-----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, IzaYuCBe3qngehEmSGRIZ+EpNgixH9pGFiWPPKqtTMHFK+ENYnjjPbpp9iqpgA1O 0/aZxKU+Uqzj6OGfpQpeFQ== 0001047469-98-045081.txt : 19981228 0001047469-98-045081.hdr.sgml : 19981228 ACCESSION NUMBER: 0001047469-98-045081 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981215 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19981224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADYNE CORP 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: 8-K/A SEC ACT: SEC FILE NUMBER: 000-11685 FILM NUMBER: 98775674 BUSINESS ADDRESS: STREET 1: 5225 S 37TH ST CITY: PHOENIX STATE: AZ ZIP: 85040 BUSINESS PHONE: 6024379620 MAIL ADDRESS: STREET 1: 5225 S 37TH ST CITY: PHOENIX STATE: AZ ZIP: 85040 8-K/A 1 FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) October 15, 1998 ------------------ RADYNE CORP. (Exact name of registrant as specified in its charter) ------------------------------------------------------- NEW YORK 0-11685-NY 11-2569467 - -------------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification) 3138 EAST ELWOOD STREET, PHOENIX, ARIZONA 85034 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 602-437-9620 ------------- 5225 SOUTH 37TH STREET, PHOENIX, ARIZONA 85040 ------------------------------------------------------------- (Former name or former address, if changed since last report) Item 2. ACQUISITION OR DISPOSITION OF ASSETS On August 28, 1998, Radyne Corp. (the "Company") signed a definitive agreement to acquire ComStream Holdings, Inc. ("Comstream") from Spar Aerospace Limited ("Spar"). On October 15, 1998 (the "Closing Date"), the Company acquired Comstream (the "Acquisition"), with Comstream becoming a wholly owned subsidiary of the Company. On the Closing Date, the Company purchased all of the outstanding shares of common stock of Comstream for an aggregate purchase price of $17,000,000, of which $10 million was paid in cash at the closing, using funds borrowed from its controlling shareholder, and $7 million will be payable up to nine months thereafter pursuant to a note (the "Note") which is convertible into the Company's common stock, par value $.002 per share (the "Common Stock"), under certain circumstances. The Company and Spar will also enter into a registration rights agreement providing Spar with piggyback and demand registration rights, in the event that the Note is converted into Common Stock. The Acquisition will be accounted for under the purchase method and is expected to result in a one-time charge of approximately $4.2 million, which represents the value assigned to purchased in-process research and development. The Company intends to finance the Acquisition and its ongoing working capital needs through (i) a rights offering pursuant to which it will offer Common Stock to its existing shareholders and (ii) the extension and enhancement of an existing bank line of credit. Stetsys Pte Ltd, the Company's controlling shareholder has committed to purchase approximately $16,040,000 of Common Stock pursuant to the rights offering at a price of $3.73 per share. This is also the conversion price of the Note provided to Spar as part of the consideration for the Acquisition. In addition, the Company's other shareholders will be offered approximately $1,660,000 of shares of Common Stock at the same price per share, in amounts proportionate to their shareholdings. This offering will be made strictly by means of a prospectus which will be distributed to shareholders of record at a date selected at the time of the Company's filing a registration statement for such offering with the Securities and Exchange Commission. The Company, with headquarters in Phoenix, Arizona and operations in San Diego, California, designs, manufactures and sells satellite modems and earth stations including digital video and high speed modems, and ancillary products, as well as digital data, audio and video satellite broadcast receivers, into primarily international markets. Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS a. Financial Statements of Businesses Acquired Audited consolidated balance sheets of Comstream as of December 31, 1997 and 1996 and the related consolidated statements of operations, stockholder's equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. Unaudited condensed interim consolidated balance sheet of Comstream as of September 30, 1998, and the related consolidated statements of operations and cash flows for each of the nine-month periods ended September 30, 1998 and September 30, 1997. b. Pro Forma Financial Information. The attached unaudited pro forma condensed combined balance sheet for the nine months ended September 30, 1998 and statement of operations for the nine months ended September 30, 1998 and year ended December 31, 1997 give effect to the purchase by the Company of all of the outstanding shares of common stock of Comstream as of the beginning of the periods presented for the statements of operations, for an aggregate purchase price of $17,000,000, of which $10 million was paid in cash at the closing, using funds borrowed from the Company's controlling shareholder, and $7 million will be payable up to nine months thereafter pursuant to a note which is convertible into the Company's Common Stock under certain circumstances. Accordingly, the acquired assets and liabilities were recorded at their estimated fair market value at the date of acquisition. The pro forma condensed combined statements of operations assume that the acquisition took place at the beginning of each period presented and combine the Company's and Comstream's results of operations for the year ended December 31, 1997 and the nine months ended September 30, 1998. The unaudited pro forma condensed combined balance sheet combines the Company's balance sheet as of September 30, 1998 with Comstream's balance sheet as of September 30, 1998, giving effect to the Acquisition as if it had occurred on September 30, 1998. The pro forma condensed combined financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred had the Acquisition been consummated at the beginning of the periods presented, nor is it necessarily indicative of future operating results or financial position. The pro forma condensed combined financial information should be read in conjunction with the audited historical consolidated financial statements and the related notes thereto of Radyne and the audited financial statements and notes thereto of Comstream included herein. c. Exhibits 4.1 Convertible Promissory Note between Spar and the Company dated October 15, 1998, with the form of Registration Rights Agreement included as Appendix A thereto. 23.0 Consent of Independent Auditors. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: December 21, 1998 RADYNE CORPORATION ------------------- (Registrant) By: /S/ Robert C. Fitting ---------------------- Its: President and CEO ComStream Holdings, Inc. Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Contents Report of Independent Auditors..................................................F-1 Consolidated Financial Statements Consolidated Balance Sheets.....................................................F-2 Consolidated Statements of Operations...........................................F-3 Consolidated Statements of Stockholder's Equity (Deficit).......................F-4 Consolidated Statements of Cash Flows...........................................F-5 Notes to Consolidated Financial Statements......................................F-6
Report of Ernst & Young LLP, Independent Auditors Board of Directors and Stockholder ComStream Holdings, Inc. We have audited the accompanying consolidated balance sheets of ComStream Holdings, Inc., a wholly-owned subsidiary of Spar Aerospace Limited, as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholder's equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of ComStream Holdings, Inc., at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP San Diego, California February 16, 1998, except for Note 11, as to which the date is April 16, 1998 F-1 ComStream Holdings, Inc. Consolidated Balance Sheets (In thousands, except share data)
December 31, 1997 1996 Assets Current assets: Cash $ 729 $ 2,377 Accounts receivable, net 9,558 7,021 Inventories 6,162 8,351 Due from affiliated companies 1,249 1,750 Prepaid expenses and other current assets 2,143 1,472 Net assets of discontinued operations -- 26,099 -------- -------- Total current assets 19,841 47,070 Property and equipment 13,129 13,101 Accumulated depreciation (6,192) (3,340) -------- -------- 6,937 9,761 -------- -------- Intangible assets, net 4,561 5,485 Other assets 504 714 -------- -------- -------- -------- Total assets $ 31,843 $ 63,030 -------- -------- -------- -------- Liabilities and stockholder's deficit Current liabilities: Accounts payable $ 4,429 $ 4,568 Accrued liabilities 6,466 4,694 Due to affiliated companies 4,337 4,775 Income taxes payable 574 998 Customer advances 602 728 Other current liabilities -- 225 Net liabilities of discontinued operations 15,266 -- -------- -------- Total current liabilities 31,674 15,988 Revolving line of credit from bank 12,000 -- Revolving line of credit from parent company 27,183 60,697 Other liabilities 283 233 -------- -------- Total long-term liabilities 39,466 60,930 Commitments and contingencies Stockholder's deficit Preferred stock, $0.001 par value; 8,000,000 shares authorized; 100 shares issued and outstanding in 1997 and 1996 -- -- Common stock, $0.001 par value; 100,000,000 shares authorized; 20,000,000 shares issued and outstanding in 1997 and 1996 20 20 Additional capital 52,608 49,380 Accumulated deficit (91,925) (63,023) Translation adjustment -- (265) -------- -------- Total stockholder's deficit (39,297) (13,888) -------- -------- -------- -------- Total liabilities and stockholder's deficit $ 31,843 $ 63,030 -------- -------- -------- --------
See accompanying notes. F-2 ComStream Holdings, Inc. Consolidated Statements of Operations (In thousands)
Years ended December 31, 1997 1996 1995 -------- -------- -------- Revenue $ 55,923 $ 60,528 $ 70,214 Cost of revenue 32,624 41,086 44,264 -------- -------- -------- Gross profit 23,299 19,442 25,950 Operating expenses: Selling and marketing 7,133 8,761 9,596 Research and development 8,267 7,054 4,767 General and administrative 7,487 6,081 8,961 Amortization of intangible assets 836 858 5,502 Restructuring costs 3,500 -- -- -------- -------- -------- Total operating expenses 27,223 22,754 28,826 Operating loss (3,924) (3,312) (2,876) Interest expense (primarily with parent company) 3,632 3,815 5,020 Other (income) expense, net 98 (346) (144) -------- -------- -------- Loss from continuing operations before income taxes (7,654) (6,781) (7,752) Provision for income taxes 80 9 3 -------- -------- -------- Loss from continuing operations (7,734) (6,790) (7,755) Discontinued operations: (Loss) income from operations of Components division, net of income taxes of $0 in 1997 and 1996 and $150 in 1995 (6,811) (5,988) 9,811 Gain on disposal of Components division, net of income taxes of $0 28,956 -- -- Loss from operations of Satellite Global Access division, net of income taxes of $0 in 1997, 1996 and 1995 (29,013) (5,584) (6,224) Loss on disposal of Satellite Global Access division, net of income taxes of $0 (14,300) -- -- -------- -------- -------- Net loss $(28,902) $(18,362) $ (4,168) -------- -------- -------- -------- -------- --------
See accompanying notes. F-3 ComStream Holdings, Inc. Consolidated Statements of Stockholder's Equity (Deficit) (In thousands, except share data)
Preferred Stock Common Stock --------------- ----------------- Additional Accumulated Translation Shares Amount Shares Amount Capital Deficit Adjustment Total ------------------------------------------------------------------------------------- Balance at December 31, 1994 100 $ -- 20,000,000 $ 20 $ 24,594 $ (40,493) $ (275) $ (16,154) Notes payable to parent contributed to capital -- -- -- -- 25,000 -- -- 25,000 Exercise of stock options -- -- 80,730 -- 392 -- -- 392 Repurchase of common stock -- -- (80,730) -- (436) -- -- (436) Net loss -- -- -- -- -- (4,168) -- (4,168) Currency translation adjustments -- -- -- -- -- -- (1) (1) ------------------------------------------------------------------------------------- Balance at December 31, 1995 100 -- 20,000,000 20 49,550 (44,661) (276) 4,633 Exercise of stock options -- -- 308,788 -- 1,497 -- -- 1,497 Repurchase of common stock -- -- (308,788) -- (1,667) -- -- (1,667) Net loss -- -- -- -- -- (18,362) -- (18,362) Currency translation adjustments -- -- -- -- -- -- 11 11 ------------------------------------------------------------------------------------- Balance at December 31, 1996 100 -- 20,000,000 20 49,380 (63,023) (265) (13,888) Exercise of stock options -- -- 980,106 1 4,755 -- -- 4,756 Repurchase of common stock -- -- (980,106) (1) (4,755) -- -- (4,756) Sale of ComStream Canada to parent -- -- -- -- 3,228 -- -- 3,228 Net loss -- -- -- -- -- (28,902) -- (28,902) Currency translation adjustments -- -- -- -- -- -- 265 265 ------------------------------------------------------------------------------------- Balance at December 31, 1997 100 $ -- 20,000,000 $ 20 $ 52,608 $ (91,925) $ -- $ (39,297) ------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------
See accompanying notes. F-4 ComStream Holdings, Inc. Consolidated Statements of Cash Flows (In thousands)
Years ended December 31, 1997 1996 1995 ---------- --------- ---------- Operating activities Net loss $ (28,902) $ (18,362) $ (4,168) Adjustments to reconcile net loss to net cash used in operating activities: Loss (income) from discontinued operations 35,824 11,572 (3,587) Gain on disposal of discontinued operations, net (14,656) -- -- Restructuring costs 3,500 -- -- Depreciation and amortization 3,222 2,663 1,949 Amortization of intangible assets 836 858 5,502 Provision for doubtful accounts 577 528 (403) Increase (decrease) in cash resulting from changes in: Accounts receivable (3,114) 1,215 1,367 Inventories 2,189 (1,808) 4,418 Due from affiliate companies 501 (808) (382) Prepaid expenses and other current assets (671) 180 (687) Accounts payable and accrued liabilities (1,215) 559 (9,338) Due to affiliated companies (438) 1,768 1,416 Income taxes payable (424) 671 (958) Customer advances (126) 320 30 Other current liabilities (226) (153) (720) ---------- --------- ---------- Net cash used in continuing operations (3,123) (797) (5,561) Net cash provided by (used in) discontinued operations (12,320) (9,686) 2,690 ---------- --------- ---------- Net cash used by operating activities (15,443) (10,483) (2,871) ---------- --------- ---------- Investing activities Proceeds from the sale of discontinued operations 37,672 -- -- Acquisition of property and equipment (1,121) (2,183) (2,765) Capital expenditures of discontinued operations (5,179) (1,998) (3,979) Other 370 (234) (558) ---------- --------- ---------- Net cash provided by (used in) investing activities 31,742 (4,415) (7,302) Financing activities Repayments of revolving line of credit from parent company (166,734) (71,504) (123,024) Proceeds from revolving line of credit from parent 136,448 88,684 133,704 company Repayments of bank indebtedness (27,000) -- -- Proceeds from bank indebtedness 39,000 -- -- Proceeds from exercise of stock options 4,756 1,497 392 Repurchase of common stock (4,756) (1,667) (436) Other 339 161 (311) ---------- --------- ---------- Net cash provided by (used in) financing activities (17,947) 17,171 10,325 Increase (decrease) in cash (1,648) 2,273 152 Cash at beginning of year 2,377 104 (48) ---------- --------- ---------- Cash at end of year $ 729 $ 2,377 $ 104 ---------- --------- ---------- ---------- --------- ---------- Supplemental disclosures: Taxes paid $ 129 $ 2 $ 722 ---------- --------- ---------- ---------- --------- ---------- Interest paid (primarily to parent company) $ 6,482 $ 1,020 $ 4,250 ---------- --------- ---------- ---------- --------- ---------- Debt forgiven by parent company $ 3,228 $ -- $ -- ---------- --------- ---------- ---------- --------- ----------
