-----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, B6mTL/S9VSpGM1/MbCKOj6wUS+OjlPxyrlxmhmDJ4z7F6UrYZ3CZtI9QhjhKufgZ Zrsyp+55QZxY2ZN1dw7Mow== 0001047469-99-000736.txt : 19990112 0001047469-99-000736.hdr.sgml : 19990112 ACCESSION NUMBER: 0001047469-99-000736 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19990111 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: S-2 SEC ACT: SEC FILE NUMBER: 333-70403 FILM NUMBER: 99504231 BUSINESS ADDRESS: STREET 1: 3138 EAST ELWOOD STREET CITY: PHOENIX STATE: AZ ZIP: 85034 BUSINESS PHONE: 6024379620 MAIL ADDRESS: STREET 1: 3138 EAST ELWOOD STREET CITY: PHOENIX STATE: AZ ZIP: 85034 S-2 1 FORM S-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------ RADYNE CORP. (Exact name of Registrant as specified in its charter) NEW YORK 3665 11-2569467 (State or jurisdiction (Primary Standard (I.R.S. Employer of incorporation or Industrial Classification Identification No.) organization) Code Number) ------------ 3138 EAST ELWOOD STREET PHOENIX, ARIZONA 85034 (602) 437-9620 (Address, including zip code and telephone number, including area code, of Registrant's principal executive offices) ------------ ROBERT C. FITTING, CHIEF EXECUTIVE OFFICER RADYNE CORP. 3138 EAST ELWOOD STREET PHOENIX, ARIZONA 85034 (602) 437-9620 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------ COPY TO: JOHN B. WADE, III, ESQ. DORSEY & WHITNEY LLP 250 PARK AVENUE NEW YORK, NY 10177 (212) 415-9311/(212) 953-7201 (TELECOPY) Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /_/ If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to item 11(a)(1) of this form, check the following box. /_/ If this Form is filed to register additional securities pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. /_/ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. /_/ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. /_/ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. /_/ ------------ CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------- 4,745,076 Common Stock, par value $.002 per share Shares(1) $3.73 $17,699,133 $4,921 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- 4,745,076 Subscription Rights to Purchase Common Subscription Stock Rights $0.00 $0.00 $0.00 - ----------------------------------------------------------------------------------------------------------- TOTAL -- -- $17,699,133 $4,921
(1) Issuable upon exercise of Rights which are being distributed to shareholders of Radyne Corp. ------------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RADYNE CORP. CROSS REFERENCE SHEET (PURSUANT TO ITEM 501(b) OF REGULATION S-K)
S-2 ITEM NUMBER AND CAPTION LOCATION OR CAPTION - --------------------------- IN PROSPECTUS ------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus ............................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus ...................... Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges ....... Prospectus Summary; Risk Factors 4. Use of Proceeds .......................... Prospectus Summary; Purpose of the Rights Offering and Use of Proceeds 5. Determination of Offering Price ......... Purpose of the Rights Offering and Use of Proceeds 6. Dilution ................................. Dilution 7. Selling Security Holders ................. Not Applicable 8. Plan of Distribution ..................... Outside Front Cover Page; The Rights Offering 9. Description of Securities to be Registered ............................... Outside Front Cover Page; The Rights Offering; Description of Capital Stock 10. Interest of Named Experts and Counsel ... Not Applicable 11. Information with Respect to the Registrant .............................. Outside Front Cover Page; Prospectus Summary; Risk Factors; Purpose of Rights Offering and Use of Proceeds; Price Range of Common Stock; Dividend Policy; Business; Shares Eligible for Future Sale; Description of Capital Stock 12. Incorporation of Certain Information by Reference ............................ Where You Can Find More Information 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities ............................. Not Applicable
PROSPECTUS RADYNE CORP. 4,745,076 SHARES OF COMMON STOCK, PAR VALUE $.002 PER SHARE AND 4,745,076 SUBSCRIPTION RIGHTS ------------ - -------------------------------------------------------------------------------- PER SHARE TOTAL --------- ----- Subscription Price ............................................. $3.73 $17,699,133 Underlying Discount .......................................... N/A N/A ----- ----------- Total Proceeds to Radyne ......................................... $3.73 $17,699,133 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Radyne Corp. manufactures and designs digital data communications equipment for satellite telecommunications systems. ------------ The proceeds of this offering will be used to repay Radyne Corp.'s majority shareholder in connection with its financing of Radyne's recent acquisition of ComStream Holdings, Inc. and earlier working capital loans. Any additional funds remaining will be used for general working capital purposes. - -------------------------------------------------------------------------------- THE SUBSCRIPTION RIGHTS - Each Radyne shareholder of record on January __, 1999 will be entitled to purchase four shares of common stock for every five shares currently owned. - The purchase price per share is $3.73. - The subscription rights expire at 5:00 p.m. New York time on ___________, 1999, unless extended. THE COMMON STOCK - One share is issuable upon the exercise of one subscription right. - Voting rights for the new shares will be equal to the voting rights of shares currently outstanding. THE OFFERING - You cannot revoke a decision to exercise. - Continental Stock Transfer & Trust Company will act as subscription agent. Payment for any shares of common stock should be sent to Continental Stock Transfer & Trust. - [California residents may not participate in this offering.] RADYNE'S COMMON STOCK IS CURRENTLY TRADED OVER THE COUNTER AND IS NOT LISTED ON ANY SECURITIES EXCHANGE OR QUOTED ON NASDAQ. ---------- YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS ON PAGE 6 BEFORE PURCHASING ANY OF THE COMMON STOCK. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------ The date of this Prospectus is January __, 1999 WHERE YOU CAN FIND MORE INFORMATION Radyne Corp. is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and files reports and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any reports or other information Radyne Corp. at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. You may also request copies of these documents upon payment of a duplicating fee, by writing to the SEC's Public Reference Section. Please call the SEC at l-800-SEC-0330 for further information on the public reference rooms. Radyne Corp.'s SEC filings are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at "http://www.sec.gov." Radyne Corp. filed a registration statement with respect to the shares of Common Stock and Rights to purchase Common Stock we are offering. Pursuant to SEC rules and regulations, this document does not contain all of the information that you can find in such registration statement. You may read and copy this information in the same way as any other information that Radyne Corp. files with the SEC. Statements in this document concerning any document filed as an exhibit to the registration statement are not necessarily complete and, in each instance, reference is made to the copy of the complete document filed as an exhibit to the registration statement. Each of those statements is qualified in its entirety by reference to the complete document. These documents, filed with the SEC, may be inspected and copied, and obtained by mail, from the SEC as set forth above and will be available for inspection and copying at the principal executive offices of Radyne Corp. at 3138 East Elwood Street, Phoenix, AZ 85034 during regular business hours by any interested securityholder of Radyne Corp. or his or her representative who has been so designated in writing. The SEC allows us to "incorporate by reference" information into this document, which means that we can disclose important information to you by referring you to another document filed separately with the SEC, including Radyne Corp.'s annual, quarterly and current reports. The information incorporated by reference is deemed to be part of this document, except for any information superseded by information in this document. The information incorporated by reference is an important part of this prospectus. This document incorporates by reference the documents set forth below that Radyne Corp. previously filed with the SEC. These documents contain important information about Radyne Corp. and its finances. Radyne Corp. incorporates by reference into this Prospectus: - its Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997, which contains audited financial statements for the Company's latest fiscal year for which a Form 10-K was required to have been filed and i incorporates by reference certain portions of the Company's definitive Information Statement for the Annual Meeting of Stockholders held May 5, 1998; - its quarterly reports on Form 10-Q for the quarters ended March 31, 1998, June 30, 1998 and September 30, 1998; - all other reports filed by the Company pursuant to Section 13(a) or 15(d) of the Exchange Act since December 31, 1997, including but not limited to, the Form 8-Ks filed on July 24, 1998, July 31, 1998, August 28, 1998, October 30, 1998 and December 24, 1998; and - the description of Radyne's Common Stock, $.002 par value, as contained in its registration statement on Form 8-A, filed with the Commission on March 8, 1984, as amended on July 25, 1988. Copies