration Statement on Form S-2, dated and declared effective on February 7, 2000 (File No. 333-90731). (b) Registrant filed the following reports on Form 8-K during the period of October 1 through December 31, 2000: Current Report on Form 8-K dated December 20, 2000, under Item 5 for a press release concerning the Registrant's acquisition of Armer Communications Engineering Services, Inc. 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. RADYNE COMSTREAM INC. --------------------- (Registrant) By: /s/ Robert C. Fitting ------------------------------------------ Robert C. Fitting, Chief Executive Officer Dated: March 30, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ Lim Ming Seong Chairman of the Board of Directors March 30, 2001 - --------------------------- Lim Ming Seong /s/ Robert C. Fitting Chief Executive Officer and Director March 30, 2001 - --------------------------- Robert C. Fitting /s/ Brian J. Duggan Chief Operations Officer and President March 30, 2001 - --------------------------- Brian J. Duggan /s/ Garry D. Kline Vice President, Finance March 30, 2001 - --------------------------- Garry D. Kline (Principal Financial and Accounting Officer) /s/ C.J. Waylan Director March 30, 2001 - --------------------------- C.J. Waylan /s/ Lee Yip Loi Director March 30, 2001 - --------------------------- Lee Yip Loi /s/ Dennis Elliott Director March 30, 2001 - --------------------------- Dennis Elliott /s/ Tang Kum Chuen Director March 30, 2001 - --------------------------- Tang Kum Chuen
49 INDEX TO EXHIBITS
NO. --- 2.1(1) Stock Purchase Agreement dated August 28, 1998 between Spar Aerospace Limited and Radyne Corp. 3.1(2) Restated Certificate of Incorporation 3.2(3) By-Laws, as amended and restated 10.1(4) 1996 Incentive Stock Option Plan 10.2(5) 1999 Employee Stock Purchase Plan 10.3(6) 2000 Long-Term Incentive Plan 10.4(7) Employment Agreement with Robert C. Fitting (Radyne Termsheet) 10.5(8) Lease between ADI Communication Partners, L.P. and ComStream dated April 23, 1997 10.6(8) First Amendment to lease between ADI Communication Partners L.P. and ComStream dated July 16, 1997 10.7(8) Second Amendment to Lease between Kilroy Realty, L.P. and ComStream dated November 18, 1998 10.8(8) Indemnity Agreement between Pacific Bell Corporation and ComStream dated November 18, 1998 10.9(8) Letter Agreement between Spar and Radyne Corp. dated November 18, 1998 10.10(9) Lease for facility in Phoenix, Arizona 10.11(10) Amendment to 1996 Incentive Stock Option Plan 10.12(11) Uncommitted Line of Credit Facility Letter Agreement, dated as of May 18, 1998, and amended as of September 28, 1998 and September 30, 1999 10.13(11) Stock Purchase Loan Agreement executed by Robert Fitting, dated October 8, 1999 10.14(11) Promissory Note executed by Robert Fitting, dated October 8, 1999 in the amount of $200,000 10.15(11) Stock Purchase Loan Agreement executed by Garry Kline, dated October 8, 1999 10.16(11) Promissory Note executed by Garry Kline, dated October 11, 1999 in the amount of $50,000 10.17(11) Stock Purchase Loan Agreement executed by Steven Eymann, dated November 11, 1999 10.18(11) Promissory Note executed by Steven Eymann, dated November 1, 1999 in the amount of $100,000 10.19(11) General Release and Settlement Agreement between Spar Aerospace Limited and Radyne ComStream Inc. dated September 29, 1999 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 99.1 Cautionary Statement Regarding Forward-Looking Statements and Risk Factors
- ---------- (1) Incorporated by reference from Registrant's Form 8-K filed on August 28, 1998. (2) Incorporated by reference from exhibit 3.1 to Registrant's description of capital stock on Form 8-A12G, filed on July 13, 2000. (3) Incorporated by reference from exhibit 3.2 to Registrant's description of capital stock on Form 8-A12G, filed on July 13, 2000. (4) Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on March 12, 1997 (File No. 333-23159). (5) Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on November 5, 1999 (File No. 333-90383). (6) Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on July 19, 2000 (File No. 333-41704) (7) 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). (8) Incorporated by reference from Registrant's Registration Statement on Form S-2, filed January 11, 1999 (File No. 333-70403). (9) Incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. (10) Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on November 18, 1998 (File No. 333-67469). (11) Incorporated by reference from Registrant's amended Registration Statement on Form S-2, dated and declared effective on February 7, 2000 (File No. 333-90731). (b) Registrant filed the following reports on Form 8-K during the period of October 1 through December 31, 2000: Current Report on Form 8-K dated December 20, 2000, under Item 5 for a press release concerning the Registrant's acquisition of Armer Communications Engineering Services, Inc. EX-21.1 2 p64754ex21-1.txt EX-21.1 1 EXHIBIT 21.1 List of Subsidiaries
Name Place of Incorporation ---- ---------------------- ComStream Corporation Delaware ComStream UK Limited England and Wales ComStream Israel Ltd. Israel Armer Communications Engineering Services, Inc. Delaware