See accompanying notes. F-5 1. Organization and Significant Accounting Policies Formation and Basis of Presentation ComStream Holdings, Inc. (the Company), a wholly-owned subsidiary of Spar Aerospace Limited (Spar), which is a publicly-held Canadian company, was incorporated in the state of Delaware in the United States in 1996. The Company's principal operating subsidiary is ComStream Corporation. In December 1992, Commercial Telecommunications Corporation (Comtel), a wholly-owned US subsidiary of Spar, purchased ComStream Corporation, a privately-owned California manufacturer of telecommunications equipment. ComStream Corporation and Comtel were merged in 1994 and continued operating as ComStream Corporation. In 1994, Spar also incorporated the net assets of its Canadian telecommunications division and contributed the stock of the new subsidiary (ComStream Canada Inc.) and the stock of ComStream Corporation to ComStream Inc., a newly formed Canadian holding company; as part of this reorganization Spar also forgave certain intercompany debt and assumed certain liabilities of its former Canadian telecommunications division aggregating $2,005,000. During 1996 and 1997, Spar implemented a reorganization of the ComStream companies in which ComStream Inc. adopted a plan of liquidation and the shares of ComStream Canada Inc. and ComStream Corporation were transferred to Spar and subsequently contributed by Spar to ComStream Holdings, Inc. The combination of the Spar businesses were accounted for in a manner similar to the pooling of interests during the periods presented. On September 30,1997, ComStream Corporation purchased certain long-term contracts from ComStream Canada Inc. All the shares of ComStream Canada Inc. were then acquired by Spar. As part of this transaction, Spar forgave intercompany debt of $3,228,000 which has been reflected as a capital contribution in the accompanying consolidated financial statements. The Company has incurred significant losses from operations and has a stockholder's deficit of $39.3 million at December 31, 1997. These matters raise doubt about the Company's ability to continue as a going concern. However, the Company has taken the following actions, partially mitigating these matters. In May 1997, the Components division, which incurred significant operating losses in 1996 and 1997, was divested for cash of $37.7 million. During the fourth quarter of 1997, the Company implemented a corporate restructuring and cost cutting initiative whereby 80 technical, sales and administrative positions were eliminated and certain facilities were consolidated. Also in the fourth quarter of 1997, the Company decided to divest or otherwise discontinue its F-6 1. Organization and Significant Accounting Policies (continued) Satellite Global Access (SGA) division which had been negatively impacted by unfavorable economic conditions in its key market areas and had incurred operating losses since its inception in 1994. On April 16, 1998, the Company completed a definitive agreement to sell the SGA business to NSI Network Sciences International Ltd. for cash proceeds of $3,050,000 subject to certain adjustments. This transaction is expected to close in June 1998 (Note 11). These restructuring and divestiture actions were taken to position the remaining business segments to achieve a profitable level of operations. However, no assurances can be provided that the Company will be able to achieve profitable operating results. The Company's cash requirements, not internally funded by operations, have been funded by a revolving line of credit arrangement with its parent company, Spar. Spar has expressed its intent to continue funding the Company's results of operations through at least December 31, 1998. Therefore, the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and as a wholly-owned subsidiary of Spar. The Company now operates primarily in North America (the United States and Canada) in two business segments in the satellite communications industry. The Satellite Products Division (SPD) designs, markets and manufactures satellite-based interactive modems and earth stations. In addition, SPD offers a family of products which provide one-way broadcast transmission of data, audio and video. The Broadband Products Division (BPD) 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, which is expected to be marketed and manufactured beginning in 1998. Basis of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. Revenue Recognition Revenue from product sales is generally recognized when products are shipped. Revenue related to the performance of nonrecurring engineering services is recognized as costs are incurred, consistent with the performance requirements of the related agreements. F-7 1. Organization and Significant Accounting Policies (continued) Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risks consist primarily of trade receivables. The Company sells its products and services to a diverse group of customers throughout the world, primarily in the satellite communications industry. At December 31, 1997, no customer accounted for greater than 10% of trade accounts receivable. To reduce risk, the Company performs ongoing evaluations of its customers' credit worthiness and may require guarantees under letters of credit. Major Customers Two SPD customers each accounted for 11% of 1997 revenues, no customers represented greater than 10% of 1996 revenues and two SPD customers accounted for 19% and 12%, respectively, of 1995 revenues. Export Revenues Export revenues from North America as a percentage of total revenues follow:
1997 1996 1995 ----------------- Asia 29% 42% 24% Europe 27 26 30 Latin and South America 11 4 7 ----------------- 67% 72% 61% ----------------- -----------------
Inventories Inventories are stated at the lower of standard cost (which approximates actual cost), or market, using the first-in, first-out method. F-8 1. Organization and Significant Accounting Policies (continued) 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. Property and Equipment Property and equipment is stated at cost. Depreciation is provided on the straight-line basis over the estimated useful lives of the property, ranging from three to ten years. Leasehold improvements are amortized on a straight-line basis over the shorter of the life of the lease or the life of the improvements. Intangible Assets Intangible assets include costs of technology and goodwill arising from the 1992 purchase of ComStream Corporation and costs of acquired patents and licenses. Purchased technology and patents and licenses are amortized over the estimated useful lives of the related products, ranging from three to seven years; goodwill is amortized over 15 years. Asset Impairment Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS 121), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. There was no effect on the consolidated financial statements from the adoption of SFAS 121. 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 F-9 1. Organization and Significant Accounting Policies (continued) 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. Stock Split In June 1997, the Company issued a 2-for-1 stock split. All shares and per share data in the accompanying consolidated financial statements have been adjusted to reflect the stock split. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The industry in which the Company operates is characterized by rapid technological change and short product life cycles. As a result, estimates are required to provide for product obsolescence and warranty returns as well as other matters. Historically, actual amounts incurred for these matters have not varied significantly from estimated amounts. Foreign Currency Translation Financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of stockholder's equity (deficit). Where the U.S. dollar is the functional currency, translation adjustments are recorded in income. Reclassification Certain prior year amounts have been reclassified to conform with the current year presentation. F-10 1. Organization and Significant Accounting Policies (continued) New Accounting Standards In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS 130, Reporting Comprehensive Income, effective for fiscal years beginning after December 15, 1997. SFAS 130 requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. The Company's comprehensive loss will not be materially different than net loss as reported. In June 1997, the FASB issued SFAS 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 131 establishes standards for the way in which publicly held companies report financial and descriptive information about its operating segments in the financial statements for both interim and annual periods. The statement also requires additional disclosures with respect to products and services, geographic areas of operation and major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997. The Company's adoption of SFAS 131 will have no impact on the Company's consolidated results of operations, cash flows or financial position but may increase the level of disclosure of segment information. Impact of Year 2000 (Unaudited) The "Year 2000 Issue" addresses the problems created by the fact that most computer software programs have been written using two digits, rather that four, to represent a specific year (e.g., "97" would represent 1997). Such date-sensitive software programs may recognize a date using "00" as the year 1900 rather than the year 2000, which might result in system failures or miscalculations causing a disruption in operations, including among others, temporary inability to process normal accounting transactions, send invoices or engage in similar normal business activities. In addition, to the extent a company distributes products containing date-sensitive computer programs, a company may incur substantial costs and time creating or modifying existing software programs, inventory and returned products. The Company completed an assessment of the impact of the Year 2000 Issue on its internal and external operations, and determined that it may be required to upgrade certain software programs it employs in the normal course of business and further may need to provide upgrades to products previously distributed to customers. The total cost of the Year 2000 Issue project is estimated to be less than $1.5 million, which includes items to be charged to operating expenses and items to be capitalized and amortized, and is estimated to be completed in 1999. The Company believes that the Year 2000 Issue will not have a material adverse effect on its operations or business. F-11 1. Organization and Significant Accounting Policies (continued) The cost of the Year 2000 Issue project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. 2. Composition of Certain Balance Sheet Accounts
December 31, 1997 1996 -------------------- (in thousands) Accounts receivable: Trade accounts receivable $ 10,440 $ 7,326 Less allowance for doubtful accounts (882) (305) -------------------- $ 9,558 $ 7,021 -------------------- --------------------
December 31, 1997 1996 -------------------- (in thousands) Inventories: Purchased parts and components $ 3,044 $ 3,099 Work-in-process 2,757 4,125 Finished goods 361 1,127 $ 6,162 $ 8,351 -------------------- --------------------
December 31, 1997 1996 -------------------- (in thousands) Property and equipment: Machinery and equipment $ 11,039 $ 10,710 Furniture and fixtures 724 1,338 Leasehold improvements 1,366 1,053 -------------------- 13,129 13,101 Less accumulated depreciation and amortization (6,192) (3,340) -------------------- $ 6,937 $ 9,761 -------------------- --------------------
F-12 2. Composition of Certain Balance Sheet Accounts (continued)
December 31, 1997 1996 -------------------- (in thousands) Intangible assets: Purchased technology $ 17,439 $ 17,439 Goodwill 5,076 5,076 Patents and licenses 116 204 -------------------- 22,631 22,719 Less accumulated amortization (18,070) (17,234) -------------------- $ 4,561 $ 5,485 -------------------- --------------------
December 31, 1997 1996 ------------------- (in thousands) Accounts payable and accrued liabilities: Accounts payable $ 4,429 $ 4,568 Accrued compensation 3,718 3,145 Accrued warranty 390 500 Accrued other 2,358 1,049 ------------------- $10,895 $ 9,262 ------------------- -------------------
3. Income Taxes The provision for income taxes from continuing operations is based on income (loss) from continuing operations before income taxes as follows (in thousands):
1997 1996 1995 ------------------------------ U.S. $(8,483) $(3,612) $(6,687) Foreign 829 (3,169) (1,065) ------------------------------ $(7,654) $(6,781) $(7,752) ------------------------------ ------------------------------
F-13 3. Income Taxes (continued) Components of the provision for income taxes from continuing operations are as follows (in thousands):
1997 1996 1995 ---------------------- Current provision: State $80 $ 2 $-- Foreign -- 7 3 ---------------------- Total provision for income taxes from continuing operations $80 $ 9 $ 3 ---------------------- ----------------------
The following is a reconciliation from the expected statutory federal income tax provision (benefit) to the Company's actual income tax provision (benefit) (in thousands):
1997 1996 1995 -------------------------------- US Federal corporate statutory rate 35% 35% 35% -------------------------------- -------------------------------- Continuing operations: Expected tax benefit $(2,679) $(2,373) $(2,713) State taxes, net of federal benefit (372) (84) (280) Increase in valuation allowance on deferred tax assets 3,537 2,518 2,373 Other (406) (52) 623 -------------------------------- Actual tax provision $ 80 $ 9 $ 3 -------------------------------- -------------------------------- Effective income tax rate (1)% 0% 0% -------------------------------- --------------------------------
1997 1996 1995 ------------------------------- Discontinued operations: Expected tax provision (benefit) $(7,409) $(4,050) $ 1,255 State taxes, net of federal benefit (1,029) (154) 119 Increase in valuation allowance on deferred tax assets 9,783 4,253 (1,480) Other (1,345) (49) 256 ------------------------------- Actual tax provision (benefit) -- -- $ 150 ------------------------------- ------------------------------- Effective income tax rate 0% 0% 5% ------------------------------- -------------------------------
F-14 3. Income Taxes (continued) The components of the Company's total deferred taxes are as follows (in thousands):
December 31, 1997 1996 -------------------- Deferred tax assets: Net operating loss carryforwards $ 7,927 $ 5,492 Reserves 18,731 7,120 Accrued expenses and other 556 2,436 -------------------- Total deferred tax assets 27,214 15,048 Valuation allowance (26,345) (13,816) -------------------- Net deferred tax assets 869 1,232 Deferred tax liabilities: Depreciation and other (443) (609) Acquired intangibles (426) (623) -------------------- Total deferred tax liabilities (869) (1,232) -------------------- -------------------- Net deferred taxes $ -- $ -- -------------------- --------------------