of our Annual Report on Form 10-K for the year ended December 31, 1997 and our Quarterly Report on Form l0-Q for the quarter ended September 30, 1998 accompany this prospectus. Other documents incorporated by reference may be obtained through the SEC and are available from Radyne Corp. without charge, other than exhibits, unless we have specifically incorporated by reference an exhibit in this document. You may obtain documents incorporated by reference in this document by making a request to Radyne Corp. by telephone at (602) 437-9620 or in writing at the following address: Director of Administration Radyne Corp. 3138 East Elwood Street Phoenix, AZ 85034. You should rely only on the information contained in this document or that we have referred you to. We have not authorized anyone to provide you with information that differs from such information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of those documents. ii PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. FOR THE MEANINGS OF CERTAIN TECHNICAL TERMS USED IN THIS PROSPECTUS IN REGARD TO THE BUSINESS OF RADYNE COMSTREAM, PLEASE SEE THE GLOSSARY COMMENCING ON PAGE 42. THE COMPANY Radyne Corp. and its subsidiaries ("Radyne Comstream") have engaged in the advanced design and production of digital data communications equipment for satellite telecommunications systems for over seventeen years. Since our inception in 1980, we have established ourselves as a supplier in the satellite ground equipment business. We design, manufacture and sell satellite modems and earth stations, satellite broadcast receivers, frequency converters, ancillary products and equipment racks containing integrated modems and supporting equipment for data, audio and TV communications. Radyne Corp. was forced to file for Chapter 11 bankruptcy protection in April 1994. We successfully emerged from bankruptcy in December 1994 upon the acquisition of approximately 91% of Radyne Corp.'s Common Stock by Engineering and Technical Services, Inc. ("ETS"), then a major customer of ours. On August 12, 1996, ETS was acquired by Singapore Technologies Pte Ltd through its wholly owned subsidiary, Stetsys Pte Ltd, and the latter's wholly owned subsidiary, Stetsys US, Inc. (collectively, "ST"). As a result, approximately 91% of Radyne Comstream's Common Stock is now held by ST. See "Business--Bankruptcy Reorganization." In 1995, ETS caused us to install a new management team, who moved our operations from New York to Phoenix, Arizona. As part of this management change, we hired an almost completely new staff of engineering, sales and support personnel, with funding advanced by ETS and subsequently ST. The new Radyne Comstream team has reinstituted our research, development and marketing programs and reinvigorated our product line. Consistent with our new growth strategy, on October 15, 1998 we acquired ComStream Holdings, Inc. ("Comstream") from Spar Aerospace Limited, a Canadian advanced technology company ("Spar"). Comstream is an international provider of digital transmission solutions for voice, data, audio and video applications with offices in the United States, Singapore, Indonesia, China and the United Kingdom. We acquired Comstream in an effort to expand our core business, supplement our product lines and take advantage of Comstream's trademark and distribution channels, and based on our belief that the combined companies could realize certain synergies. In addition, we believed that Comstream's recurring costs were very excessive and that substantial savings could be realized. To date, we have reduced ongoing costs in Comstream by almost $1,000,000 per month. See "Business." -1- Radyne Corp. was incorporated in the State of New York on November 25, 1980. Our current headquarters address is 3138 East Elwood Street, Phoenix, Arizona 85034 and our telephone number is (602) 437-9620. PURPOSE OF THE RIGHTS OFFERING AND USE OF PROCEEDS This Rights offering is intended to raise approximately $17,700,000 in gross proceeds to repay ST for the $10,000,000 of financing which it provided in connection with the Comstream acquisition and approximately $5,618,000 in principal amount of earlier working capital loans. Any additional funds remaining will be used for general working capital purposes. If we complete the Rights offering, the maximum gross proceeds to Radyne Comstream would be approximately $17,700,000 before payment of related fees and expenses estimated to be $300,000. However, although we have been informed that ST intends to fully exercise its Rights, no assurance can be given that any or all of the Rights received by others will be exercised. Shares underlying any unexercised Rights will not be reoffered to the public or otherwise issued at this time. Therefore, the actual proceeds from the Rights offering could be somewhat less. The Subscription Price has been established by the Board of Directors at $3.73 per share, which the Board determined to be the fair market value of the Common Stock based on the negotiated conversion price of the convertible note issued to Spar in connection with the Comstream acquisition. See "Purpose of the Rights Offering and Use of Proceeds." -2- SUMMARY OF THE RIGHTS OFFERING The Rights ........... Shareholders, [other than residents of California,] will receive four Rights for every five shares of Common Stock held on the Record Date. An aggregate of approximately 4,745,076 Rights will be distributed. Holders of the Rights are entitled to purchase one share of Common Stock for each Right exercised at the Subscription Price. The Rights will be transferable. No fractional Rights will be issued. Each Right will entitle a shareholder to purchase one share of Common Stock at $3.73 per share. Subscription Price ... $3.73 per share of Common Stock. Record Date .......... January __, 1999. Transferability of Shareholder Rights .. The Rights will be transferable, but it is not anticipated that a market will be made in the Rights or that they will be listed for trading on any exchange. [Because subscriptions cannot be accepted from residents of California, no shareholder may transfer Rights to residents of such state.] Expiration Date ...... 5:00 p.m., New York time, on __________, 1999 unless the Board of Directors determines that a material event has occurred that necessitates one or more extensions of the Expiration Date to permit adequate disclosure of information concerning such event.
-3- Procedure for Exercising Rights ... Rights may be exercised by properly completing the certificate evidencing such Rights (a "Subscription Certificate") and forwarding the Subscription Certificate to the Subscription Agent or Radyne Comstream (or following the Guaranteed Delivery Procedures, referred to below) on or prior to the Expiration Date, together with payment in full of the Subscription Price with respect to such Rights. If the mail is used to forward Subscription Certificates, it is recommended that insured, registered mail be used. The exercise of a Right may not be revoked or amended. If time does not permit a holder of a Right to deliver a Subscription Certificate to the Subscription Agent or Radyne Comstream on or before the Expiration Date, such person should make use of the Guaranteed Delivery Procedures described under "The Rights Offering--Exercise of Rights." THE EXERCISE OF RIGHTS IS IRREVOCABLE ONCE MADE. NO INTEREST WILL BE PAID ON THE MONEY DELIVERED IN PAYMENT OF THE SUBSCRIPTION PRICE. If paying by uncertified personal check, please note that the funds paid thereby may take at least five business days to clear. Accordingly, persons who wish to pay the Subscription Price by means of uncertified personal check are urged to make payment sufficiently in advance of the Expiration Date to ensure that such payment is received and clears by such date. Shareholders are urged to consider payment by means of certified or cashier's check or money order. A Right may not be exercised in part and fractional shares will not be issued. Persons Holding Shares, or Wishing to Exercise Rights, Through Others ....... Persons who hold their Radyne Corp. shares and rights with a broker, dealer, commercial bank, trust company or other nominee should contact the appropriate institution or nominee and request it to effect the transactions for them. Issuance of Common Stock .............. Certificates representing shares of Common Stock issuable upon exercise of Rights (the "Rights Shares") will be delivered to the holder of such Rights as soon as practicable after such Rights are validly exercised. Funds delivered to the Subscription Agent will be held by the Subscription Agent until the issuance of the related Rights Shares. No interest will be paid to holders of the Rights on funds held by the Subscription Agent regardless of whether such funds are applied to the Subscription Price or returned to the Holders.
-4- Subscription Agent ... Continental Stock Transfer & Trust Company Information .......... Any questions regarding this offering, including the procedure for exercising Rights, and requests for additional copies of this Prospectus, the Subscription Certificate or the notice of guaranteed delivery should be directed to Radyne Comstream at 3138 East Elwood Street, Phoenix, Arizona 85034, Attention: Director of Administration. Telephone: (602) 437-9620. Maximum Shares of Common Stock Outstanding after the Rights Offering .... 10,676,422 shares based on 5,931,346 shares outstanding on December 31, 1998. Does not give effect to the issuance of 2,071,942 shares reserved for issuance upon the exercise of options previously granted or that may be granted from time to time under the 1996 Incentive Stock Option Plan or the possible conversion of an outstanding convertible note into an additional 1,876,675 shares.