EX-23.1 3 p64754ex23-1.txt EX-23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Radyne ComStream Inc.: We consent to the incorporation by reference in the registration statements of Radyne ComStream Inc. on Form S-8 (File No. 333-23159) filed as of March 12, 1997, Form S-8 (File No. 333-67469) filed as of November 19, 1998 and amended as of May 5, 1999, Form S-8 (File No. 333-90383) filed as of November 5, 1999 and Form S-8 (file No. 333-41704) filed as of July 19, 2000, of our report dated March 9, 2001, on the consolidated balance sheets of Radyne ComStream Inc. as of December 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000, which report appears in the December 31, 2000 annual report on Form 10-K of Radyne ComStream Inc. /s/ KPMG LLP Phoenix, Arizona March 29, 2001 EX-99.1 4 p64754ex99-1.txt EX-99.1 1 EXHIBIT 99.1 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS In passing the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), Congress encouraged public companies to make "forward-looking statements" by creating a safe harbor to protect companies from securities law liability in connection with forward-looking statements. Radyne ComStream intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions. "Forward-looking statements" are defined by the Reform Act. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. The words "believe," "expect," "anticipate," "intends," "forecast," "project," and similar expressions identify forward-looking statements. Such statements may include, but not are limited to: (i) continued growth in demand for satellite system ground-based equipment and satellite-delivered communications services, (ii) continued global deregulation and privatization of telecommunications carriers, (iii) continued growth in worldwide demand for Internet over Satellite connectivity and communications serves in general, (iv) an increase in total foreign sales, and (v) sufficient cash reserves and cash from operations to fund planned future operations and capital requirements through the end of 2001. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or result to differ materially from those projected. Due to those and other uncertainties and risks, the investment community is urged not to place undue reliance on written or oral forward-looking statements of Radyne ComStream. Radyne ComStream undertakes no obligation to update or revise this Cautionary Statement Regarding Forward-Looking Statements to reflect future developments. In addition, Radyne ComStream undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to future operating results over time. Radyne ComStream provided the following risk factor disclosure in connection with its continuing effort to qualify its written and oral forward-looking statements under the safe harbor protection of the Reform Act and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the disclosures contained in the Company's Annual Report on Form 10-K to which this statement is appended as an exhibit and also include the following: RISK FACTORS You should carefully consider the following risks before you decide to buy our securities. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. As a result, the trading price of our securities could decline, and you may lose all or part of the money you paid to buy our securities. We Have A History Of Operating Losses, Only Recently Became Profitable, And Could Suffer Further Losses In The Future. As a result of operating losses prior to 1999, we had an accumulated deficit of $6.6 million at December 31, 2000. Although we have been profitable over the past 2 years, the economy has shown signs of weakening, which we expect to affect profitability in the first quarter of this year. Further, there can be no assurance that we will remain profitable in the future. Reductions in our profitability or losses would adversely affect our stock price. We Depend On International Sales, Which Could Cause Our Sales Levels To Be Volatile. Sales to our foreign customers were approximately 50% of our net sales for the year ended December 31, 1998, 56% of our net sales for the year ended December 31, 2 2000. Additionally, we estimate that approximately 60% of domestic sales are eventually exported. 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 throughout 1999 and 2000. 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. The Current 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 rapid growth and evolution in the global telecommunications and Internet industries, as well as the rapid growth in demand for Internet services and the resultant need for high-speed or enhanced telecommunications products seen in prior years has been slowed by current economic conditions in the United States and elsewhere. The potential growth in these areas is 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. 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. 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 Chief Executive Officer, and Steve Eymann, our Executive Vice President and Chief Technical Officer. The loss of either of these key employees would adversely affect our operations. Mr. Fitting is 65 years old and the Company may eventually need to effect an 3 appropriate transition to a new Chief Executive Officer. Any such transition may disrupt our business, customers and employees. 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. 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 Comtech Telecommunications Corp., 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 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. 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. 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 $9,316,633 in the year ended December 31, 2000 on research and development activities. This represents 13% of our net sales for the year ended December 31, 2000. Additionally, 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. 4 Continued Growth Could Prove Unsuccessful And Strain Our Personnel And Systems And Divert Our Resources. Our operations have expanded significantly as a result of our acquisitions of ComStream and Armer Communications Engineering Services, Inc. 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 would entail various risks, including the difficulty of assimilating the operations and personnel of the acquired businesses or products, the potential disruption of our ongoing business and, generally, our potential inability to obtain the desired financial and strategic benefits from the acquisition or investment. 