At December 31, 1997, the Company had federal and California net operating loss (NOL) carryforwards in the amount of $22.3 million and $2.2 million, respectively, which may be used to offset future taxable income. Federal and California NOLs will begin to expire in 2004 and 2001, respectively, unless previously utilized. The Company also had credit carryforwards available to offset federal tax liabilities in the amount of $317,000. These credits will begin to expire in 2000 unless previously utilized. The use of such losses and credits is currently subject to certain limitations. Additional annual limitations may be applicable in the event of certain future stock ownership changes. 4. Employee Stock Option Plans 1994 Non-Qualified Share Option Plan In December 1994, the Board of Directors of ComStream Inc. adopted the 1994 Non-Qualified Share Option Plan (1994 Option Plan). Under the 1994 Option Plan, the Board of Directors was authorized to grant options to officers and key employees to purchase up to 5,000,000 shares of ComStream Inc. common stock, at a price equal to the fair market value of the stock at the date of grant. Generally, options vest at 25% annually and are exercisable for up to ten years from the grant date. In 1995, the Board granted options for 993,000 shares at prices ranging from $4.85 to $5.40 per share. No options were granted in 1996 or 1997. Certain of the option agreements provide for the acceleration of vesting in the event of a change of control of the Company, as defined in the option F-15 4. Employee Stock Option Plans (continued) agreement. As a result of such provisions, an additional 101,250 of the options outstanding at December 31, 1997 would become exercisable in the event of a change of control of the Company. In March 1997, all outstanding options granted under the 1994 Option Plan were exchanged for options to purchase common stock of ComStream Holdings, Inc. No further grants will be made under the 1994 Option Plan. In December 1997, all options outstanding under the Plan were canceled and reissued at $3.75 per share. At December 31, 1997, 540,876 options were outstanding, of which 355,662 were exercisable. 1995 Equity Incentive Plan Under the terms of the 1995 Equity Incentive Plan (1995 Equity Plan) adopted by the Board of Directors of ComStream Corporation in October 1995, the Board was authorized to grant stock awards to employees, directors or consultants to purchase up to 2,000,000 shares of common stock of ComStream Corporation. The stock awards could be in the form of incentive stock options, nonstatutory stock options, stock bonuses or rights to purchase restricted stock or stock appreciation rights. The grants could be at a price not less than the fair market value of the stock at the date of grant for incentive stock options and not less than 85% of the fair market value at the date of grant for nonstatutory stock options. Generally, options vest at 25% per year (in no event less than 20% per year) and are exercisable for up to ten years from the grant date. In 1995 and 1996, the Board granted non-qualified options for 1,153,130 and 226,000 shares, respectively, at a price of $5.40 per share. In March 1997, all outstanding options granted under the 1995 Equity Plan were exchanged for options to purchase common stock of ComStream Holdings, Inc. There were no new grants made under the Plan during 1997. No further grants will be made under the 1995 Equity Plan. In December 1997, all options outstanding under the Plan were canceled and reissued at $3.75 per share. At December 31, 1997, 390,126 options were outstanding, of which 187,062 were exercisable. 1996 Equity Incentive Plan In January 1996, the Board of Directors of ComStream Holdings, Inc. adopted the 1996 Equity Incentive Plan. Stock awards may be granted to employees, directors or consultants of the Company in the form of incentive stock options, nonstatutory stock options, stock bonuses, rights to purchase restricted stock, and stock appreciation rights. F-16 4. Employee Stock Option Plans (continued) The awards may be granted at prices not less than 85% of the fair market value of the stock at the time of the grant, except awards of incentive stock options which must be granted at 100% of fair market value. Options vest in periodic installments, but in no event less than 20% per year. All options are exercisable up to ten years from the date of grant. The Board granted non-qualified options for 1,350,818 and 191,650 shares in 1997 and 1996, respectively, at a price of $5.40 per share. In December 1997, all options outstanding under the Plan were canceled and reissued at $3.75 per share. At December 31, 1997, 1,264,818 options were outstanding, of which, 131,121 options were exercisable. 1996 Non-Qualified Stock Option Plan In October 1996, the Board of Directors of ComStream Holdings, Inc. adopted the 1996 Non-Qualified Stock Option Plan. The Board may grant options to officers and key employees of the Company at the fair market value of the stock on the date of grant. Generally options vest at 25% per year and are exercisable up to ten years from the date of grant. The Board granted options for 400,000 and 750,000 shares in 1997 and 1996, respectively, at a price of $5.40 per share. The terms of the options granted under the 1996 Non-Qualified Plan provide for the acceleration of vesting in the event of a change of control of the Company, as defined in the option agreement. As a result of such provisions, all of the 280,000 options outstanding at December 31, 1997 would become exercisable in the event of a change in control of the Company. In December 1997, all options outstanding under the Plan were canceled and reissued at $3.75 per share. At December 31, 1997, 280,000 options were outstanding, of which, 5,000 were exercisable. F-17 4. Employee Stock Option Plans (continued) A summary of stock option activity under all the plans follows (in thousands, except per share data):
Options Outstanding ---------------------- Options Available for Number of Average Grant Shares Price Per Share -------------------------------------- Balance at December 31, 1994 2,475 2,525 $ 4.85 Additional reserved 2,000 -- -- Granted (2,146) 2,146 $ 5.31 Canceled 439 (439) $ 4.85 Exercised -- (81) $ 4.85 -------------------------------------- Balance at December 31, 1995 2,768 4,151 $ 5.09 Additional reserved 4,500 -- -- Granted (1,366) 1,366 $ 5.40 Canceled 779 (779) $ 5.20 Exercised -- (309) $ 4.85 ------------------------------------- Balance at December 31, 1996 6,681 4,429 $ 5.18 Granted* (4,308) 4,308 $ 4.44 Canceled* 5,281 (5,281) $ 5.34 Exercised -- (980) $ 4.85 -------------------------------------- Balance at December 31, 1997 7,654 2,476 $ 3.75 -------------------------------------- --------------------------------------
- ---------- * options granted and canceled in 1997 include 2,507 options originally granted at prices ranging from $4.85 to $5.40 per share which were reissued at $3.75 per share. At December 31, 1997, there were 10,130,000 shares of common stock reserved for future issuance pursuant to the terms of the various stock option plans. Under the various stock option plans, the Company, in circumstances as defined, has the right of first refusal to repurchase the options granted and the right to repurchase any shares issued pursuant to the options. In connection with the foregoing, during 1997, 1996 and 1995 the Company repurchased 980,106, 308,788 and 80,730 shares, respectively, of common stock of the Company from certain former employees. The weighted average remaining contractual life of the options outstanding was 9.1 years at December 31, 1997. F-18 4. Employee Stock Option Plans (continued) Stock-Based Compensation As permitted under FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123), the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) in accounting for stock-based awards to employees. Under APB 25, the Company generally recognizes no compensation expense with respect to such awards. Pro forma information regarding net income and earnings per share is required by SFAS 123 for awards granted after December 31, 1994 as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The fair value of the Company's stock-based awards to employees was estimated using a minimum value option pricing model. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:
1997 1996 1995 ------------------- Expected life (years) 5.0 5.0 5.0 Risk-free interest rate 6.0% 6.0% 6.0% Annual dividend yield -- -- --
For pro forma purposes, the estimated fair value of the Company's stock-based awards to employees is amortized over the options' vesting period. The Company's pro forma information follows (in thousands):
1997 1996 1995 ------------------------------ Net loss As reported $(28,902) $(18,362) $(4,168) Pro forma $(30,318) $(19,265) $(4,302)
Because SFAS 123 is applicable only to awards granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until approximately 1999. The weighted-average fair value of options granted during 1997, 1996 and 1995 was $.97, $1.43 and $1.31 per share, respectively. F-19 4. Employee Stock Option Plans (continued) Incentive Phantom Stock Plan Under the Incentive Phantom Stock Plan (Phantom Plan), which was adopted by the Board of Directors of ComStream Inc. in December 1994, the Board of Directors was authorized to grant up to 5,000,000 Phantom Stock Rights (PSRS) to key employees. Each PSR entitles employees to receive cash compensation in an amount equivalent to the excess of the market value of the stock at a future date over the grant price, subject to certain limits. In the event of an initial public offering (IPO), (i) the market value used to compute the increase in value from the grant date cannot exceed the IPO price; and (ii) vested amounts will become payable. The PSRs generally vest at 25% annually and become exercisable at the earlier of the completion of an IPO of the Company's common stock, the sixth anniversary of the grant date or termination of employment. In 1995, the Board granted 153,200 PSRs, respectively, at a price of $4.85 each. No PSRs were granted in 1996 and 1997. ComStream Holdings, Inc. has assumed the obligations of ComStream Inc. with respect to the Phantom Plan. No further grants will be made under the Phantom Plan. At December 31, 1997, 123,250 PSRs were outstanding, of which 83,436 were exercisable. ComStream Shares to Appreciate and Reward Plan The Company also has the Shares to Appreciate and Reward Plan (STAR), a stock appreciation rights plan for non-officer employees with at least three months of service who have not been granted options under any of the option plans or the Phantom Plan described above. New grants are made on January 2 and July 1 of each year. Each eligible employee receives 1,000 Phantom Stock Units (PSUs); each PSU gives the employee the right to receive cash compensation in an amount equivalent to the excess of the market value of the stock at a future date over the grant date. Such compensation is limited to one month of the employee's salary at the grant date. The PSUs vest at 25% annually and become exercisable at the earlier of the completion of an IPO of the Company's common stock, the sixth anniversary of the grant date or termination of employment. At December 31, 1997, a total of 217,500 PSUs were outstanding at price of $3.75 per share of which 88,000 were exercisable. The Company intends to terminate the STAR plan in the event of an IPO, although all rights granted prior to such date would continue. Compensation expense which may accrue to employees under the Phantom Plan and the STAR Plan is initially measured at the grant date based on the fair value of the common stock, with adjustments made quarterly for fair value fluctuations. In 1997, 1996 and 1995 compensation expense of $0, $28,000 and $215,000, respectively, was recorded in the accompanying consolidated financial statements related to these plans. F-20 5. Employee Savings and Profit Sharing Plans The 401(k) Savings Plan for ComStream Employees (Savings Plan) covers all full-time employees with 30 days of continuous service. Participating employees can contribute up to 15% of their compensation, subject to legal limits. The Company matches 35% of the participants' contributions, up to the first 7% of compensation. Employer matching contributions vest to the participants beginning in the second year at 40% and 20% per year thereafter. Total matching contributions made under the plans were $388,000, $368,000 and $351,000 during 1997, 1996 and 1995, respectively. 6. Transactions with Parent Company and Affiliated Companies Spar provides the Company with various financial and administrative functions and services, including cash management, treasury, legal, tax, insurance, and general management services. The Company is charged associated direct costs and expenses for such functions. In addition, the Company, along with other companies affiliated with Spar, receives an allocation of certain management fees and indirect administrative costs. Management fees and indirect administrative costs charged to the Company by Spar totaled $570,000, $707,000 and $615,000 in 1997, 1996 and 1995, respectively. Such amounts are included in general and administrative expenses in the accompanying statement of operations. Also included in general and administrative expenses are certain costs allocated to the Company by Spar, primarily insurance, in the amounts of $260,000, $315,000 and $428,000 in 1997, 1996 and 1995, respectively. On September 30,1997, ComStream Corporation purchased certain long-term contracts from ComStream Canada, Inc. All the shares of ComStream Canada Inc. were then acquired by Spar. As part of this transaction, Spar forgave intercompany debts of $3,228,000 which amounts have been reflected as a capital contribution in the accompanying consolidated financial statements. In December 1993, Comtel declared and recorded a $25 million dividend payable to Spar. Notes payable to Spar were issued as payment of the dividend; the principal was due and payable December 31, 1995, with interest payable quarterly at prime plus 2%. Interest expense on the notes totaled $2,649,000 and $2,314,000 in 1995 and 1994, respectively. In December 1995, the notes payable to Spar were contributed to the Company's equity. From time to time, the Company contracts with various companies affiliated with Spar on terms comparable to those with third parties. F-21 7. Credit Agreements The Company's cash needs, not internally funded by operations, have been funded by a revolving line of credit arrangement from Spar. Outstanding advances bear interest at LIBOR plus 7/8% (7.3% at December 31, 1997); interest is due quarterly. Because the borrowings under this revolving loan with Spar have no defined maturity terms, the balance is classified as a long-term liability in the accompanying consolidated balance sheets. Interest expense on the revolving loan from Spar was $3,173,000, $3,705,000 and $2,167,000 in 1997, 1996 and 1995, respectively. In April 1997, Spar finalized a three-year term credit facility with a syndicate of Canadian chartered banks ("the Syndicate"), which was amended in early 1998, for borrowings up to $52.5 million with the Company as a co-borrower under this facility. This credit facility is subject to compliance with certain financial covenants by Spar. Borrowings under the facility are available at U.S. base rates and U.S. LIBOR rates plus the applicable grid pricing percentage (6.3% at December 31, 1997). In addition, through the Syndicate, the Company and Spar have a $28 million facility available for letters of credit or letters of guarantee. Borrowings under the credit facilities are secured by substantially all of the assets of the Company and Spar. As of December 31, 1997, the Company had borrowed $12 million under this facility. The proceeds were used to reduce the borrowings outstanding under the revolving line of credit with Spar. In connection with this term credit facility, certain financing fees amounting to $930,000 were allocated by Spar to the Company of which $287,000 has been charged to interest expense as of December 31, 1997. 8. Commitments and Contingencies Lease Obligations The Company leases its facilities and certain equipment under noncancelable operating leases. Rent expense is recognized on a straight-line basis over the life of the related leases and totaled $1,955,000, $1,625,000 and $1,365,000 for 1997, 1996 and 1995, respectively. In April 1997, the Company signed a build-to-suit lease for new corporate headquarters for occupancy in early 1998. The minimum payments pursuant to this seven year operating lease are included below. The Company has the option to extend the new lease beyond the initial seven-year term. F-22 8. Commitments and Contingencies (continued) Following is a schedule of future minimum payments under non-cancelable operating leases as of December 31, 1997 (in thousands): 1998 $ 2,508 1999 3,883 2000 2,945 2001 2,773 2002 2,912 Thereafter 6,545 -------- $21,566 -------- --------
The Company is attempting to secure sublease arrangements for facilities representing approximately $7.0 million of the noncancelable operating lease commitments identified in the table above. No assurance can be provided that the Company will be able to consummate such sublease arrangements. Litigation In August 1997, subsequent to the resolution of a dispute pursuant to which a customer of the Company's discontinued SGA Division signed a final acceptance certificate and a general release of all claims against the Company, such customer filed a civil lawsuit against the Company claiming damages in excess of $5 million. The Company believes that this case has no merit, intends to vigorously defend the action, and believes that the ultimate resolution of this matter will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. The Company is also party to various legal proceedings arising in the normal course of business. In management's opinion, the outcome of these proceedings will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. The Company has entered into several agreements which may require payment of certain royalties and/or license fees on revenues from the future use or sale of the technology developed under such agreements. F-23 8. Commitments and Contingencies (continued) Purchase Obligations The Company generally has commitments with certain suppliers and subcontract manufacturers to purchase certain components and estimates its non-cancelable obligations to be approximately $5.0 to $8.0 million at any given time. In addition, the Company was committed to capital expenditures of approximately $2.2 million as of December 31, 1997 in connection with plans to relocate to new corporate headquarters. Letters of Credit The Company is contingently liable under letters of credit in the amount of approximately $2.5 million to guarantee liabilities accrued in the accounts. 9. Business Segment Information The Company's continuing operations have been classified into two business segments previously described in Note 1: the Satellite Products Division (satellite modems and earth stations), and the Broadband Products Division (broadband products). F-24 9. Business Segment Information (continued) Summarized financial information by business segment is as follows (in thousands):