For more information regarding this offering, including the procedure for exercising Rights, see "The Rights Offering." CERTAIN FEDERAL INCOME TAX CONSEQUENCES See "Certain Federal Income Tax Consequences" for a discussion of certain tax consequences that should be considered in connection with this offering. RISK FACTORS The purchase of Common Stock in the Rights Offering or the purchase of Rights in the secondary market involves investment risks relating to Radyne Comstream, to the data communications equipment industry in general and to this offering. Investors are urged to read and consider carefully the information set forth under the heading "Risk Factors." The Board of Directors of Radyne Comstream Makes No Recommendation to Holders as to Whether a Holder Should Exercise Rights to Purchase Shares of Common Stock in The Rights Offering. In Addition, The Board Makes No Recommendation to Any Person as to Whether a Person Should Purchase Rights. -5- RISK FACTORS AN INVESTMENT IN THE COMMON STOCK OR RIGHTS IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD INVEST IN THESE SECURITIES ONLY IF YOU CAN AFFORD THE LOSS OF YOUR ENTIRE INVESTMENT. PRIOR TO MAKING AN INVESTMENT DECISION, YOU SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE OTHER MATTERS REFERRED TO IN THIS PROSPECTUS, OR INCORPORATED BY REFERENCE, THE FOLLOWING RISK FACTORS. INFORMATION CONTAINED AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL," "SHOULD" OR "ANTICIPATES" OR THE NEGATIVES OF SUCH TERMS OR OTHER VARIATIONS ON SUCH TERMS OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW. OTHER FACTORS CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS COULD ALSO CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE FUTURE RESULTS INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. HISTORY OF LOSSES MAY CONTINUE On a pro forma basis, Radyne Comstream incurred losses from continuing operations of $12,186,000 during the nine months ended September 30, 1998 and $6,826,000 during the year ended December 31, 1997. Radyne Comstream has been largely dependent upon loans from controlling shareholders to satisfy its working capital requirements. Accordingly, the likelihood of Radyne Comstream's future success must be considered in light of Radyne Corp.'s bankruptcy in 1994 and the possibility of future operating losses, as well as the problems, expenses, difficulties, risks and complications frequently encountered in connection with similarly situated companies. In addition, our future plans for Radyne Comstream are subject to known and unknown risks and uncertainties that may cause Radyne Comstream's actual results in future periods to be materially different from any future performance implied in this Prospectus. See "Additional Financing Requirements." SIGNIFICANT LEVEL OF DEBT REQUIRES LARGE AMOUNT OF RESOURCES Radyne Corp. has been largely dependent on a succession of short-term loans and guarantees from its controlling shareholder, ST, and affiliates of ST since it emerged from Chapter 11 protection on December 16, 1994. Prior to its acquisition by Radyne, Comstream had been dependent on borrowings facilitated by Spar. At present, Radyne Comstream has short-term indebtedness to ST of $15,618,272, plus interest, payable on March 31, 1999, and has a $20,500,000 bank line of credit on which it owes approximately [$8,500,000]. In addition, Radyne Comstream owes Spar $7,000,000 in connection with the Comstream acquisition. Most of the proceeds from this offering will be used to repay the loans from ST. Although Radyne Comstream's indebtedness to the bank or Spar is not supported by a guarantee or any other form of binding agreement, ST has provided the bank with a letter of awareness. All loans pursuant to -6- the bank line are demand loans. There can be no assurance that the bank will not demand repayment at an inopportune time for Radyne Comstream or that ST will continue to assist Radyne Comstream in maintaining such financing. If Radyne Comstream were to fail to realize substantially the anticipated net proceeds of this offering, its ability to repay its overall indebtedness, including its indebtedness to ST, and its financial condition could be materially adversely affected. See "Purpose of the Rights Offering and Use of Proceeds." ADDITIONAL FINANCING REQUIREMENTS Based on our operating plan, we believe that in addition to the net proceeds of this offering, Radyne Comstream will require substantial additional financing in the next year. Specifically, we will need to repay the $7,000,000 note issued to Spar in connection with the Comstream acquisition. Accordingly, there can be no assurance that our resources will be sufficient to satisfy our capital requirements for such period. In addition to repaying debt, we anticipate that Radyne Comstream may require additional financing in order to meet its current plans for expansion. Such financing may take the form of the issuance of common or preferred equity securities or debt securities, or may involve additional bank financing. We may be unable to obtain such additional capital on a timely basis, on favorable terms, or at all. See "Purpose of the Rights Offering and Use of Proceeds." HEAVY DEPENDENCE ON INTERNATIONAL SALES; SUBSTANTIAL DISRUPTIONS IN OVERSEAS MARKETS Radyne Comstream's strategy involves a commitment to expanding its business in overseas markets. Part of the rationale for pursuing overseas, as opposed to domestic, markets is the substantially greater need for our wireless communications technology in developing and underdeveloped countries. Such countries typically lack the infrastructure for building land based telecommunications systems and often involve vast distances and rugged terrain over which any such systems could be installed. As a result, we have dedicated substantial resources to penetrating markets in Europe, the Middle East, Canada, Latin America and Asia. While this activity fits with Radyne Comstream's long-term strategy, recent market volatility in Latin America and Asia may cause short-term problems which may have longer term negative effects. Export sales, as a percentage of net sales, were approximately 62% in the nine months ended September 30, 1998 and 64% for the year ended December 31, 1997 on a pro forma basis. As a result, the possibility of substantial future disruptions and the impact of events to date could have a material adverse effect on our business, financial condition and results of operations. See "Business--Sales and Marketing." -7- DEPENDENCE ON DISTRIBUTORS AND PRINCIPAL CUSTOMERS Sales to key customers and certain distributors have constituted and are anticipated to constitute a significant portion of Radyne Comstream's business. On a pro forma basis, one customer accounted for approximately 10% of net sales for the nine-month period ended September 30, 1998 and approximately 9% of net sales for the year ended December 31, 1997. Decreased sales to such customer or the loss of any of these distributors could have a material adverse effect on the operating results and financial condition of Radyne Comstream. Radyne Comstream's distributors are not obligated to purchase any minimum quantity of its products. We can provide no assurance that such distributors will continue to purchase products or that Radyne Comstream will be able to enter into favorable agreements with other distributors for the sale of its products. See "Business--Sales and Marketing." DEPENDENCE ON KEY PERSONNEL AND RECRUITMENT Our future performance is significantly dependent on the continued active participation of Robert C. Fitting, President and Chief Executive Officer, and Steve Eymann, Executive Vice President and Chief Technical Officer. Should either of these key employees leave or otherwise become unavailable to us, Radyne Comstream's business and results of operations could be materially adversely affected. Our continued ability to attract and retain highly skilled personnel is critical to the operations and expansion of Radyne Comstream. To date, we have been able to attract and retain the personnel necessary for our limited operations. However, we may not be able to do so in the future, particularly as we expand the business. If we are unable to attract and retain personnel with the necessary skills when needed, our business and expansion plans could be materially adversely affected. DEPENDENCE ON SUPPLIERS TO MANUFACTURE OUR PRODUCTS Radyne Comstream outsources the purchase, assembly and testing of certain of its subsystems and products to a small number of qualified vendors. Other products are assembled and tested at either our San Diego, California or Phoenix, Arizona facilities using subsystems and circuit boards supplied by subcontractors. Although we believe that we maintain adequate stock to reduce the procurement lead time for certain components, our products use a number of specialized chips and customized components or subassemblies produced by a limited number of suppliers. In the event that such vendors and suppliers are unable to fulfill our requirements, we could experience an interruption in production until an alternative source of supply was developed. We believe that there are a number of companies capable of providing replacements for the types of unique chips and customized components and subassemblies used in Radyne Comstream's products. See "Business--Manufacturing." -8- RAPID TECHNOLOGICAL CHANGE; RISK OF OBSOLESCENCE OF OUR PRODUCTS The technology used in modems, converters and related equipment changes rapidly. Radyne Comstream's competitors may succeed in developing or marketing products or technologies that are more effective and/or less costly and which render our products obsolete or non-competitive. In addition, new technologies could be developed that replace or reduce the value of our products. For example, as more fiber cables are laid under the oceans or otherwise brought into service, the use of satellites for international telephony is slowing. Our success will depend in part on our ability to respond quickly to technological changes through the development and improvement of our products. Accordingly, we believe that a substantial amount of capital will need to be allocated to research and development activities in the future. There can be no assurance that Radyne Comstream's product development efforts will be successful. Failure to improve our existing products and develop new products could have a material adverse effect on our business, financial condition and results of operations. See "Business--Industry Overview", "Business--Research and Development" and "Business--Competition." HIGH COST OF RESEARCH AND DEVELOPMENT Our research and development efforts to date have been devoted to the design and development of new products for the satellite communications and telecommunications industries. Radyne Comstream's future growth depends on increasing the market share for its new products and adapting existing satellite communications products to new applications, and the introduction of new communications products that will find market acceptance and benefit from Radyne Comstream's established international distribution channels. Accordingly, we are actively applying our communications expertise to design and develop new hardware and software products and enhance existing products. On a pro forma basis, the Company expended $9,172,000 in the nine months ended September 30, 1998 and $10,529,000 in the year ended December 31, 1997, on research and development activities. However, Radyne Comstream may not continue to have access to sufficient capital to fund the necessary research and development and such efforts, even if adequately funded, may not prove successful. See "Business--Research and Development." RISK FROM COMPETITORS We have a number of major competitors in the satellite communications field. These include large companies, such as Hughes Network Systems, NEC and California Microwave which have significantly larger and more diversified operations and greater financial, marketing, human and other resources than Radyne Comstream. We believe that we have been able to compete by concentrating our sales efforts in the international market, utilizing the resources of local distributors, and by emphasizing product features and quality. However, most of our competitors offer products which have one or more features or functions