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, 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 condition, and results of operations. Further, any future acquisitions and investments also could result in substantial cash expenditures, potentially dilutive issuances of equity securities, the incurrence of additional debt and contingent liabilities, and amortization expenses related to goodwill and other intangible assets, which could adversely affect our financial results and condition. Our Competitive Position Relies Heavily On Our Proprietary Technology And Intellectual Property. 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. We may find it necessary to take legal action in the future to enforce or protect our intellectual property rights. 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. Our Products Could Infringe On The Intellectual Property Of Others. 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 defend against claims that our products or 5 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. 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. 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; - 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. The Ownership Interest Of Our Controlling Shareholder May Make Our Stock Less Attractive To Investors And Potential Acquirers. ST owns a majority 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 stockholders. 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. Our Outstanding Options And Warrants May Dilute Our Stockholders' Interests And Could Hinder Us From Obtaining Additional Financing. We grant options and warrants to purchase shares of common stock to employees, directors and others with business relationships with us. To the extent that outstanding options and warrants are exercised, our stockholders' interests will be diluted. Also, we may not be able to obtain additional equity capital on acceptable terms, because the holders of the outstanding options and warrants will likely exercise them at a time when we may be able to obtain such capital on better terms than those under the options and warrants. 6 Our Redemption Of Redeemable Warrants May Have An Adverse Effect On The Holders Of The Warrants. We have the right to redeem all, but not less than all, of the redeemable warrants under certain conditions. Redemption of the redeemable warrants could encourage holders to exercise them and pay the exercise price at a time when it may be disadvantageous for the holders to do so, to sell the redeemable warrants at the current market price when they might otherwise wish to hold the redeemable warrants or to accept the redemption price, which may be substantially less than the market value of the redeemable warrants at the time of redemption. The holders of the redeemable warrants will automatically forfeit their rights to purchase the shares of common stock issuable upon exercise of those warrants unless the warrants are exercised before they are redeemed. The holders of redeemable warrants will not possess any rights as stockholders unless and until the redeemable warrants are exercised. Stock Prices Of Technology Companies Have Declined Precipitously In The Past Year And The Trading Price Of Our Common Stock And Redeemable Warrants Is Likely To Be Volatile, Which Could Result In Substantial Losses To Investors. The trading price of our common stock and redeemable warrants have fallen in recent months and could continue to be volatile in response to factors including the following, some of which are beyond our control: - decreased demand in the Internet-services sector; - variations in our operating results; - announcements of technological innovations or new services by us or our competitors; - changes in expectations of our future financial performance, including financial estimates by securities analysts and investors; - changes in operating and stock price performance of other technology companies similar to us; - conditions or trends in the technology industry; - additions or departures of key personnel; and - future sales of our common stock. Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock and redeemable warrants. The Large Number Of Shares Eligible For Future Sale May Adversely Affect The Market Price Of Our Common Stock. A large number of our issued and outstanding shares of common stock are eligible for future sale. 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. Nasdaq Could Delist Our Common Stock Or Redeemable Warrants, Which Could Make It More Difficult For You To Sell Or Obtain Quotations As To The Price Of Our Common Stock Or Redeemable Warrants. In order to continue to be listed on Nasdaq, we must meet the following requirements: - net tangible assets of at least $2,000,000, or a market capitalization of $35,000,000 or $500,000 in net earnings for two of the last three years; - a minimum bid price of $1.00; - two market makers; - 300 stockholders; - at least 500,000 shares in the public float or a minimum market value for the public float of $1,000,000; and 7 - compliance with certain corporate governance standards. If we cannot satisfy Nasdaq's maintenance criteria in the future, Nasdaq could delist our common stock or redeemable warrants. In the event of delisting, trading, if any, would be conducted only in the over-the-counter market in the so-called "pink sheets" or the NASD's Electronic Bulletin Board. As a result of any delisting, an investor would likely find it more difficult to sell or obtain quotations as to the price of our common stock or redeemable warrants. 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 otherwise would be required to pay. 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. Anti-Takeover Effect Of Delaware Law And Our Charter. Under the Delaware general Corporation Law, which we are subject to, it will be more difficult for a third party to take control of the Company and may limit the price some investors are willing to pay for shares of our common stock. Furthermore, our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock without a vote or other stockholder approval. -----END PRIVACY-ENHANCED MESSAGE-----