1997 1996 1995 ---------------------------------------------------- Revenue: SPD $50,124 $49,449 $64,356 BPD 5,799 11,079 5,858 ---------------------------------------------------- $55,923 $60,528 $70,214 ---------------------------------------------------- ---------------------------------------------------- Operating income (loss): SPD $ 6,633 $ 2,653 $ (3,692) BPD (7,057) (5,965) 816 Restructuring costs (3,500) -- -- ---------------------------------------------------- $ (3,924) $ (3,312) $ (2,876) ---------------------------------------------------- ---------------------------------------------------- Depreciation and amortization: SPD $ 3,658 $ 3,276 $ 7,428 BPD 400 245 23 ---------------------------------------------------- $ 4,058 $ 3,521 $ 7,451 ---------------------------------------------------- ---------------------------------------------------- Capital expenditures: SPD $ 753 $ 1,637 2,091 BPD 368 546 674 ---------------------------------------------------- $ 1,121 $ 2,183 $ 2,765 ---------------------------------------------------- ---------------------------------------------------- Total assets: SPD $19,907 $21,146 $21,728 BPD 2,699 3,616 3,519 Net assets of discontinued operations -- 26,099 28,140 Corporate 9,237 12,169 7,671 ---------------------------------------------------- $31,843 $63,030 $61,058 ---------------------------------------------------- ----------------------------------------------------
Certain corporate administrative expenses are allocated to segments based upon the nature of the expense. F-25 10. Restructuring Costs (continued) In November 1997, the Company announced a corporate restructuring and cost cutting initiative, and provided a restructuring charge of $3,500,000. Included in this restructuring charge was approximately $2,454,000 in termination benefits for 80 individuals in the technical, sales and administrative staff. The remaining balance of the charge was comprised of the remaining lease commitment of $625,000 and equipment to be disposed of with a net book value of $421,000. As of December 31, 1997, the remaining balance in the restructure accrual approximates $2,486,000 which comprises remaining termination benefits, lease commitments and equipment to be disposed of. 11. Discontinued Operations Components Division On May 23, 1997, the Company completed the sale of certain assets and liabilities of its broadband components ("Components") business for cash proceeds of $37.7 million and contingent proceeds of $11.5 million to be based upon the fiscal 1998 and 1999 revenue of the business sold. The Company sold certain inventory, equipment and intellectual property and the purchaser assumed certain employee related liabilities and warranty commitments. The net book value of assets transferred to the purchaser was approximately $4.3 million. The results of the Components business have been classified as discontinued operations in the accompanying financial statements. Components revenue accounted for $6.8 million, $37.9 million and $90.2 million in 1997, 1996 and 1995, respectively. Operating expenses of the discontinued operations include specifically identifiable research and development and sales and marketing expenses and certain allocated general and administrative expenses, including a portion of management salaries and related costs, which are not expected to be incurred subsequent to the discontinuance. Such allocated general and administrative expenses aggregated approximately $172,000, $1,700,000 and $2,000,000 in 1997, 1996 and 1995, respectively. The proceeds received in connection with this transaction were used to reduce $36.4 million of the revolving line of credit from the parent company. SGA Division In December 1997, the Company's Board of Directors approved a strategic plan which included the divestiture of the SGA division. The results of the SGA division have been classified as discontinued operations in the accompanying financial statements. SGA revenue accounted for $29.8, $47.4 million and $23.6 million in 1997, 1996 and 1995, respectively. Operating expenses of the discontinued operations include specifically identifiable research and development and sales and marketing expenses and certain F-26 11. Discontinued Operations (continued) allocated general and administrative expenses, including a portion of management salaries and related costs, which are not expected to be incurred subsequent to discontinuance. Such allocated general and administrative expenses aggregated approximately $4,461,000, $3,282,000 and $1,384,000 in 1997, 1996 and 1995, respectively. On April 16, 1998, the Company completed a definitive agreement to sell the SGA business to NSI Network Sciences International Ltd. (NSI) for cash proceeds of $3,050,000, subject to certain adjustments. This agreement provides that the effective date of the transaction is to be April 1, 1998 and is expected to close in June 1998. NSI will acquire substantially all of the assets, principally trade accounts receivable, inventory and equipment, and certain liabilities of the SGA business. The carrying amount of the net assets to be acquired by NSI as of March 31, 1998 approximates $4.8 million (unaudited). The loss on disposal of the SGA division is comprised principally of three components: (i) obligations of the SGA division not assumed by NSI aggregating approximately $8.0 million; (ii) operating losses of the SGA division for the period from the measurement date to the estimated date of closing aggregating approximately $5.0 million; and (iii) the estimated difference between the net proceeds of the sale and the carrying value of the SGA division assets as of the closing date of the sale. It is at least reasonably possible that the NSI transaction may not ultimately be consummated and, in that event, the Company may incur additional costs up to $2.0 million with respect to the discontinuance of the SGA division. The net assets and liabilities related to discontinued operations consist of:
December 31, 1997 1996 ---------------------------------- Accounts receivable, net $ 3,618 $30,016 Inventory 5,121 11,244 Property and equipment, net 445 3,439 Other assets 338 786 Accounts payable and accrued liabilities (10,488) (19,386) Loss on disposal of the SGA division (14,300) -- ---------------------------------- Total $(15,266) $26,099 ---------------------------------- ----------------------------------
F-27 ComStream Holdings, Inc. Unaudited Condensed Interim Consolidated Financial Statements Nine-month periods ended September 30, 1998 and 1997 Contents
Unaudited Condensed Interim Consolidated Financial Statements Consolidated Balance Sheet....................................................................................F-29 Consolidated Statements of Operations.........................................................................F-30 Consolidated Statements of Cash Flows.........................................................................F-31 Notes to Unaudited Condensed Interim Consolidated Financial Statements........................................F-32
F-28 ComStream Holdings, Inc. Condensed Consolidated Balance Sheet (Unaudited) (in thousands)
September 30, 1998 ------------- Current Assets: Cash & cash equivalents....................................... $ 344 Accounts receivable, net...................................... 5,336 Inventories................................................... 5,926 Prepaids and other current assets............................. 565 ------------ Total current assets....................................... 12,171 ------------ Property and equipment--net..................................... 6,493 Other Assets: Goodwill...................................................... 3,701 Other assets.................................................. 416 ------------ Total other assets......................................... 4,117 ------------ Total assets............................................... $ 22,781 ------------ ------------ Liabilities and Stockholders' Equity Current liabilities: Accounts payable--trade....................................... $ 4,141 Accrued liabilities........................................... 4,868 Net liabilities and discontinued operations................... 1,275 Taxes payable................................................. 546 ------------ Total current liabilities................................. 10,830 ------------ Obligations under capital leases-LT Portion..................... 83 ------------ Total liabilities......................................... 10,913 ------------ Stockholders' Equity: Common stock and additional capital........................... 115,737 Accumulated deficit........................................... (103,869) ------------ Total stockholders' equity................................ 11,868 ------------ Total liabilities and stockholders' equity................ $ 22,781 ------------ ------------
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements. F-29 ComStream Holdings, Inc. Condensed Consolidated Statements of Operations (Unaudited) (in thousands)
Nine months ended Nine months ended September 30, September 30, 1998 1997 ------------------ ----------------- Revenue .............................................. $ 29,851 $ 41,196 Cost of revenue ...................................... 21,382 24,487 ------------------ ----------------- Gross Profit ......................................... 8,469 16,709 Operating Expenses: Selling and marketing .............................. 5,350 5,055 Research and development ........................... 7,227 6,054 General and administrative ......................... 3,877 5,437 Amortization of intangible assets .................. 645 642 ------------------ ----------------- Total Operating Expenses ............................. 17,099 17,188 ------------------ ----------------- Operating loss ....................................... (8,630) (479) Interest expense (primarily with parent company) ..... 3,240 2,805 ------------------ ----------------- Loss from continuing operations before income taxes .. (11,870) (3,284) Provision for income taxes ........................... (76) (66) ------------------ ----------------- Loss from continuing operations ...................... (11,946) (3,350) ------------------ ----------------- Discontinued operations: Loss from operations of Components division, net of income taxes of $0 .......................... (6,811) Gain on disposal of Components division, net of income taxes of $0 ............................. 28,956 Loss from operations of Satellite Global Access division, net of income taxes of $0 ............ (7,459) ------------------ ----------------- -- 14,686 ------------------ ----------------- Net income (loss)..................................... $(11,946) $ 11,336 ------------------ ----------------- ------------------ -----------------
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements. F-30 ComStream Holdings, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands)
Nine months ended Nine months ended September 30, September 30, 1998 1997 -------------------- ------------------ Operating activities Net income (loss)........................................... $ (11,946) $ 11,336 Adjustments to reconcile net income to net cash used in operating activities: Discontinued operations .............................. -- (14,686) Depreciation and amortization ........................ 2,309 2,416 Amortization of intangible assets .................... 645 642 Increase (decrease) in cash resulting from changes in: Accounts receivable .............................. 4,222 (3,373) Inventories ...................................... 236 2,654 Due from affiliate companies ..................... 1,249 585 Prepaid expenses and other current assets ........ 1,578 (1,415) Accounts payable and accrued liabilities ......... (2,488) (696) Due to affiliate companies ....................... (4,337) (554) Income taxes payable ............................. (28) (59) -------------------- ------------------ Net cash used in continuing operations ..................... (8,560) (3,150) Net cash used in discontinued operations ................... (17,041) (3,163) -------------------- ------------------ Net cash used in operating activities ...................... (25,601) (6,313) -------------------- ------------------ Investing activities Proceeds from the sale of discontinued operations .......... 3,050 37,672 Acquisition of property and equipment ...................... (1,615) (841) Capital expenditures of discontinued operations ............ (250) (3,884) Other ...................................................... 105 375 -------------------- ------------------ Net cash provided by investing activties ................... 1,290 33,322 -------------------- ------------------ Financing activties Proceeds from revolving line of credit from parent company . 80,319 125,050 Repayment of revolving line of credit from parent company .. (64,393) (151,138) Proceeds from bank indebtedness ............................ -- 27,000 Repayment of bank indebtedness ............................. (12,000) (27,000) Contribution of additional capital from parent company ..... 20,000 -- -------------------- ------------------ Net cash provided by (used in) financing activties ......... 23,926 (26,088) -------------------- ------------------ -------------------- ------------------ Increase (decrease) in cash ................................ (385) 921 Cash at beginning of period ................................ 729 2,377 -------------------- ------------------ -------------------- ------------------ Cash at end of period ...................................... $ 344 $ 3,298 -------------------- ------------------ -------------------- ------------------
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements. F-31 ComStream Holdings, Inc. Notes To Unaudited Condensed Interim Consolidated Financial Statements 1. Basis of Presentation The unaudited condensed interim consolidated financial statements of ComStream Holdings, Inc. ("Comstream" or the "Company") should be read in conjunction with the Company's audited financial statements as of December 31, 1997 and 1996 and the related consolidated statements of operations, stockholder's equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. Comstream was a wholly owned subsidiary of Spar Aerospace Limited ("Spar"). 2. Discontinued Operations [a] Components Division On May 23, 1997, the Company completed the sale of certain assets and liabilities of its broadband components ("Components") business for cash proceeds of $37.7 million and contingent proceeds of $11.5 million to be based upon the fiscal 1998 and 1999 revenue of the business sold. The Company sold certain inventory, equipment and intellectual property and the purchaser assumed certain employee related liabilities and warranty commitments. The results of the Components business have been classified as discontinued operations in the accompanying consolidated financial statements. The proceeds received in connection with this transaction were used to reduce $36.4 million of the revolving line of credit from Spar. [b] SGA Division On June 26, 1998 the Company completed a definitive agreement to sell the Satellite Global Access ("SGA") business to NSI Network Sciences International Ltd. (NSI) for cash proceeds of $3,050,000, subject to certain adjustments. NSI acquired substantially all of the assets, principally trade accounts receivable, inventory and equipment, and the purchaser assumed certain liabilities of the SGA business. The results of the SGA division have been classified as discontinued operations in the accompanying consolidated financial statements 3. Contribution of Additional Capital In August 1998, Spar contributed $20.0 million of additional capital to the Company. The Company used these funds to repay bank indebtedness and to repay, in part, advances from Spar under a revolving line of credit arrangement. Approximately $43.1 million of the revolving line of credit from Spar could not be repaid and this amount has been forgiven by Spar. The extinguishment of debt with Spar has been reflected as a contribution of additional capital in these interim consolidated financial statements. 4. Subsequent Event On October 15, 1998, Radyne Corp. completed the acquisition of all of the outstanding shares of common stock of Comstream from Spar for an aggregate purchase price of $17.0 million consisting of $10.0 million in cash and a $7.0 million convertible promissory note. F-32 Radyne Corp. Pro Forma Condensed Combined Financial Statements (Unaudited) The attached unaudited pro forma condensed combined balance sheet for the nine months ended September 30, 1998 and statement of operations for the nine months ended September 30, 1998 and year ended December 31, 1997 give effect to the purchase by the Company of all of the outstanding shares of common stock of Comstream as of the beginning of the periods presented, for an aggregate purchase price of $17,000,000, of which $10 million was paid in cash at the closing, using funds borrowed from the Company's controlling shareholder, and $7 million will be payable up to nine months thereafter pursuant to a note which is convertible into the Company's Common Stock, under certain circumstances. Accordingly, the acquired assets and liabilities were recorded at their estimated fair market value at the date of acquisition. The pro forma condensed combined statements of operations assume that the acquisition took place at the beginning of each period presented and combine the Company's and Comstream's results of operations for the year ended December 31, 1997 and the nine months ended September 30, 1998. The unaudited pro forma condensed combined balance sheet combines the Company's balance sheet as of September 30, 1998 with Comstream's balance sheet as of September 30, 1998, giving effect to the Acquisition as if it had occurred on September 30, 1998. Contents Pro Forma Condensed Combined Balance Sheet as of September 30, 1998............................................F-34 Pro Forma Condensed Combined Statement of Operations for the Nine Month Period Ended September 30, 1998........F-35 Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1997......................F-36 Notes to Pro Forma Condensed Combined Financial Statements.....................................................F-37