similar to those offered by Radyne Comstream. We believe that the quality, performance and capabilities of our -9- products, our ability to customize certain network functions and the relatively lower overall cost of our products, as compared to the costs generally offered by Radyne Comstream's major competitors, have contributed to Radyne Comstream's ability to compete successfully. However, our major competitors have the resources available to develop products with features and functions competitive with or superior to those offered by us. Such competitors may successfully develop such products, which may prevent us from maintaining a lower cost advantage for our products. Moreover, we may experience increased competition in the future from these, other currently unknown competitors or future entrants to the business. See "--Heavy Dependence on International Sales; Substantial Disruptions in Overseas Markets", and "Business--Competition." RISK OF PATENT INFRINGEMENT CLAIMS We believe that improvement of existing products, reliance upon trade secrets, copyrights and unpatented proprietary know-how and the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage. Because patents often provide only narrow protection which may not provide a competitive advantage in areas of rapid technological change and because patent applications require public disclosure of information which may otherwise be subject to trade secret protection, Radyne Comstream has been cautious in obtaining patents on existing products. We have a number of patents, copyrights and other intellectual property rights in the form of software and integrated circuit designs. However, our technology could be found to infringe upon the intellectual property of others. If our technology should be found to impermissibly utilize the intellectual property of others, Radyne Comstream's ability to utilize the technology could be materially restricted or prohibited. In such event, we might be required to obtain licenses from third parties to utilize the patents or proprietary rights of others. We might be unable to obtain such licenses on acceptable terms or at all. In addition, in such event, we could incur substantial costs in defending against infringement claims made by third parties or in enforcing our own intellectual property rights. It should also be noted that some foreign countries in which Radyne Comstream's products are sold provide less protection to intellectual property than do the laws of the United States. Any misappropriation of Radyne Comstream's products could adversely affect our business. See "Business--Technology." DIFFICULTY OF SUCCESSFULLY INTEGRATING AN ACQUISITION In pursuit of our business strategy, we recently acquired Comstream. The successful integration of Comstream is subject to risks commonly encountered in making acquisitions of companies or their services and technologies. Such risks include, among other things, the difficulty associated with assimilating the operations and personnel of the acquired companies, the potential disruption of our ongoing business, the inability of management to maximize our financial and strategic position through the successful integration of acquired customers, network facilities, technology, other assets, and distribution networks, additional expenses associated with the amortization of acquired intangible assets, the inability to maintain uniform standards, -10- controls, procedures and policies and the impairment of relationships with employees as a result of the integration of new management personnel. In addition, part of our interest in acquiring Comstream was based on our belief that we could achieve substantial cost savings in its business. We may be unable to fully achieve such savings or overcome these or other risks associated with this acquisition. See "Purpose of the Rights Offering and Use of Proceeds." CONTROL BY PRINCIPAL STOCKHOLDER Upon the closing of this offering, ST, which currently owns approximately 91% of Radyne Comstream's outstanding Common Stock, will continue to maintain a substantially similar level of control. ST will, therefore, continue to have the ability to elect all of Radyne Comstream's directors and to control the outcome of all issues submitted to a vote of Radyne Comstream's stockholders. As a result of ST's substantial ownership interest in the Common Stock, it may be more difficult for a third party to acquire Radyne Comstream. A potential buyer would likely be deterred from any effort to acquire Radyne Comstream absent the consent of ST or its participation in the transaction. We are subject to Section 912 of the New York Business Corporation Law, which restricts certain business combinations that are not approved by a corporation's board of directors. NO DIVIDENDS We have not paid any cash dividends on the Common Stock since inception and do not intend to pay any dividends to our stockholders in the foreseeable future. We currently intend to reinvest earnings, if any, in the development and expansion of our business. See "Dividend Policy" and "Description of Common Stock." SIGNIFICANT DISCRETION OVER USE OF PROCEEDS BY BOARD OF DIRECTORS Substantially all of the net proceeds from this offering are expected to be allocated to reducing debt owed to ST in connection with both the Comstream acquisition and certain working capital loans. However, such proceeds may be utilized in the discretion of the Board of Directors. As a result, investors will not know in advance how such net proceeds will be utilized by Radyne Comstream. See "Purpose of the Rights Offering and Use of Proceeds." IMMEDIATE AND SUBSTANTIAL DILUTION; NET TANGIBLE BOOK VALUE DEFICIENCY BEFORE OFFERING Upon the closing of this offering, investors will incur immediate and substantial dilution in the per share net tangible book value of their Common Stock. At December 31, 1997, after giving effect to the receipt by Radyne Comstream of the maximum net proceeds of the Rights Offering, Radyne Comstream, would have had a pro forma net tangible book value of -11- approximately $0.40 per share. Net tangible book value is the amount of Radyne Comstream's total assets minus intangible assets and liabilities. See "Dilution." To the extent that Rights are exercised, those shareholders who do not exercise their Rights in full will realize a dilution in their percentage voting interest and ownership interest in future net earnings, if any, of Radyne Comstream. Radyne Comstream cannot predict the effect, if any, this offering will have on the market price of the Common Stock. See "Market Considerations; Volatility of Stock Price" below. Radyne Comstream currently has outstanding under the 1996 Incentive Stock Option Plan options exercisable to purchase an aggregate of 721,332 shares of Common Stock at an exercise price of $2.50 per share (in the case of 656,957 of such options, the optionee/employee would be entitled to a bonus of $1.72 per share upon exercise) and 77,750 shares at $3.125 per share. Options on an additional 146,625 shares and 233,250 shares will become exercisable at $2.50 per share and $3.125 per share, respectively, over the next three years, assuming that the grantees, employment does not terminate prematurely. An additional 892,985 shares are available for options yet to be granted under the Plan. Exercise of the options granted under the 1996 Incentive Stock Option Plan would further reduce a shareholder's percentage voting and ownership interest. SHARES ELIGIBLE FOR FUTURE SALE The sale, or availability for sale, of a substantial number of shares of Common Stock in the public market subsequent to this offering pursuant to Rule 144 under the Securities Act ("Rule 144") or otherwise could materially adversely affect the market price of the Common Stock and could impair Radyne Comstream's ability to raise additional capital through the sale of its equity securities or debt financing. Upon completion of this offering, if all Rights are fully exercised, there would be approximately 10,676,422 shares of Common Stock issued and outstanding. Of these shares, Radyne Comstream believes that approximately 999,622 would be freely transferable. The remaining approximately 9,676,800 shares would be held by ST and would be eligible for resale subject to the volume and manner of sale limitations of Rule 144 under the Securities Act. DISCLOSURES RELATING TO LOW PRICED STOCKS MAY NEGATIVELY AFFECT LIQUIDITY Radyne Comstream's securities are subject to Rule 15g-9 under the Exchange Act which imposes additional sales practice requirements for broker-dealers which sell penny stocks to persons other than established customers and accredited investors as defined in Regulation D under the Securities Act. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. The SEC regulations define a "penny stock" to be any equity security not registered on a national securities exchange or for which quotation information is disseminated on NASDAQ -12- that has a market price (as therein defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Unless exempt, the rules require delivery, prior to a transaction in a penny stock, of a disclosure schedule prescribed by the SEC relating to the penny stock market. Disclosure is also required to be made about commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, such rule may adversely affect the ability of broker-dealers to sell Radyne Comstream's securities and may adversely affect the ability of purchasers in this offering to sell any of the securities acquired hereby in the secondary market. MARKET CONSIDERATIONS; VOLATILITY OF STOCK PRICE Radyne Comstream cannot predict the effect that this offering will have on the trading price of the Common Stock. There can be no assurance that the market price of the Common Stock will not fall [remain] below the Subscription Price or that, following the exercise of Rights, a Rights holder will be able to sell shares acquired in this offering at a price equal to or greater than the Subscription Price. Since Radyne Comstream emerged from bankruptcy, the price of the Common Stock, which trades in the over-the-counter market under the OTC Bulletin Board symbol "RADN" (prior to January 1997, the symbol was "RDYN"), has varied widely and the price of the Common Stock or the Shareholder Rights may be subject to significant fluctuation in the future. See "Price Range of Common Stock" and "Dividend Policy." There has been no prior market for the Rights. YEAR 2000 RISKS The Year 2000 issue concerns the fact that certain computer systems and processors may recognize the designation "00" as the year 1900 when it is intended to mean the Year 2000, resulting in system failure or miscalculations. Certain dates in 1999 may also cause problems for certain computer programs. Commencing in 1997, we began a comprehensive review of our information technology systems, upon which we are dependent for the conduct of day to day business operations, in order to determine the adequacy of those systems in light of future business requirements. Year 2000 readiness was one of the factors considered in the review process. We have completed our review of internal systems at our Phoenix facility, but our review of the San Diego and other Comstream facilities is ongoing. The majority of Radyne Comstream's application software programs are purchased from and maintained by vendors. Therefore, we are working with these software vendors to verify these applications are, or will become, Year 2000 compliant. We recognize the potential business impact related to the Year 2000 computer system issue and we are implementing a plan to assess and improve Radyne Comstream's state of readiness with respect to such issue. We presently believe that all mission critical systems are Year 2000 compliant and that the Year 2000 issue will not pose significant operational problems for Radyne Comstream's internal systems. However, it is possible that the scope of the Year 2000 problem could be greater than originally believed and that our efforts -13- could prove inadequate. All Year 2000 costs to date have been expensed and we do not expect to incur any significant future costs related to the Year 2000 issue. However, we may choose to upgrade certain existing software that is already Year 2000 compliant, in which case the costs related to those upgrades will be capitalized in the normal course of business. As part of