F-33 Radyne Corp. Pro Forma Condensed Combined Balance Sheet September 30, 1998 (Unaudited) (in thousands)
Radyne Comstream Pro Forma Unaudited Unaudited Adjustments Notes Combined --------- --------- ----------- ----- ---------- Current Assets: Cash & Cash Equivalents $ 776 $ 344 $ -- $ 1,120 Restricted Cash 10,000 -- (10,000) a -- Accounts Receivable, net 2,198 5,336 7,534 Inventories 4,269 5,926 10,195 Prepaids and Other Current Assets 453 565 1,018 ----------------------------------------------------------------------- Total Current Assets 17,696 12,171 (10,000) 19,867 ----------------------------------------------------------------------- Property and Equipment - Net 1,488 6,493 (1,150) b 6,831 Other Assets: Goodwill 3,701 (3,701) b 2,508 2,508 b Purchased Technology 2,500 b 2,500 Other Assets 351 416 767 ----------------------------------------------------------------------- Total Other Assets 351 4,117 1,307 5,775 ----------------------------------------------------------------------- Total Assets $ 19,535 $ 22,781 $ (9,843) $ 32,473 ----------------------------------------------------------------------- ----------------------------------------------------------------------- Liabilities and Stockholders' Capital Deficiency Current liabilities: Notes payable under lines of credit $ 5,500 $ -- $ -- $ 5,500 Notes payable to affiliates-Current 15,618 15,618 Convertible promissory note payable to 7,000 a 7,000 Spar Obligations under capital leases-Current Portion 78 78 Accounts Payable - trade 1,022 4,141 300 b 5,463 Accrued Liabilities 1,124 4,868 (1,400) a 6,192 1,600 b -- Net liabilities of discontinued operations 1,275 (1,275) a -- Taxes payable 54 546 600 ----------------------------------------------------------------------- Total Current Liabilities 23,396 10,830 6,225 40,451 ----------------------------------------------------------------------- Obligations under capital leases-LT 38 83 121 ----------------------------------------------------------------------- Portion Total Liabilities 23,434 10,913 6,225 40,572 ----------------------------------------------------------------------- Stockholders' Capital Deficiency: Common Stock & Additional Paid-In 5,706 115,737 (115,737) a 5,706 Capital Accumulated Deficit (9,605) (103,869) 103,869 a (13,805) (4,200) c ----------------------------------------------------------------------- Total Stockholders' Capital Deficiency (3,899) 11,868 (16,068) (8,099) ----------------------------------------------------------------------- Total Liabilities and Stockholders' $ 19,535 $ 22,781 $ (9,843) $ 32,473 Capital Deficiency ----------------------------------------------------------------------- -----------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements. F-34 RADYNE CORPORATION PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS For the nine month period ended September 30, 1998 (Unaudited) (in thousands except per share data)
Pro Forma Pro Forma Radyne Comstream Adjustments Notes Combined ------ --------- ----------- ----- ----------- Sales $ 9,974 $ 29,851 $ -- $ 39,825 Cost of sales 7,705 21,382 29,087 Gross Profit 2,269 8,469 -- 10,738 Operating Expenses: Selling, general and administrative 2,373 9,227 11,600 Research and development 1,945 7,227 9,172 Amortization of intangible assets 171 645 (645) d 572 401 d ------------- ------------- ------------- ------------- Total Operating Expenses 4,489 17,099 (244) 21,344 ------------- ------------- ------------- ------------- Operating income (loss) (2,220) (8,630) 244 (10,606) Interest expense 569 3,240 (3,240) e 1,580 1,011 e ------------- ------------- ------------- ------------- Income (loss) from continuing operations before income taxes $ (2,789) $ (11,870) $ 2,473 $ (12,186) ------------- ---------- ----------- ------------- ------------- ---------- ----------- ------------- Loss per share $ (0.47) $ (2.05) ------------- ------------- ------------- ------------- Weighted average number of common shares 5,931,346 5,931,346 outstanding ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements. F-35 RADYNE CORP. PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS For the year ended December 31, 1997 (Unaudited) (in thousands except per share data)
Pro Forma Pro Forma Radyne Comstream Adjustments Notes Combined ------ --------- ----------- ----- --------- Audited Audited ------ ------- Sales $ 13,446 $ 55,923 $ -- $ 69,369 Cost of sales 8,022 32,624 40,646 Gross Profit 5,424 23,299 -- 28,723 Operating Expenses: Selling, general & administrative 4,242 14,620 18,862 Research and development 2,262 8,267 10,529 Amortization of intangible assets 836 (836) d -- 535 d 535 Restructuring costs 3,500 3,500 ------------- ------------ ------------ ------------- Total Operating Expenses 6,504 27,223 (301) 33,426 ------------- ------------ ------------ ------------- Operating income (loss) (1,080) (3,924) 301 (4,703) Interest expense 677 3,632 (3,632) e 2,025 1,348 e Other Expense 98 98 ------------- ------------ ------------ ------------- Income (loss) from continuing operations before income taxes $ (1,757) $ (7,654) $ 2,585 $ (6,826) ------------- ------------ ------------ ------------- ------------- ------------ ------------ ------------- Loss per share $ (0.35) $ (1.36) ------------- ------------- ------------- ------------- Weighted average number of common shares outstanding 5,012,664 5,012,664 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements. F-36 Radyne Corp. Notes To Unaudited Pro Forma Condensed Combined Financial Statements (1) Basis of Accounting On October 15, 1998, Radyne Corp. ("Radyne") completed the acquisition of all of the outstanding shares of common stock of ComStream Holdings, Inc. ("Comstream") from Spar Aerospace Limited ("Spar") for an aggregate purchase price of $17.0 million consisting of $10.0 million in cash and a $7.0 million convertible promissory note. The pro forma unaudited condensed combined balance sheet gives effect to the acquisition as if the transaction had taken place on September 30, 1998 and combines Radyne unaudited September 30, 1998 balance sheet amounts with Comstream September 30, 1998 unaudited consolidated balance sheet amounts. The pro forma unaudited condensed combined statement of operations for the year ended December 31, 1997 is presented using the Radyne audited statement of operations for the year ended December 31, 1997 combined with the Comstream audited year ended December 31, 1997 consolidated statement of operations, as if the transaction had taken place on January 1, 1997. The pro forma unaudited condensed combined statement of operations for the nine months ended September 30, 1998 is presented using the Radyne unaudited statement of operations for the nine months ended September 30, 1998 combined with the Comstream unaudited consolidated statement of operations for the nine months ended September 30, 1998, as if the transaction had taken place on January 1, 1998. The pro forma condensed combined financial statements should be read in conjunction with the audited financial statements and notes thereto of Radyne and with the audited consolidated financial statements and notes thereto of Comstream. The pro forma combined statements of operations are not necessarily indicative of the future results of operations of Radyne or the results of operations which would have resulted had Radyne and Comstream been combined during the periods presented. In addition, the pro forma results are not intended to be a projection of future results. (2) Pro Forma Condensed Combined Balance Sheet and Pro Forma Condensed Combined Statement of Operations The accompanying pro forma adjustments reflect adjustments for the following items: a) Reduction of Radyne's Restricted Cash balance of $10,000,000 for the cash remitted to Spar and recognition of the $7,000,000 convertible promissory note. This note is convertible to common shares of the Company at the rate of $3.73 per common share. Accrued liabilities and net liabilities of discontinued operations were reduced by $1,400,000 and $1,275,000 respectively as Spar has provided Radyne with an indemnity related to certain liabilities previously recorded in the accounts of Comstream. The common stock and additional paid-in capital and retained earnings of Comstream were eliminated in their entirety as a result of using the "purchase method" of accounting. b) Radyne Corp. paid a total of $17,000,000 for assets with a fair value of $14,492,000 resulting in an excess of the purchase price over the fair value of the net assets acquired (goodwill) of $2,508,000. The fair value of the purchased technology and the in-process research and development has been determined through an independent valuation utilizing the Discounted F-37 Cash Flow method within the Income approach. This valuation considered the commercial profits and growth prospects of the existing product lines of Comstream and of the products in development for which technological feasibility had not been attained as of the transaction date. A summary of the allocation of fair values is as follows:
Description Fair Value ----------- ---------- Cash $ 344,000 --------------------------------------------------------------------------------- Accounts receivable 5,336,000 --------------------------------------------------------------------------------- Inventory 5,926,000 --------------------------------------------------------------------------------- Prepaids and other current assets 565,000 --------------------------------------------------------------------------------- Property and equipment 5,343,000 --------------------------------------------------------------------------------- Other assets 416,000 --------------------------------------------------------------------------------- Purchased technology 2,500,000 --------------------------------------------------------------------------------- In-process research and development 4,200,000 --------------------------------------------------------------------------------- Assumed liabilities (8,538,000) --------------------------------------------------------------------------------- Accrued severance costs (1,600,000) -------------- --------------------------------------------------------------------------------- Total fair value 14,492,000 --------------------------------------------------------------------------------- Consideration exchanged 17,000,000 -------------- --------------------------------------------------------------------------------- Excess of purchase price over fair value of assets $ 2,508,000 acquired -------------- -------------- ---------------------------------------------------------------------------------
c) The fair value of acquired in-process research and development of $4,200,000 is expected to be expensed in the period in which the acquisition is completed. This amount is shown as an increase in the accumulated deficit in the accompanying pro forma condensed combined balance sheet. It has not been shown as an expense in the accompanying pro forma condensed combined statements of operations. d) Amortization expense related to goodwill on Comstream's balance sheet has been eliminated. Amortization of purchased technology and goodwill related to the Comstream acquisition has been recorded based on estimated useful lives of 6.25 years and 15 years, respectively. e) Interest expense incurred by Comstream, primarily related to borrowings pursuant to a revolving line of credit arrangement with Spar has been eliminated. Interest expense has been recorded as if the companies had been combined during the same periods after giving effect to the $7,000,000, 8% convertible promissory note due to Spar and the $10,000,000, 6.375% note payable to Stetsys US, Inc. Interest expense has also been adjusted to reflect the 1.0% facility fee payable to Citibank, N.A. in connection with the increase in the uncommitted line of credit facility with Citibank, N.A. credit from $5,500,000 to $20,500,000. F-38 EX-4.1 2 EXHIBIT 4.1 Exhibit 4.1 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SO REGISTERED OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE. RADYNE CORP. CONVERTIBLE PROMISSORY NOTE $7,000,000.00 Irvine, California October 15, 1998 RADYNE CORP., a New York corporation (the "Company"), for value received hereby promises to pay to SPAR AEROSPACE LIMITED, or its registered assigns, the sum of Seven Million Dollars ($7,000,000.00), or such lesser amount as shall then equal the outstanding principal amount hereof and any unpaid accrued interest hereon, as set forth below. Unless sooner paid, such amounts shall be due and payable on the Maturity Date, which shall be the earlier to occur of (i) July 15, 1999, (ii) the consummation of a public or private equity or debt offering by the Company, excluding bank debt, affiliate debt, employee stock option grants and exercises and the offering described in Section 7(e) Company (an "Equity Offering") (PROVIDED that in the event the Equity Offering is in an amount less than the full principal and interest then outstanding hereunder, the debt shall mature in an amount no greater than the net amount of the Equity Offering) or (iii) when declared due and payable by the Holder upon the occurrence of an Event of Default (as defined below). Payment of all amounts due hereunder shall be made by wire transfer to a bank account designated in writing by the Holder at least three business days prior to payment. This Note is issued pursuant to the provisions of Section 2.3 of that certain Stock Purchase Agreement, dated as of August 28, 1998, by and between the Company and Spar Aerospace Limited (the "Stock Purchase Agreement"). The following is a statement of the rights of the Holder of this Note and the conditions to which this Note is subject, and to which the Holder hereof, by the acceptance of this Note, agrees. 1. DEFINITIONS. As used in this Note, the following terms, unless the context otherwise requires, have the following meanings: (a) "Company" includes any corporation which shall succeed to or assume the obligations of the Company under this Note. (b) "Holder," when the context refers to a holder of this Note, shall mean any person who shall at the time be the registered holder of this Note. As of the date hereof the Holder is Spar Aerospace Limited 2. INTEREST. The principal amount of this Note shall bear simple interest, payable on the Maturity Date, at 8% per annum on the principal of this Note outstanding (the "Note Rate") during the period beginning on the date of issuance of this Note and ending on the date that the principal amount hereof is paid in full. In the event of a partial or full conversion of the Note, interest shall accrue on the converted amount through the date of the conversion. Following the occurrence of an Event of Default (as defined below), the Note Rate shall increase to and shall thereafter be 12%. Interest shall be computed daily at the Note Rate on the basis of the actual number of days in which all or any portion of the principal amount hereof is outstanding computed on the basis of a 360 day year. 3. EVENTS OF DEFAULT. If any of the events specified in this Section 3 shall occur (herein individually referred to as an "Event of Default"), the Holder of the Note may, so long as such condition exists, declare the entire principal and unpaid accrued interest hereon immediately due and payable, by notice in writing to the Company: (a) Default in the payment of the principal and unpaid accrued interest of this Note when due and payable if such default is not cured by the Company within five (5) days after the Holder has given the Company written notice of such default; (b) The institution by the Company of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to institution of bankruptcy or insolvency proceedings against it or the filing by it of a petition or answer or consent seeking reorganization or release under the federal Bankruptcy Act, or any other applicable federal or state law, or the consent by it to the filing of any such petition or the appointment of a receiver, liquidator, assignee, trustee or other similar official of the Company, or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the taking of corporate action by the Company in furtherance of any such action; (c) If, within sixty (60) days after the commencement of an action against the Company (and service of process in connection therewith on the Company) seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such action shall not have been resolved in favor of the Company or all orders or proceedings thereunder affecting the operations or the business of the Company stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if, within sixty (60) days after the appointment without the consent or acquiescence of the Company of any trustee, receiver or liquidator of the Company or of all or any substantial part of the properties of the Company, such appointment shall not have been vacated; (d) If the Company merges or consolidates with any person; or sells, leases (as lessor) or otherwise disposes of all or substantially all of the consolidated assets of the Company, or sells, leases (as lessor) or otherwise dispose of assets representing more than 25% of the corporation's total consolidated assets in any three-month period (other A-2 than sales or other dispositions of inventory in the ordinary course of business); or liquidates or dissolves; (e) If Stetsys Pte. Ltd. ceases to have the voting power to elect a majority of the Company's board of directors; (f) Default in the payment, whether at maturity or otherwise, of any debt of the Company in an aggregate amount exceeding $3,000,000 and the lender shall have declared an event of default to be existing under the relevant loan agreement or agreements. 4. PREPAYMENT. The Company shall have the right, exercisable from time to time on ten (10) days written notice to the Holder, to call this Note, without prepayment penalty, and prepay the entirety or any portion of the outstanding principal amount, together with all accrued interest thereon. 5. CONVERSION. Holder shall have the right (a) at any time to convert 20% of the original principal balance of the Note and (b) at any time after the Maturity Date, prior to payment in full of the principal balance of this Note, to convert the then outstanding balance of this Note in accordance with the provisions of Section 6 hereof, in whole or in part, into shares (the "Shares") of the Company's common stock, par value $.002 per share (the "Common Stock"). The number of Shares into which this Note may be converted shall be determined by dividing the aggregate principal amount and all accrued but unpaid interest to the date of conversion by $3.73 (the "Conversion Price"), as such Conversion Price may be adjusted from time to time in accordance with the terms of Section 7 hereof. Upon conversion of this Note, the Company shall appoint Spar Representatives to the Board of Directors of the Company in a number commensurate with Holder's percentage of ownership of the Company. 6. MECHANICS AND EFFECT OF CONVERSION. No fractional Shares shall be issued upon conversion of this Note. In lieu of the Company issuing any fractional shares to the Holder upon the conversion of this Note, the Company shall pay to the Holder the amount of outstanding principal and interest that is not so converted. Upon any partial conversion of this Note, the Holder shall surrender this Note and shall receive a new Note for the remaining principal amount. Upon the full conversion of this Note, the Holder shall surrender this Note, duly endorsed, at the principal office of the Company. At its expense, the Company shall, as soon as practicable thereafter, issue and deliver to such Holder at such principal office a certificate or certificates for the number of Shares to which the Holder shall be entitled upon such conversion (bearing such legends as are required by applicable state and federal securities laws in the opinion of counsel to the Company), together with any other securities and property to which the Holder is entitled upon such conversion under the terms of this Note, including a check payable to the Holder for any cash amounts payable as described above. Upon conversion of this Note, the Company shall be forever released from all its obligations and liabilities under this Note, except that the Company shall be obligated to pay the Holder, within ten (10) days after the date A-3 of such conversion, any interest accrued and unpaid or unconverted to and including the date of such conversion, and no more. Concurrently with the delivery of the Shares, the Company shall deliver to the Holder an executed counterpart of the Registration Rights Agreement attached hereto as Exhibit A. 7. ADJUSTMENTS TO CONVERSION PRICE. (a) If outstanding shares of the Common Stock of the Company shall be subdivided into a greater number of shares, or a dividend in Common Stock or other securities of the Company convertible into or exchangeable for Common Stock (in which latter event the number of shares of Common Stock issuable upon the conversion or exchange of such securities shall be deemed to have been distributed) shall be paid in respect to the Common Stock of the Company, the Conversion Price in effect immediately prior to such subdivision or at the record date of such dividend shall, simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend, be proportionately reduced, and conversely, if outstanding shares of the Common Stock of the Company shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall simultaneously with the effectiveness of such combination, be proportionately increased. Any adjustment to the Conversion Price under this Section 7(a) shall become effective at the close of business on the date the subdivision or combination referred to herein becomes effective. (b) In the event the Company at any time, or from time to time, shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company other than shares of Common Stock or securities convertible into or exchangeable for Common Stock, then and in each such event, provision shall be made so that the Holder shall receive upon conversion of the Note, in addition to the number of shares of Common Stock receivable thereupon, the amount and kind of securities of the Company which it would have received had the Note been converted into Common Stock on the date of such event and had thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this Section 7 with respect to the rights of the Holder. (c) In the event of any capital reorganization, any reclassification of the Common Stock (other than a change in par value or as a result of a stock dividend, subdivision, split-up or combination of shares), the consolidation or merger of the Company with or into another person (collectively referred to hereinafter as "Reorganizations"), the Holder shall thereafter be entitled to receive, and provision shall be made therefor in any agreement relating to a Reorganization, upon conversion of the Note, the kind and number of shares of Common Stock or other securities or property (including cash) of the Company, or other corporation resulting from such consolidation or surviving such merger, to which a holder of the number of shares of the Common Stock of the Company which the Note entitled the Holder to convert to immediately prior to such Reorganization would have been entitled to receive with respect to A-4 such Reorganization; and in any such case appropriate adjustment shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Holder, to the end that the provisions set forth herein (including the specified changes and other adjustments to the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares, other securities or property thereafter receivable upon conversion of the Note. The provisions of this Section 7(c) shall similarly apply to successive Reorganizations. (d) (i) If at any time or from time to time the Company shall issue or sell Additional Shares of Common Stock (as hereinafter defined) other than as a dividend or other distribution on any class of stock as provided in Section 7(b) above and other than as a subdivision or combination of shares of Common Stock as provided in Section 7(a) above, for a consideration per share less than the then existing Conversion Price, then, and in each such case, the then existing Conversion Price shall be reduced, as of the opening of business on the date of such issuance or sale, to a price determined by dividing (1) an amount equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to that issuance or sale (including as outstanding all shares of Common Stock issuable upon conversion of the portion of the Note for which the conversion price is being adjusted) multiplied by such Conversion Price then in effect, and (B) the consideration, if any, received by the Company upon that issuance or sale, by (2) the total number of shares of Common Stock outstanding immediately after that issuance or sale (including as outstanding all shares of Common Stock issuable upon conversion of the portion of the Note for which the conversion price is being adjusted). (ii) For the purpose of making any adjustment in the Conversion Price or number of shares of Common Stock issuable upon conversion of the Note, as provided above, the consideration received by the Company for any issue or sale of securities shall: (A) To the extent it consists of cash, be computed at the net amount of cash received by the Company after deduction of any underwriting or similar commissions, compensations, discounts or concessions paid or allowed by the Company in connection with such issuance or sale; (B) To the extent it consists of property other than cash, the consideration other than cash shall be computed at the fair market value thereof as determined in good faith by the Board of Directors, at or about, but as of, the date of the adoption of the resolution specifically authorizing such issuance or sale, irrespective of any accounting treatment thereof; and (C) If Additional Shares of Common Stock, Convertible Securities (as hereinafter defined) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for consideration which covers both, the consideration received for the Additional Shares of Common Stock, Convertible Securities or rights or options shall be computed as that portion of the consideration so received which is reasonably A-5 determined in good faith by the Board of Directors to be allocable to such Additional Shares of Common Stock, convertible Securities or rights or options. (iii) For the purpose of making any adjustment in the Conversion Price provided in this Section 7(d), if at any time, or from time to time, the Company issues any stock or other securities convertible into Additional Shares of Common Stock (such stock or other securities being hereinafter referred to as "Convertible Securities") or issues any rights or options to purchase Additional Shares of Common Stock or Convertible Securities (such rights or options being hereinafter referred to as "Rights"), then, and in each such case, if the Effective Conversion Price (as hereinafter defined) of such Rights or Convertible Securities shall be less than the Conversion Price in effect immediately prior to the issuance of such Rights or Convertible Securities, the Company shall be deemed to have issued at the time of the issuance of such Rights or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received in consideration for the issuance of such shares an amount equal to the aggregate Effective Conversion Price of such Rights or Convertible Securities. For the purposes of this Section 7(d)(iii), "Effective Conversion Price" shall mean an amount equal to the sum of the consideration, if any, received or receivable by the Company with respect to each Additional Share of Common Stock upon issuance of the Rights or Convertible Securities and upon their exercise or conversion, respectively. No further adjustment of the Conversion Price adjusted upon the issuance of such Rights or Convertible Securities shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such Rights or the conversion of any such Convertible Securities. If any such Rights or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, such Conversion Price as adjusted upon the issuance of such Rights or Convertible Securities shall be readjusted to the Conversion Price which would have been in effect had such adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such Rights or on the conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such Rights, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted plus the consideration, if any, actually received by the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities. (e) "Additional Shares of Common Stock" as used in this Section 7 shall mean all shares of Common Stock issued by the Company, whether or not subsequently reacquired or retired by the Company, other than (i) shares of Common Stock issued upon the conversion of the Note, (ii) shares of Common Stock issued in connection with an offering to existing shareholders of the Company and employees of the Company announced on or before the closing date of the Stock Purchase Agreement in which Stetsys US, Inc., a Delaware corporation, and Stetsys Pte. Ltd., a Singapore corporation, will collectively purchase Common Stock of the Company, (iii) shares of Common Stock issued in connection with an Equity Offering the proceeds of which are used to repay all outstanding principal and accrued but unpaid A-6 interest on the Note; and (iv) shares issued upon the exercise of employee stock options or underwriters' warrants. (f) In each case of an adjustment or readjustment of the Conversion Price or the number of shares of Common Stock or other securities issuable upon conversion of the Note, the Company, at its expense, shall cause the Chief Financial Officer of the Company to compute such adjustment or readjustment in accordance with the provisions of this Note and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first-class mail, postage prepaid, to the registered Holder at the Holder's address as shown on the Company's stock transfer books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (i) the consideration received or to be received by the Company for any Additional Shares of Common Stock issued or sold or deemed to have been issued or sold, (ii) the Conversion Price at the time in effect for the Note and (iii) the number of Additional Shares of Common Stock and the type and amount, if any, of other property which at the time would be received upon conversion of the Note. Such notice may be given in advance of such adjustment or readjustment and may be included as part of a notice required to be given pursuant to Section 7(g) below. (g) In the event the Company shall propose to take any action of the type or types requiring an adjustment to the Conversion Price as set forth herein, the Company shall give notice to the Holder in the manner set forth in Section 14 below, which notice shall specify the record date, if any, with respect to any such action and the date on which such action is to take place. Such notice shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable upon the occurrence of such action or deliverable upon the conversion of the Note. 8. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Note, such number of its shares of Common Stock as shall from time to time be sufficient to effect a conversion of the Note, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the Note, the Company shall promptly seek such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. In the event of the consolidation or merger of the Company with another corporation where the Company is not the surviving corporation, effective provisions shall be made in the certificate or articles of incorporation, merger or consolidation, or otherwise of the surviving corporation so that such corporation will at all times reserve and keep available a sufficient number of shares of Common Stock or other securities or property to provide for the conversion of the Note in accordance with the provisions of this Section 8. A-7 9. PAYMENT OF TAXES. The Company shall pay all taxes and other governmental charges (other than any income or other taxes imposed upon the profits realized by the recipient) that may be imposed in respect of the issue or delivery of shares of Common Stock or other securities or property upon conversion of the Note, except any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock or other securities in a name other than that of which the Note was registered. 