our comprehensive review, we are continuing to verify the Year 2000 readiness of third parties (vendors and customers) with whom Radyne Comstream has material relationships. This is a particular concern in light of our reliance on overseas assembly operations. We are not able to determine the effect on results of operations, liquidity and financial condition in the event our material vendors and customers are not Year 2000 compliant. Our inability to accurately forecast such effects may prevent Radyne Comstream from taking necessary steps to rectify any Year 2000 problems in advance. Moreover it is impossible to predict the extent, if any, to which customers may allocate funds to the solution of their own Year 2000 problems instead of purchasing our products. We will continue to monitor the progress of our material vendors and customers and formulate a contingency plan if and when we conclude that a material vendor or customer may not be compliant. A Year 2000 readiness survey was recently sent to all of our material vendors and customers. The readiness surveys are currently being collected for review and analysis. We have also started to generate a formal Year 2000 plan. This plan document should be completed by March 31, 1999. While we believe our efforts to date are adequate to prevent any Year 2000 problem from having an adverse effect on Radyne Comstream, our assessment may turn out to be inaccurate. Moreover, we have no ability to assess the Year 2000 readiness of our material vendors and suppliers other than based on the information they provide to us. In the event that such information proves inaccurate, Radyne's business, financial condition and results of operations could be adversely effected. PURPOSE OF THE RIGHTS OFFERING AND USE OF PROCEEDS ESTABLISHMENT OF SUBSCRIPTION PRICE This section contains forward-looking statements. See "Special Note Regarding Forward-Looking Statements." The Subscription Price has been independently established by the Board of Directors at $3.73 per share, which the Board determined to be the fair market value of the Common Stock. The Board made this determination based on the conversion price fixed in the convertible note issued to Spar in connection with the Comstream acquisition. Through arms length negotiations, this price was set at fifty cents below the average trading price of the Common Stock for the five trading days following the announcement of the acquisition and this offering. -14- USE OF PROCEEDS The maximum net proceeds we will receive from the sale of the Rights, net of estimated expenses payable by Radyne Comstream, are estimated to be approximately $17,400,000. We intend to use substantially all of the net proceeds of this offering to repay indebtedness to ST. Any excess will be used for general corporate and working capital purposes. The indebtedness to ST which we intend to repay with the proceeds of this offering equals $15,618,272 in principal amount, with interest and maturities as follows:
DATE OF NOTE PRINCIPAL INTEREST RATE MATURITY - ------------ --------- ------------- -------- January 5, 1998 $ 500,000.00 6.84375% March 31, 1999 January 15, 1998 $ 4,618,271.87 6.84375% March 31, 1999 April 14, 1998 $ 250,000.00 6.625% March 31, 1999 August 13, 1998 $ 250,000.00 6.75% March 31, 1999 August 28, 1998 $10,000,000.00 6.375% March 31, 1999
Of this indebtedness, $10,000,000 was borrowed for the Comstream acquisition and the balance was incurred for short-term working capital purposes or to repay other indebtedness incurred for such purposes. DILUTION On a pro forma basis, the net tangible book value (deficit) of Radyne Comstream at September 30, 1998, was approximately $(13,107,000), or $(2.21) per share of Common Stock. Net tangible book value per share of Common Stock represents the tangible assets (total assets less intangible assets) less total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the sale of the Rights and the Common Stock issuable pursuant to the Rights, and the application of the net proceeds from such transactions, the net tangible book value of the Common Stock at September 30, 1998 on a pro forma basis would have been approximately $4,293,000 or $0.40 per share. This represents an immediate increase in net tangible book value of $2.61 per share to existing shareholders and an immediate dilution to purchasers of Common Stock through the exercise of Rights of $3.33 (89%) per share. -15-
PER SHARE ---------------- Rights offering price .............................................. $ 3.73 Net tangible book value (deficit) at September 30, 1998 ............ $(2.21) Increase attributable to sale of Common Stock pursuant to Rights ... $ 2.61 Pro forma net tangible book value after this offering(1) ........... $ 0.40 ------ Dilution to new investors .......................................... $ 3.33 ------ ------
(1) After deducting offering expenses of approximately $300,000 payable by Radyne Comstream. The foregoing computations exclude (i) 867,957 shares of Common Stock issuable upon exercise of outstanding stock options at an exercise price of $2.50 per share and another 311,000 shares under options with an exercise price of $3.125 per share and (ii) 892,985 shares reserved for future grants under Radyne Comstream's 1996 Incentive Stock Option Plan. -16- THE RIGHTS OFFERING SUBSCRIPTION RIGHTS Shareholders, [other than residents of California,] will receive four Rights for every five shares of Common Stock held on the Record Date. An aggregate of approximately 4,745,076 Rights will be distributed. Holders are entitled to purchase at the Subscription Price one share of Common Stock for each Right held. The Rights will expire on the Expiration Date. The Rights will be transferable. No fractional Rights will be issued. EXPIRATION DATE The Rights will expire at 5:00 p.m., New York time, on ____, 1999, except that Radyne Comstream reserves the right to extend the exercise period on one or more occasions if the Board of Directors determines that the occurrence of a material event necessitates an amendment of the Registration Statement or recirculation of this Prospectus in order to permit time for the distribution of such information. After the Expiration Date, unexercised Rights will be null and void. Radyne Comstream will not be obligated to honor any purported exercise of such Rights received by the Subscription Agent or Radyne Comstream after the Expiration Date, regardless of when the documents relating to such exercise were sent, except pursuant to the guaranteed delivery procedures described below. If Radyne Comstream elects to extend the Expiration Date, it will issue a press release to such effect not later than the first business day following the most recently announced Expiration Date. In the event that Radyne Comstream elects to extend the Expiration Date by more than 14 calendar days, it will, in addition, cause written notice of such extension to be promptly sent to all Rights holders of record. EXERCISE OF RIGHTS Rights may be exercised by delivering to the Subscription Agent or Radyne Comstream, at or prior to 5:00 p.m., New York time, on the Expiration Date, the properly completed and executed Subscription Certificate evidencing such Rights with any required signatures guaranteed, together with payment in full of the Subscription Price for each Right exercised. Such payment in full must be by check drawn upon a U.S. bank or postal, telegraphic or express money order payable to Continental Stock Transfer & Trust Company, as Subscription Agent; provided, however, that checks or money orders sent directly to Radyne Comstream should be made payable to Radyne Corp. Payment of the Subscription Price will be deemed to have been received by the Subscription Agent or Radyne Comstream, as the case may be, only upon (a) clearance of any uncertified check, or (b) receipt by the Subscription Agent or Radyne Comstream as the case may be, of any certified check drawn upon a United States bank or of any postal, telegraphic or express money order. -17- IF PAYING BY UNCERTIFIED PERSONAL CHECK, PLEASE NOTE THAT THE FUNDS PAID THEREBY MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR. ACCORDINGLY, HOLDERS OF RIGHTS WHO WISH TO PAY THE SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE URGED TO MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE THAT SUCH PAYMENT IS RECEIVED AND CLEARS BY SUCH DATE AND ARE URGED TO CONSIDER PAYMENT BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER. The address to which the Subscription Certificates and payment of the Subscription Price with respect to Rights should be delivered to the Subscription Agent is set forth below under "Subscription Agent." If a holder of Rights wishes to exercise Rights, but time will not permit such holder of Rights to cause the Subscription Certificate or Subscription Certificates evidencing such Rights to reach the Subscription Agent or Radyne Comstream on or prior to the Expiration Date, such Rights may nevertheless be exercised if all of the following conditions (the "Guaranteed Delivery Procedures") are met: (i) such holder of Rights has caused payment in full of the Subscription Price for each Rights Share being subscribed for to be received (in the manner set forth above) by the Subscription Agent on or prior to the Expiration Date; (ii) the Subscription Agent receives, on or prior to the Expiration Date, a guaranteed notice (a "Notice of Guaranteed Delivery") from a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc., or from a commercial bank or trust company having an office or correspondent in the United States (each, an "Eligible Institution"), substantially in the form available upon request from the Subscription Agent whose address and telephone numbers are set forth under "Subscription Agent" below, stating the name of the exercising holder of Rights, the number of Rights represented by the Subscription Certificate(s) held by such exercising holder of Rights, the number of shares of Common Stock being subscribed for and guaranteeing the delivery to the Subscription Agent of any Subscription Certificate(s) evidencing such Rights within three business days following the date of the Notice of Guaranteed Delivery; and (iii) the properly completed Subscription Certificate(s), with any required signatures guaranteed, is received by the Subscription Agent within three business days following the date of the Notice of Guaranteed Delivery relating thereto. The Notice of Guaranteed Delivery may be delivered to the Subscription Agent in the same manner as Subscription Certificates at the address set forth under "Subscription Agent" below, or may be transmitted to the Subscription Agent by facsimile transmission (telecopy no. (212) 509-5150). -18- A holder of Rights who holds shares of Common Stock for the account of others, such as a broker, a trustee or a depository for securities, should notify the respective beneficial owners of such shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Rights. If the beneficial owner so instructs, the record holder of such Rights should complete the Subscription Certificate and submit it to the Subscription Agent with the proper payment. In addition, the beneficial owner of Common Stock or Rights held through such a holder of record should contact the rights holder and request the Rights holder to effect transactions in accordance with the beneficial owner's instructions. Unless a Subscription Certificate (i) provides that the shares of Common Stock to be issued pursuant to the exercise of Rights represented thereby are to be delivered to the Holder or (ii) is submitted for the account of an Eligible Institution, signatures on such Subscription Certificate must be guaranteed by an Eligible Institution. If either the number of shares of Common Stock being subscribed for is not specified on the Subscription Certificate, or the amount delivered is not enough to pay the Subscription Price for all Common Stock to be subscribed for, the number of Common Stock subscribed for will be assumed to be the maximum amount that could be subscribed for upon payment of such amount, after allowance for the Subscription Price of any specified Common Stock. These instructions should be read carefully and followed in detail. THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT OR RADYNE COMSTREAM WILL BE AT THE ELECTION AND RISK OF THE RIGHTS HOLDER, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT OR RADYNE COMSTREAM AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., NEW YORK TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, RIGHTS HOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER. [Because the cost of qualifying the Common Stock for sale in the State of California would have been disproportionately high as compared to the expected proceeds of such sales, the Common Stock has not been so qualified. Accordingly subscriptions cannot be accepted from residents of California.] All questions concerning the timeliness, validity, form and eligibility of any exercise of Rights will be determined by Radyne Comstream, whose determinations will be final and -19- binding. Radyne Comstream, in its sole discretion, may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine, or reject the purported exercise of any Right. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as Radyne Comstream determines in its sole discretion. NEITHER RADYNE COMSTREAM NOR THE SUBSCRIPTION AGENT WILL BE UNDER ANY DUTY TO GIVE NOTIFICATION OF ANY DEFECT OR IRREGULARITY IN CONNECTION WITH THE SUBMISSION OF SUBSCRIPTION CERTIFICATES OR INCUR ANY LIABILITY FOR FAILURE TO GIVE SUCH NOTIFICATION. Any questions or requests for assistance concerning the method of exercising Rights or requests for additional copies of this Prospectus or the Notice of Guaranteed Delivery should be directed to Radyne Comstream at 3138 East Elwood Street, Phoenix, Arizona 85034, Attention: Director of Administration, telephone: (602) 437-9620. NO REVOCATION ONCE A HOLDER OF RIGHTS HAS EXERCISED THOSE RIGHTS, SUCH EXERCISE MAY NOT BE REVOKED. FRACTIONAL SHARES Fractional Rights will not be distributed by Radyne Comstream and a Right may not be exercised in part. METHOD OF TRANSFERRING SHAREHOLDER RIGHTS The Shareholder Rights evidenced by a single Subscription Certificate may be transferred in whole by endorsing the Subscription Certificate for transfer in accordance with the accompanying instructions. A portion of the Rights evidenced by a single Subscription Certificate may be transferred (but only in units to purchase whole shares) by delivering to the Subscription Agent a Subscription Certificate properly endorsed for transfer, with instructions to register such portion of the Rights in the name of the transferee (and to issue a new Subscription Certificate to the transferee evidencing such transferred Rights). In such event, a new Subscription Certificate evidencing the balance of the Rights will be issued to the holder of the Rights or, if the holder of the Rights so instructs, to an additional transferee. Holders of Rights wishing to transfer all or a portion of their Rights (but only in units to purchase whole shares) should allow a sufficient amount of time prior to the Expiration Date for (i) the transfer instructions to be received and processed by the Subscription Agent, (ii) a new Subscription Certificate to be issued and transmitted to the transferee or transferees with respect to transferred Rights, and to the transferor with respect to retained Rights, if any, and (iii) the Rights evidenced by such new Subscription Certificates to be exercised or sold by the recipients thereof. If time does not permit a transferee of a Right who wishes to exercise its Right to deliver -20- its Subscription Certificate to the Subscription Agent on or before the Expiration Date, such transferee should make use of the Guaranteed Delivery Procedure described under "Exercise of Rights" above. Neither Radyne Comstream nor the Subscription Agent shall have any liability to a transferee or transferor of Rights if Subscription Certificates or new Subscription Certificates are not received in time for exercise or sale prior to the Expiration Date. It is not anticipated that a market will be made in the Rights or that they will be traded on any exchange. There is no assurance that any market will develop for the Rights. In any event, trading in the Rights will cease at the close of business on the business day preceding the Expiration Date. [Because subscriptions cannot be accepted from residents of California, Rights may not be transferred to such residents.] FEES AND EXPENSES Except for the fees charged by the Subscription Agent (which will be paid by Radyne Comstream as described below), all commissions, fees and other expenses (including brokerage commissions and transfer taxes) incurred in connection with the purchase or sale of Rights will be for the account of the transferor of the Rights, and none of such commissions, fees or expenses will be paid by Radyne Comstream or the Subscription Agent. All fees and other expenses incurred in connection with the exercise of Rights will be for the account of the holder of such Rights, and none of such fees or expenses will be paid by Radyne Comstream or the Subscription Agent. SUBSCRIPTION AGENT Radyne Comstream has appointed Continental Stock Transfer & Trust Company as Subscription Agent for this offering. The Subscription Agent's address, which is its address to which the Subscription Certificates and payment of the Subscription Price must be delivered, as well as the address to which Notice of Guaranteed Delivery must be delivered, is: Continental Stock Transfer & Trust Company 2 Broadway New York, New York 10004 (212) 509-4000 Subscription Price payments received by the Subscription Agent will be held thereby, pending the application or return of such payments in accordance with the terms of this offering. Radyne Comstream will pay the Subscription Agent reasonable and customary compensation for its services in connection with this offering and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. -21- THE BOARD OF DIRECTORS OF RADYNE COMSTREAM MAKES NO RECOMMENDATION TO HOLDERS OF RIGHTS WITH RESPECT TO WHETHER A HOLDER OF RIGHTS SHOULD EXERCISE RIGHTS TO PURCHASE SHARES OF COMMON STOCK OR TO INVESTORS WITH RESPECT TO WHETHER AN INVESTOR SHOULD PURCHASE SHARES OF COMMON STOCK, OR TO PERSONS WITH RESPECT TO WHETHER A PERSON SHOULD PURCHASE RIGHTS. -22- CERTAIN FEDERAL INCOME TAX CONSEQUENCES In the opinion of Dorsey & Whitney LLP, counsel to Radyne Comstream, the following are the federal income tax consequences of the Rights Offering that are likely to be material to the holders of the Rights (other than certain holders of the Rights described in the following paragraph) upon the issuance, exercise, transfer and lapse of the Rights. This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury Regulations promulgated thereunder, judicial authority and current administrative rulings and practice, all of which are subject to change on a prospective or retroactive basis, and on the accuracy of certain representations of Radyne Comstream. The tax consequences of this offering under state, local and foreign law are not discussed. Moreover, special considerations not described herein may apply to certain taxpayers, such as financial institutions, broker-dealers, life insurance companies, regulated investment companies, foreign entities, individuals who are not citizens or residents of the United States for federal income tax purposes, tax-exempt organizations or accounts and corporations affiliated with Radyne Comstream. The discussion is limited to those who have held the Common Stock, and will hold the Rights and any Common Stock acquired upon the exercise of Rights as capital assets (generally, property held for investment) within the meaning of Section 1221 of the Code. ISSUANCE OF THE RIGHTS. Holders of Common Stock will not recognize taxable income for federal income tax purposes in connection with the receipt of the Rights. BASIS AND HOLDING PERIOD OF THE RIGHTS. If either (i) the fair market value of the Rights on the date of distribution is equal to 15% or more of the fair market value (on such date) of the Common Stock with respect to which they are received or (ii) the shareholder properly elects, in the shareholder's federal income tax return for the taxable year in which the Rights are received, to allocate part of the basis of such Common Stock to the Rights, then upon exercise or transfer of the Rights, the shareholder's basis in such Common Stock will be allocated between the Common Stock and the Rights exercised or transferred in proportion to the fair market values of each on the date of distribution. Except as provided in the preceding sentence, the basis of the Rights received by a shareholder as a distribution with respect to such shareholder's Common Stock will be zero. The holding period of a shareholder with respect to the Rights received as a distribution on such shareholder's Common Stock will include the shareholder's holding period for the Common Stock with respect to which the Rights were issued. In the case of a purchaser of Rights, the tax basis of such Rights will be equal to the purchase price paid therefor, and the holding period for such Rights will commence on the day following the date of the purchase. -23- TRANSFER OF THE RIGHTS. A shareholder who sells the Rights prior to exercise will recognize gain or loss equal to the difference between the amount realized from the sale and such shareholder's basis (if any) in the Rights sold. Such gain or loss will be capital gain or loss if gain or loss from a sale of the underlying Rights Shares would be characterized as capital gain or loss at the time of such sale. Any gain or loss recognized on a sale of Rights acquired by purchase will be capital gain or loss if the underlying Rights Shares would be a capital asset in the hands of the seller. LAPSE OF THE RIGHTS. Shareholders who allow the Rights received by them to lapse will not recognize any gain or loss, and no adjustment will be made to the basis of the Common Stock, if any, owned by such shareholders. Purchasers of the Rights will be entitled to a loss equal to their tax basis in the Rights, if such Rights expire unexercised. Any loss recognized on the expiration of the Rights acquired by purchase will be a capital loss if the underlying Rights Shares would be a capital asset in the hands of the purchaser. EXERCISE OF THE SHAREHOLDER RIGHTS; BASIS AND HOLDING PERIOD OF COMMON STOCK. Holders of Rights will not recognize any gain or loss upon the exercise of Rights. The basis of the Common Stock acquired through exercise of the Rights will be equal to the sum of the Subscription Price paid therefor and the holder's basis in such Rights (if any). The holding period for the Common Stock acquired through exercise of the Rights will begin on the date the Rights are exercised. INFORMATION REPORTING AND WITHHOLDING Under the backup withholding rules of the Code, a holder of the Rights may be subject to backup withholding at the rate of 31 percent with respect to payments made pursuant to this offering, unless such Rights holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (ii) provides a correct taxpayer identification number and certifies under penalties of perjury that the taxpayer identification number is correct and that the holder of Rights is not subject to backup withholding because of a failure to report all dividends and interest income. Any amount withheld under these rules will be credited against such person's federal income tax liability. Radyne Comstream may require holders of the Rights to establish exemption from backup withholding or to make arrangements satisfactory to Radyne Comstream with respect to the payment of backup withholding. THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY. ACCORDINGLY, EACH HOLDER IS URGED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE RIGHTS OFFERING APPLICABLE TO HIS OR HER OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE AND LOCAL INCOME AND OTHER TAX LAWS. -24- PRICE RANGE OF COMMON STOCK Radyne Comstream's Common Stock is traded in the over-the-counter market under the OTC Bulletin Board symbol "RADN". However, there is no established trading market as actual transactions are infrequent. The following table sets forth the range of high and low trading prices as reported by the National Quotation Bureau, Inc. for the periods indicated. At December 31, 1998, Radyne Comstream had approximately 448 shareholders of record. Radyne Comstream believes that the number of beneficial owners is actually in excess of 1,600, due to the fact that a large number of shares are held in street name.