10. COVENANTS. (a) The Company shall, concurrently with the mailing thereof to the Company's shareholders, provide the Holder with copies of all Annual Reports and reports on Forms 10-K, 10-Q and 8-K prepared by the Company. The Company shall also provide the Holder with copies of all Registration Statements and Prospectuses prepared with respect to the Company. (b) The Company will permit any representative designated by the Holder upon reasonable notice and during normal business hours, to visit and inspect any of the properties of the Company, examine the corporate and financial records of the Company and make copies thereof or extracts therefrom, and to discuss the affairs, finances and accounts of the Company with the directors, officers, key employees and independent accountants of the Company provided that no such representative shall unduly interfere with the normal business and operations of the Company during such visit or inspection. (c) The Company will perform and observe all of its obligations to the Holder set forth in this Agreement, and all of its obligations to holders of Registrable Securities (as defined in the Registration Rights Agreement attached hereto as Appendix A) set forth in the Registration Rights Agreement, as the foregoing may from time to time be amended. (d) The Holder shall maintain the confidentiality of all nonpublic information obtained by it from the Company; PROVIDED, that (a) the Holder may, to the extent required by law, disclose such information in connection with the sale or transfer of the Note (or the Common Stock issued upon conversion thereof) if the Holder's transferee agrees in writing to be bound by the provisions hereof and (b) after reasonable notice to the Company, the Holder may disclose such information (i) at the request of any applicable regulatory authority or in connection with an examination of the Company by any such authority, (ii) pursuant to subpoena or other court process, (iii) when required to-do so in accordance with the provisions of any applicable law, (iv) to the Holder's independent auditors and other professional advisors provided such persons acknowledge and agree to be bound by the Holder's confidentiality obligations hereunder (e) The Company shall not amend its certificate of incorporation in a manner that adversely impacts or may adversely impact the Holder without the prior written consent of the Holder. 11. ASSIGNMENT. The rights and obligations of the Company and the Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, administrators and A-8 transferees of the parties. Holder agrees not to assign the Note to any direct competitor of the Company or its affiliates. 12. WAIVER AND AMENDMENT. Any provision of this Note may only be amended, waived or modified upon the written consent of the Company and the Holder. 13. TREATMENT OF NOTE. To the extent permitted by generally accepted accounting principles, the Company will treat, account and report the Note as debt and not equity for accounting purposes and with respect to any returns filed with federal, state or local tax authorities. 14. NOTICE. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if telecopied or mailed by registered or certified mail, postage prepaid, at the respective addresses of the parties set forth in the Stock Purchase Agreement. Any party hereto may by notice so given change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when personally delivered or when deposited in the mail or telecopied in the manner set forth in the Stock Purchase Agreement and shall be deemed to have been received when delivered. 15. DISPUTE RESOLUTION. Any dispute between the Company and the Holder shall be resolved in accordance with the dispute resolution provisions of the Stock Purchase Agreement. 16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, excluding that body of law relating to conflict of laws. 17. HEADING; REFERENCES. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. Except where otherwise indicated, all references herein to Sections refer to Sections hereof. IN WITNESS WHEREOF, the Company has caused this Note to be issued this 15th day of October, 1998. RADYNE CORP. By: /s/ R.C. Fitting ------------------------------------- Name: R.C. Fitting ----------------------------------- Its: President ------------------------------------ A-9 APPENDIX A TO CONVERTIBLE PROMISSORY NOTE RADYNE CORP. REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of __________, 199_ by and between RADYNE CORP., a New York corporation (the "COMPANY"), and [__________] (the "PURCHASER"). RECITALS A. The Company is the maker of that certain Convertible Promissory Note dated as of ____________, 1998 (the "Note"), which Note is convertible into Common Stock, par value $.002, of the Company (the "Common Stock"); B. The Purchaser has exercised its right to convert the Note to Common Stock and concurrently with the execution of this Agreement the Company is issuing to the Purchaser [__________] shares of Common Stock (the "Shares"). C. Pursuant to the terms of the Note, the Company is required to execute and deliver this Agreement with the Shares. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the parties agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "COMMISSION" shall mean the Securities and Exchange Commission of the United States or any other United States federal agency at the time administering the Securities Act. "HOLDER" shall mean the Purchaser, and its transferees or assigns as permitted by SECTION 11 HEREOF, holding Registrable Securities or securities convertible into or exercisable for Registrable Securities. "REGISTRABLE SECURITIES" means (i) the Shares and (ii) any shares of Common Stock issued or issuable in respect of the Shares upon any stock split, stock dividend, recapitalization, or similar event. Shares shall only be treated as Registrable Securities if they (A) have not been sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) are not able to be sold in a single transaction exempt pursuant to Rule 144(k) from the registration and prospectus delivery requirements of the Securities Act so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale. The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement by the Commission. "REGISTRATION EXPENSES" shall mean all expenses, excluding Selling Expenses (as defined below) except as otherwise stated below, incurred by the Company in complying with SECTION 2, SECTION 3 and SECTION 4 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company and reasonable fees and disbursements of one counsel for the Holder selected by the Holder and approved by the Company (which consent shall not be unreasonably withheld), Blue Sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder. "SELLING EXPENSES" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holder. Such expenses shall be borne by the Holder. 2. DEMAND REGISTRATION. (a) REQUEST FOR REGISTRATION. In the event the Company shall receive a written request from Holders collectively holding at least twenty five percent (25%) of the Registrable Securities on or after the maturity date of the Note then held by all Holders of Registrable Securities at the time of such request that the Company effect any registration, qualification or compliance with respect to Registrable Securities having an aggregate proposed selling price of not less than One Million Dollars ($1,000,000) (a "REGISTRATION NOTICE"), the Company will, as soon as practicable, use its best efforts to effect such registration, qualification or compliance (including, without limitation, appropriate qualification under applicable Blue Sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request. Notwithstanding the foregoing, the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this SECTION 2 (i) prior to the effective date of the Company's first registered public offering of its stock or (ii) after the Company has effected one registration pursuant to this SECTION 2 and such registrations have been declared or ordered effective. Subject to the foregoing clauses (i) and (ii), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, 2 after receipt of the request or requests of the Holder. Notwithstanding the foregoing, the Company shall be entitled to defer for a reasonable period of time, but not in excess of 120 days, the filing of any registration statement otherwise required to be prepared and filed by it under this SECTION 2 if (i) (A) the Company is at such time conducting or about to conduct an underwritten public offering of its securities for its own account and the Board of Directors of the Company determines in good faith that such offering by the Company would be materially adversely affected by such registration requested by the Holder(s), (B) the Company is pursuing an acquisition, merger, reorganization, disposition or other similar transaction and the Board of Directors of the Company determines in good faith that the Company's ability to pursue or consummate such transaction would be materially adversely affected by such registration requested by the Holder(s), or (C) the Company is in possession of material nonpublic information concerning it or its business and affairs and the Board of Directors of the Company determines in good faith that the prompt public disclosure of such information in such registration requested by the Holder(s) would have a material adverse effect on the Company; and (ii) the Company so notifies the requesting Holder(s) within ten (10) days after the Company's receipt of the Registration Notice from such Holder(s). (b) UNDERWRITING. In the event that a registration pursuant to this Section is for a registered public offering involving an underwriting, the Company shall so advise the Holder as part of the notice given pursuant to SECTION 2(A). In such event, the right of the Holder to registration pursuant to this Section shall be conditioned upon the Holder's participation in the underwriting arrangements required by this Section, and the inclusion of the Holder's Registrable Securities in the underwriting to the extent requested shall be limited to the extent provided herein. The Holder shall, together with the Company, enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company, but subject to the reasonable approval of the Holder. If the Holder disapproves of the terms of any such underwriting, the Holder may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 3. REGISTRATION ON FORM S-3. (a) REQUEST FOR REGISTRATION. If at any timeon or after the maturity date of the Note, or from time to time thereafter, the Holder requests that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of Registrable Securities and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use its best efforts to cause such Registrable Securities to be registered for the offering on such form and to cause such Registrable Securities to be qualified in such jurisdictions as the Holder may reasonably request. Notwithstanding the foregoing, the Company shall not be obligated to take any action pursuant to Section 2 and SECTION 3 more than one (1) time per calendar year. Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, after receipt of the request or requests of the Holder. Notwithstanding the foregoing, the Company shall be entitled 3 to defer for a reasonable period of time, but not in excess of 120 days, the filing or any other actions with respect to any registration statement otherwise required to be prepared and filed by it under this SECTION 3 if (i) (A) the Company is at such time conducting or about to conduct an underwritten public offering of its securities for its own account and the Board of Directors of the Company determines in good faith that such offering by the Company would be materially adversely affected by such registration requested by the Holder(s), (B) the Company is pursuing an acquisition, merger, reorganization, disposition or other similar transaction and the Board of Directors of the Company determines in good faith that the Company's ability to pursue or consummate such transaction would be materially adversely affected by such registration requested by the Holder(s), or (C) the Company is in possession of material nonpublic information concerning it or its business and affairs and the Board of Directors of the Company determines in good faith that the prompt public disclosure of such information in such registration requested by the Holder(s) would have a material adverse effect on the Company; and (ii) the Company so notifies the requesting Holder(s) within ten (10) days after the Company's receipt of the registration request from such Holder(s). (b) UNDERWRITING. The substantive provisions of SECTION 2(B) shall be applicable to each such registration initiated under this Section involving an underwriting. 4. INCIDENTAL REGISTRATIONS. (a) NOTICE OF REGISTRATION. If at any time on or after the maturity date of the Note or from time to time thereafter the Company shall determine to file a registration statement under the Securities Act for the general registration of any of its securities to be sold for cash, either for its own account or the account of a security holder or holders, other than (i) a registration relating solely to stock option or other employee benefit plans or (ii) a registration relating solely to a Commission Rule 145 transaction, the Company will: (A) promptly give the Holders written notice thereof; and (B) include in such registration (and any related qualification under Blue Sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within twenty (20) days after receipt of such written notice from the Company, by the Holder, subject to the terms of SECTION 4(B). (b) UNDERWRITING. If the registration with respect to which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holder as a part of the written notice given pursuant to SECTION 4(A). In such event, the right of the Holder to registration pursuant to this Section shall be conditioned upon the Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. The Holder shall, together with the Company, enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. If the Holder disapproves of the terms of any such underwriting, the Holder may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 4 Notwithstanding any provision contained herein to the contrary, if the managing underwriter or underwriters of the registration in which the Company gives notice under this SECTION 4 shall advise the Company in writing that, in its opinion, the total amount of Registrable Securities that the Holder(s) request to include in such registration, together with any other securities with similar incidental or piggyback registration rights (collectively, the "REQUESTED SECURITIES") would materially reduce the amount of securities to be offered by the Company or interfere in any material respect with the offer of the Company's securities, then the amount and kind of Requested Securities to be offered for the accounts of any Holder whose shares of Requested Securities were requested to be included in such registration shall be reduced pro rata with respect to each such Holder to the extent necessary to reduce the total amount of securities to be included in such registration to the amount recommended by such managing underwriter or underwriters; PROVIDED, HOWEVER, that such reduction shall not include the following: (i) if the registration initially occurs at the insistence of the Company, shares to be issued by the Company; or (ii) if the registration occurs due to a demand registration right, including the Demand Registration provided in SECTION 2, shares of the Holder(s) making that demand. (c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section prior to the effectiveness of such registration whether or not the Holder has elected to include Registrable Securities in such registration; provided, however, if the Holder elects to use its demand registration right pursuant to SECTION 2, then such registration shall be governed by SECTION 2 and it shall not be terminated. 5. LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date hereof, the Company will not, without the prior written consent of holders of two-thirds of the Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which allows such holder or prospective holder of any securities of the Company to include such securities in any registration filed under SECTION 2 hereof, unless, under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not adversely affect the Holder's registration rights pursuant to such SECTION 2. 6. EXPENSES OF REGISTRATION. (a) REGISTRATION EXPENSES. The Company shall bear all Registration Expenses incurred in connection with all registrations pursuant to SECTION 2 or SECTION 4 hereof, and shall bear all Registration Expenses incurred in connection with the first registration pursuant to SECTION 3. In the event the Holder withdraws a Registration Notice, abandons a registration statement or, following an effective registration pursuant to SECTION 2 hereof, does not sell Registrable Securities, then all Registration Expenses in respect of such Registration Notice shall be borne, at the Holder's option, either by the Holder or by the Company (in which case, if borne by the Company, such withdrawn or abandoned registration shall be deemed to be an effective registration for purposes of SECTION 2(A)(II) hereof). The Holder shall bear all Registration Expenses incurred in connection with the second and any subsequent registration pursuant to SECTION 3. 5 (b) SELLING EXPENSES. Unless otherwise stated, all Selling Expenses relating to securities registered on behalf of the Holders shall be borne by the Holders pro rata on the basis of the number of shares so registered. 7. REGISTRATION AND QUALIFICATION. If and whenever the Company is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will as promptly as is practicable: (a) prepare and file with the Commission, as soon as practicable, and use its best efforts to cause to become effective for a time period not to exceed 90 days, a registration statement under the Securities Act relating to the Registrable Securities to be offered on such form as the Holder, or if not filed pursuant to SECTION 2 or SECTION 3 hereof, the Company, determines and for which the Company then qualifies; (b) prepare and file with the Commission such amendments (including post-effective amendments) to such registration statement and the prospectus and supplements used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities until the earlier of such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition set forth in such registration statement or the expiration of ninety (90) days after such registration statement becomes effective; provided that such ninety (90) day period shall be extended in the case of a registration pursuant to SECTION 2 or SECTION 3 hereof for such number of days that equals the number of days elapsing from (i) the date the written notice contemplated by SECTION 7(F) hereof is given by the Company to (ii) the date on which the Company delivers to the Holder the supplement or amendment contemplated by SECTION 7(F) hereof; (c) furnish to the Holder and to any underwriter of Registrable Securities such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, such documents incorporated by reference in such registration statement or prospectus, and such other documents, as the Holder or such underwriter may reasonably request; (d) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of such registration statement at the earliest possible moment; (e) if requested by the Holder, (i) furnish to the Holder an opinion of counsel for the Company addressed to the Holder and dated the date of the closing under the underwriting agreement (if any) (or if such offering is not underwritten, dated the effective date of the registration statement), and (ii) use its best efforts to furnish to the Holder a "comfort" or "special procedures" letter addressed to the Holder and signed by the independent public accountants who have audited the Company's financial statements included in such registration statement, in each such case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) as are customarily covered in 6 opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities and such other matters as the Holder may reasonably request and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements; (f) immediately notify the Holder in writing (i) at any time when a prospectus relating to a registration hereunder is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) of any request by the Commission or any other regulatory body or other body having jurisdiction for any amendment of or supplement to any registration statement or other document relating to such offering, and in either such case (i) or (ii) at the request of the Holder prepare and furnish to the Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances under which they are made, not misleading; (g) use its best efforts to list all such Registrable Securities covered by such registration statement on each securities exchange and inter-dealer quotation system on which a class of common equity securities of the Company is then listed, and to pay all fees and expenses in connection therewith; and (h) upon the transfer of Shares by the Holder in connection with a registration hereunder, furnish unlegended certificates representing ownership of the Registrable Securities being sought in such denominations as shall be requested by the Holder or the underwriters. 8. INDEMNIFICATION. (a) BY THE COMPANY. The Company will indemnify the Holders, their respective officers, directors, partners, legal counsel and accountants, and each person controlling any Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statementor prospectus, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act or any rule or regulation promulgated under the Securities Act applicable to the Company in connection 7 with any such registration, qualification or compliance, and the Company will reimburse the Holder, its officers, directors and partners, each person controlling the Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by the Holder, controlling person or underwriter and stated to be specifically for use therein. If the Holder is represented by counsel other than counsel for the Company, the Company will not be obligated under this SECTION 8(A) to reimburse legal fees and expenses of more than one separate counsel for the Holder. (b) BY THE HOLDER. The Holder will indemnify the Company, its directors, officers, legal counsel, accountants, each underwriter, if any, of the Company's securities covered by such a registration statement, and each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statementor prospectus, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such directors, officers, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement or prospectus in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by the Holder and stated to be specifically for use therein. Notwithstanding the foregoing, the liability of the Holder under this subsection (b) shall be limited in an amount equal to the net proceeds of the shares sold by the Holder, unless such liability arises out of or is based on willful misconduct by the Holder. (c) PROCEDURE FOR INDEMNIFICATION. Each party indemnified under paragraph (a) or (b) of this SECTION 8 (the "INDEMNIFIED PARTY") shall, promptly after receipt of notice of any claim or the commencement of any action against such Indemnified Party in respect of which indemnity may be sought, notify the party required to provide indemnification (the "INDEMNIFYING PARTY") in writing of the claim or the commencement thereof; provided that the failure of the Indemnified Party to notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability which it may have to an Indemnified Party on account of the indemnity agreement contained in paragraph (a) or (b) of this SECTION 8, unless the Indemnifying Party was materially prejudiced by such failure, and in no event shall relieve the Indemnifying Party from any other liability which it may have to such Indemnified Party. If any such claim or action shall be brought against an Indemnified Party, it shall notify the Indemnifying Party thereof and the Indemnifying Party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the Indemnified Party. After 8 notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such claim or action, the Indemnifying Party shall not be liable (except to the extent the proviso to this sentence is applicable, in which event it will be so liable) to the Indemnified Party under this SECTION 8 for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof other than reasonable costs of investigation; provided that each Indemnified Party shall have the right to employ separate counsel to represent it and assume its defense (in which case, the Indemnifying Party shall not represent it) if (i) upon the advice of counsel, the representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, or (ii) in the event the Indemnifying Party has not assumed the defense thereof within ten (10) days of receipt of notice of such claim or commencement of action, and in which case the fees and expenses of one such separate counsel shall be paid by the Indemnifying Party. If any Indemnified Party employs such separate counsel it will not enter into any settlement agreement which is not approved by the Indemnifying Party, such approval not to be unreasonably withheld. If the Indemnifying Party so assumes the defense thereof, it may not agree to any settlement of any such claim or action as the result of which any remedy or relief, other than monetary damages for which the Indemnifying Party shall be responsible hereunder, shall be applied to or against the Indemnified Party, without the prior written consent of the Indemnified Party. In any action hereunder as to which the Indemnifying Party has assumed the defense thereof with counsel reasonably satisfactory to the Indemnified Party, the Indemnified Party shall continue to be entitled to participate in the defense thereof, with counsel of its own choice, but, except as set forth above, the Indemnifying Party shall not be obligated hereunder to reimburse the Indemnified Party for the costs thereof. If the indemnification provided for in this Section shall for any reason be unavailable to an Indemnified Party in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each Indemnifying Party shall, in lieu of indemnifying such Indemnified Party, contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage or liability, or action in respect thereof, in such proportion as shall be appropriate to reflect the relative fault of the Indemnifying Party on the one hand and the Indemnified Party on the other with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Indemnifying Party on the one hand or the Indemnified Party on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission, but not by reference to any Indemnified Party's stock ownership in the Company. In no event, however, shall the Holder of Registrable Securities be required to contribute in excess of the amount of the net proceeds received by the Holder in connection with the sale of Registrable Securities in the offering which is the subject of such loss, claim, damage or liability. The amount paid or payable by an Indemnified Party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this paragraph shall be deemed to include, for purposes of this paragraph, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. No person guilty of 9 fraudulent misrepresentation (within the meaning of Section 12(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 9. INFORMATION FROM THE HOLDERS. Notwithstanding any provision contained herein to the contrary, it shall be a condition precedent to the obligation of the Company to take any action pursuant to this Agreement in respect of the Registrable Securities that are to be registered at the request of any Holder thereof that (i) such Holder furnish to the Company such information regarding the Holder as shall be necessary to enable the Company to comply with the provisions hereof in connection with any registration, qualification or compliance referred to in this Agreement, and (ii) such Holder deliver and perform under any underwriting and selling shareholder agreements as may be reasonably requested by the underwriters. 10. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission that may at any time permit the sale of the Registrable Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"); (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and (c) Furnish to any Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as the Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration. 11. TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to register securities under SECTION 2, SECTION 3 or SECTION 4 may be assigned in connection with any transfer or assignment by the Holder of Registrable Securities provided that: (a) such transfer may otherwise be effected in accordance with applicable securities laws; (b) such transfer is effected in compliance with the restrictions on transfer contained in this Agreement and in any other agreement between the Company and the Holder; and (c) such assignee or transferee acquires at least 25% of the Registrable Securities then outstanding and shall execute a counterpart of this Agreement whereby such assignor or transferee agrees to be bound by the terms of this Agreement and assumes all of the obligations of the transferring Holder hereunder. 10 No transfer or assignment will divest the Holder or any subsequent owner of such rights and powers unless all Registrable Securities are transferred or assigned. 12. TERMINATION. This Agreement shall terminate at such time as all Registrable Securities held by the Holders constitute less than one percent (1%) of the voting securities of the Company (on an as-converted basis) and can be sold pursuant to Rule 144, other than Rule 144(k), within a consecutive three (3) month period without compliance with the registration requirements of the Securities Act. The respective indemnities, representations and warranties of the Purchaser and the Company shall survive such termination. 13. MARKET STAND-OFF. If requested by an underwriter of securities of the Company, each Holder of Registrable Securities shall not sell or otherwise transfer or dispose of any Registrable Securities held by such Holder during the one-hundred twenty (120) day period following the effective date of a registration statement; provided, however, that such agreement shall apply only to the first registration statement covering the offered securities to be sold on the Company's behalf to the public in an underwritten offering. 14. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement will be governed by and construed in accordance with the State of New York without given effect to the conflicts of law principles thereof. (b) AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holder of at least two-thirds (2/3) of the Registrable Securities, voting as a class. Any amendment or waiver effected in accordance with this paragraph will be binding upon the Company, each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), and any transferee of such securities. (c) SEVERABILITY. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, invalid, unenforceable or void, this Agreement shall continue in full force and effect without said provision. In such event, the parties shall negotiate, in good faith, a legal, valid and binding substitute provision which most nearly effects the intent of the parties in entering into this Agreement. (d) NOTICES. All notices and other communications required or permitted hereunder shall be in writing (or in the form of a telex or telecopy (confirmed in writing) to be given only during the recipient's normal business hours unless arrangements have otherwise been made to receive such notice by telex or telecopy outside of normal business hours) and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand, messenger, or telex-or telecopy (as provided above) addressed (a) if to the Purchaser, at such address as the Purchaser shall have furnished to the Company in writing or (b) if to the Company, one copy should be sent to its principal executive offices and addressed to the 11 attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Purchaser. Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or, if by telex or telecopy pursuant to the above, when received. (e) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. (f) CAPTIONS. The section captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. RADYNE CORP., a New York corporation By: ------------------------------------- Its: ------------------------------------ [ADD PURCHASER] 12 EX-23 3 EXHIBIT 23 Exhibit 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-23159 and No. 333-67469) pertaining to the 1996 Incentive Stock Option Plan of Radyne Corp. of our report dated February 16, 1998 (except for Note 11, as to which the date is April 16, 1998) with respect to the consolidated financial statements of ComStream Holdings, Inc. included in Radyne Corp.'s Form 8-K/A to be filed on or about December 24, 1998 related to Radyne Corp.'s acquisition of ComStream Holdings, Inc. /s/ Ernst & Young LLP San Diego, California December 18, 1998 -----END PRIVACY-ENHANCED MESSAGE-----