High Low ---- --- 1997: First Quarter ............................. 6 3-1/8 Second Quarter ............................ 3-1/4 3 Third Quarter ............................. 10-3/4 5 Fourth Quarter ............................ 10-1/2 4 1998: First Quarter ............................. 5-1/4 2-7/64 Second Quarter ............................ 5 2-3/4 Third Quarter ............................. 5 3-3/16 Fourth Quarter ............................ 5 2-1/2
On January 5, 1999 the last sale price of the Common Stock as reported by the OTC Bulletin Board was $3-3/8 per share. DIVIDEND POLICY Radyne Comstream has not paid dividends on the Common Stock since inception and does not intend to pay any dividends to its stockholders in the foreseeable future. Radyne Comstream currently intends to reinvest earnings, if any, in the development and expansion of its business. The declaration of dividends in the future will be at the election of the Board of Directors and will depend upon the earnings, capital requirements and financial position of Radyne Comstream, general economic conditions and other pertinent factors. -25- BUSINESS Radyne Comstream has engaged in the advanced design and production of digital data communications equipment for satellite telecommunications systems for over seventeen years. Since Radyne Comstream's inception in 1980, it has established itself as a supplier in the satellite ground equipment business. We design, manufacture and sell satellite modems and earth stations, satellite broadcast receivers, frequency converters, ancillary products and equipment racks containing integrated modems and supporting equipment for data, audio, and TV communications. Radyne Corp. was forced to file for Chapter 11 bankruptcy protection in April 1994. It successfully emerged from bankruptcy in December 1994 upon the acquisition of approximately 91% of its Common Stock by Engineering and Technical Services, Inc., then a major customer. On August 12, 1996, ETS was acquired by Singapore Technologies Pte Ltd through its indirect wholly owned subsidiary, Stetsys US, Inc. As a result, approximately 91% of Radyne Comstream's Common Stock is now held by ST. In 1995, Radyne Corp. installed a new management team, which moved Radyne Comstream's operations from New York to Phoenix, Arizona. As part of this management change, we hired an almost all new staff of engineering, sales and support personnel. Consistent with our new growth strategy, Radyne Corp. recently acquired Comstream Holdings, Inc. from Spar Aerospace Limited, a Canadian advanced technology company. Comstream is an international provider of digital transmission solutions for voice, data, audio and video applications with offices in the United States, Singapore, Indonesia, China and the United Kingdom. Revenues of Comstream for 1998 were approximately $37 million. We acquired Comstream in an effort to expand our core business, supplement our product lines and take advantage of Comstream's trademarks and distribution channels, and based on our belief that the combined companies could compete more effectively and realize certain synergies. We believe that Radyne's acquisition of Comstream will have a number of positive effects, including the following: 1. The combined annual revenues of Radyne Comstream should be in the $50 million range versus Radyne's stand-alone revenues of $16 million. This dramatic difference in size should provide us with better control over prices and margins and enable us to compete in larger markets. It should also increase the likelihood that our Common Stock can be qualified for trading on Nasdaq. 2. We also anticipate the combination to produce a synergistic effect in light of Radyne's newer product lines and Comstream's superior worldwide sales channels. We expect the introduction of newer and more numerous products into the Comstream distribution channels to register positive effects commencing in the current calendar quarter. We also expect -26- positive results from the Comstream employee sales force as compared to Radyne's historic reliance on independent sales representatives. 3. While we viewed Comstream's gross margins as excellent, its profitability had suffered from extremely high expense levels. Since closing the acquisition in October, we have reduced Comstream's recurring expenses by almost $1,000,000 per month. We expect continued efficiencies and product rationalization to result in still more cost savings. The new Radyne Comstream has an expanded product line and a worldwide sales and service organization with international offices in Beijing, Singapore, London, Moscow, Jakarta, Rio de Janeiro and Amsterdam. Radyne Comstream is currently addressing four markets/businesses as follows: - Satellite Modems and Earth Stations, including Intelsat equipment - Data, Audio, and Video Broadcast Equipment - Digital Video and High Speed Modems - Military and Government Data Modems OPERATING STRATEGY Radyne Comstream's operating strategy is to: - continue to build on the experience, skills and customer access of its management team; - maintain a strong international position in the earth station business and capitalize on its dominant position of supplying satellite broadcast receivers, including entering the Internet provider business with a new personal computer receiver card; - continue to find new niche military and government markets; - complete the integration and rationalization of Comstream and Radyne Corp. so as to maximize cost savings and the benefits of Comstream's product lines and sales channels; and - expand into new market segments, such as Internet communications, rural telephone, private networks, government networks and compressed television transmission. See "Target Markets" below. -27- Radyne Comstream's engineering staff and support facilities are dedicated to: - maintaining the state-of-the-art status of Radyne Comstream's traditional products for the satellite ground equipment segment of the market; - designing and enhancing products for emerging markets, such as Internet communications rural telephony for developing areas, high-speed satellite communications, government data equipment and the growing private network market; and - providing special configurations to satisfy customers' individual needs. Radyne Comstream has already shipped commercial volumes of its products for rural telephony and private network applications and has shipped units to one government data equipment customer. Radyne Comstream has a contract with one of the world's largest telephone and data service providers to develop a new line of satellite modems with a higher frequency (L-Band) interface which will be used to replace aging equipment in existing earth stations. This equipment will be designed to substantially reduce the space and power requirements in these earth stations, as well as improve reliability and permit lower cost of maintenance. It is believed this equipment will be the future standard for major earth stations. Radyne Comstream believes we are one of the largest suppliers of satellite broadcast receivers for data and audio, with an installed base of more than 75,000 receivers. Broadcast receivers are used to receive financial data, audio and video. We have also supplied more than 1,000,000 set-top television receivers on an original equipment manufacturer (OEM) basis. We also have a line of satellite receivers used in PCs to receive Internet information and private network data. Radyne Comstream has an agreement with Panasonic for the development of the next generation set-top box that can be used for satellite reception or for cable reception. Radyne Comstream's modems cover a large range of data rates from 2.4 kilobytes per second to 155 megabytes per second. The range of uses include data and audio to telephony and High Definition TV. Our frequency converters handle most of the frequency bands used in satellite communications. We believe that most of our current line of modems and converters are smaller and lower priced than the previous generation of products, enabling large system installation in significantly less rack space than the products of Radyne Comstream's competitors. We also market redundancy switches which operate in conjunction with satellite modems and converters and provide automatic fault monitoring. In the event of a failure, the standby equipment takes over. Radyne Comstream's line of frequency converter products can be used in many types of earth stations to convert intermediate frequencies into microwave frequencies for satellite transmission. These converters are competitively priced, small in size and accommodate either single or dual bands used in the satellite industry. -28- Radyne Comstream manufactures a line of small earth stations that are used worldwide for private phone and data systems. The earth stations operate in both C-Band and Ku-Band, the most widely used frequencies for satellite transmission. We have recently begun shipping a new lower cost earth station using an L-Band interface. Radyne Comstream's newer products include a low cost modem with expanded features and small size, making it attractive for use in both private networks and rural telephone systems offered in China, Indonesia and India. Radyne Comstream also manufactures a line of satellite frequency translators presently used for testing in satellite earth stations. The development of digital compression technology has allowed the transmission of television in a small bandwidth, which has made TV transmission by satellite more economical than ever before. Video compression allows many times more channels on a satellite than was previously the case, thus producing a new market of major interest. This compression technology is used for transmission of TV to network facilities and homes, distribution of cable TV to cable companies, high definition TV distribution and video teleconferencing. Radyne Comstream has developed a modulator and demodulator product to be used in conjunction with compression equipment and has been shipping this product for the past two and one-half years. Radyne Comstream has developed a line of modems used in government and defense systems. This equipment is interoperable with certain existing equipment. The equipment being replaced is expensive and/or no longer being manufactured. We have received two major orders for this equipment in the past 6 months. Notwithstanding the foregoing, investors should be aware that Radyne Comstream's future plans are subject to a number of variables outside of its control, and there can be no assurance that Radyne Comstream will be able to implement any or all of such plans or that such plans, when and if implemented, will be successful. See "Risk Factors." INDUSTRY OVERVIEW There are more than 190 major commercial communications satellites in orbit today, almost 60 of which were launched in the past two years . Over 65 more of these expensive geosynchronous earth orbiting satellites (GEO's) are on order. (Source: VIA SATELLITE , July 1998). The ways in which satellites are used continue to shift over time. The principal uses today are for television distribution, international telephone service, data and audio broadcasting, Internet service and private networks. As more fiber cables are laid under the oceans, the use of satellites for international telephony is slowing. However, satellites represent a sizable investment and a unique communications medium which will continue to be used in other ways. For example, the use of this satellite resource is already shifting towards domestic telephony in countries, such as China and India, which are seriously lacking in infrastructure. In addition, technological advances, such as voice compression, have made it economical for third world countries to have more telephone service. Moreover, television distribution is going -29- through a technology revolution in which ten times as many programs can be transmitted through satellites than was possible 5 years ago. A typical satellite can deliver 250 or more channels today compared to 24 channels before. This technological and economical breakthrough has created many new markets. For example, it is now cost-effective for many relatively small market segments to have their own TV networks (such as we are now seeing with regional college sports). Satellites are an ideal medium to distribute High Definition TV (HDTV). Finally, the lowering of international barriers and privatization are allowing the expansion of more private networks. Almost anyone who uses a satellite as a transmission path has the need for equipment of the sort produced by Radyne Comstream. Radyne Comstream expects to continue operating within the satellite ground equipment segment of the market for the next several years, while continuing to expand into various new markets. For example, additional needs for Internet service, new data broadcast requirements, and communications directly to computers are new areas of interest. Although the telecommunications industry is rapidly changing, becoming more complex and requiring new technology, we do not expect the transformation and evolution of the industry to cause satellite data equipment to become obsolete, at least within the near future. INDUSTRY TRENDS Several major trends in the telecommunications industry should provide opportunities for Radyne Comstream. - Telecommunications needs in the Pacific Rim, South America, and the Eastern European countries and an increase in the number of satellites orbiting over the Pacific and Indian Oceans will produce a substantial need for satellite data communications equipment. - The requirement for increased dissemination of financial data increases the requirements for broadcast receivers. - If the United States defense budget continues to shrink, more NDIs (non-developmental items) and COTS (commercial off-the-shelf products) may be purchased from suppliers, such as Radyne Comstream, who can offer these products for much less than the government would pay to develop or produce the products. Radyne Comstream anticipates being able to and has already begun to supply commercial versions of military equipment. - As digital television and HDTV (high-definition television) becomes available, the need for satellite equipment for distribution to cable companies and homes will increase. -30- SATELLITE MODEMS AND EARTH STATIONS Satellite communication has been established as a key element in the growth of the telecommunications industry. Although the emergence of fiber cable, which is preferred for certain applications, has created competition for satellite communications, satellite communications enjoy advantages in many markets for several reasons. First, it is not cost-effective to utilize fiber cable in all areas of the world, especially emerging countries where telecommunications capabilities are just beginning to develop. Second, although fiber cable has performance advantages, it has a tendency to break, resulting in the need for satellite capabilities as a back-up. Third, fiber cable is utilized mainly for point-to-point communications. Satellite transmission, on the other hand, is superior for distribution communications, for example, distribution of financial market information or video broadcasting on major television networks. Thus, although fiber cable can be viewed as a competitor of satellite communications, it has not historically reduced, nor is it anticipated to reduce, the need for satellite modem equipment. Moreover, there should be "niche" requirements that can be satisfied only with satellite communications for a long time to come. (Source: SATELLITE COMMUNICATIONS, September 1996). For example, it is not cost effective to lay fiber cable in mountainous terrain or in nations composed of many islands, a geographical feature which is relatively common in the Pacific. Sparsely populated areas are generally not suited to fiber cable on a cost-effective basis. Moreover fiber cable is not suitable for portable communications, such as PCS (personal communications systems), news gathering, emergency services and other mobile communication requirements. Rural telephony and private network DAMA (Demand Assigned and Multiple Access) products require special communications equipment which is efficient for low traffic volume at many different locations. DAMA products allow many users to access the same channel on demand. Radyne Comstream serves the DAMA products segment of the market with its DMD-2401 modem. he DMD-2401 can be utilized in both rural telephony and private network systems. Rural telephony can be described as an intra-country telecommunications network linking many small villages or islands in a country like the Philippines, for example, ultimately allowing the villages to communicate with each other and with the world. A private network can be described as a network in the commercial world. For example, banks and other financial institutions, airlines, and large and multi-unit corporations all have the need for satellite communications and may be linked via private networks. Radyne Comstream has developed the new DMD-2401 VSAT/SCPC Modem, which has enhanced features, to compliment the DMD-2401 products and to address other user requirements. Radyne Comstream sells its DAMA/VSAT compatible products to system integrators (customers who make a business of supplying turnkey earth station operations for their customers), domestically and abroad, as components of systems that they have designed, as well as directly to end users. Radyne Comstream offers these products for sale on a global basis and believes their use to be global. The RCS-10 represents the newest generation system used in major earth stations which combines modems and redundancy switching in a single unit. Up to 30 modems can be -31- combined in a single rack and each redundancy switch can control up to 10 modems. The compact design which eliminates more than 1500 parts and cables from prior systems, offers improved reliability and rapid installation. In addition to an expanded data rate range (9.6 Kbps to 8.448 Mbps) the RCS-10 offers an improved display and menu structure and more options. The newest version, being developed under contract from a major international communications supplier, is the RCS-1OL. The RCS-10L is a version with an L-Band interface, allowing substantially lower power consumption. In addition the L-Band interface has a 500MHz bandwidth instead of the usual 36 MHZ bandwidth, requiring over 60% fewer earth station frequency converters. The CM7O1 modem has been the workhorse of the industry for 8 years. The CM-701 is used in Intelsat applications, digital video and small earth station applications. It has a unique multi-slot modular bus architecture that supports a wide range of configurations, including full duplex, simplex and combination operations. In its basic mode of a full duplex system, the CM701 supports three data rate ranges with multiple forward error correction rates, which reduces the power required from the satellite. At each of these different rates, either Intelsat, digital video broadcast ("DVB") or proprietary operational modes are supported. Additional options for the CM701 family include a 70 MHZ single-card modem, an L-Band single-card modem, an L-Band demodulator, a satellite control channel, Intelsat framer for intermediate data rate and Intelsat business services operation, burst modulation operation, doppler buffer, special modulator FEC rates and multiple input/output modules. The DMD-2401, DMD-2401L, and DMD-2401VME are the latest modems satisfying the requirements of the Intelsat, private networks, and VSAT DAMA requirements. The DMD-2401 line of equipment is the latest design featuring small size and low cost. The DMD-2401 line allow the use of the latest and best forward error correction and can support all interfaces necessary to work in any system today. Radyne Comstream offers 3 different earth stations. The DT-7000 is primarily used for C-Band applications. The DMD-2401 LB/ST is a low cost version that can be used in either the C-Band or Ku-Band applications. The newest version, the DT-8000, is used in Ku-Band applications. The DT-8000 has an optional feature to provide signal leveling to meet the latest market requirements. Radyne Comstream's earth stations provide a high performance solution for data, voice, facsimile and video conferencing applications. Radyne Comstream also has a complete line of synthesized frequency up converters and down converters. Radyne Comstream also offers a full line of loop test translators, including C-Band, Ku-Band, X-Band and Tri-Band models. These are self contained frequency converters which perform transmit to receive loopback testing of earth station equipment. Augmenting these product offerings is the Star Network Management System ("SNMS"). SNMS is a graphical user interface based network management platform, which provides for the monitoring and control of an entire network of modems, earth stations, and ancillary equipment from a single location. It provides local and remote modem management, -32- control of the equipment connected to the modems and earth stations (such as multiplexers), collection of network status and alarm information, remote channel monitoring and dial-up control. DATA, AUDIO AND VIDEO BROADCAST PRODUCTS Radyne Comstream is one of the world's largest suppliers of satellite broadcast receivers and associated equipment for data and audio, having manufactured more than 75,000 units. Satellites are an ideal transmission medium for broadcast services with a single satellite having the ability to communicate with ground locations spread across one-third of the surface of the earth. We have long-term agreements with major users such as Reuters News Service. The equipment is used to provide music and other audio services as well as the distribution of financial data and other digital services. The new DBR-202 receiver is a low cost platform handling audio, data, Internet Protocol (IP) data, and MPEG video and audio. There is an emerging market to provide data and video directly to the personal computer. Towards that end, Radyne Comstream has developed a very low cost receiver card for use in the PC. The card has successfully passed trials in a private network, resulting in an order for 2,000 cards and further orders expected. Our data broadcast networks consist of a single data uplink (full-size or mini-hub), multiple receivers and the Network Management System for security, monitoring and control. The receivers can be configured for C-band and Ku-band transmissions and can be located anywhere within the footprint of a satellite. The variable rate commercial data receiver (DBR4O1VR) provides a low-cost alternative for transmitting data across a wide range of data rates. Our DBR8O1 high speed receiver is an ideal solution for high speed transmission of digital audio, video or data. Radyne Comstream is currently designing a new fourth generation set-top box for Panasonic, which will feature open TV requirements and new conditional access requirements. Conditional access is the name for the security system which only allows subscribers to access the service. The new design will be usable for direct to home TV service or as a cable converter box. Revenue is expected to be realized through an agreement on royalties. DIGITAL VIDEO AND HIGH SPEED MODEMS Compressed digital video is the latest frontier in satellite communications technology. Several aspects of this market are of particular interest to Radyne Comstream: - Television broadcasters have requirements for efficient and economic distribution. - Compressed video encoding and decoding are available for the less demanding business video teleconferencing and distance learning markets. -33- - Expanding Internet usage should produce demand for high speed satellite transmission for connecting to the Internet. International connections are relayed to the United States by satellite. The economics of the new compressed video allow the use of satellite transmission for long-distance teaching applications. - There is an emerging application for digital cinema distribution. As movie theaters get smaller and thereby proliferate, the costs of making and distributing copies of films becomes proportionally greater. Using satellite distribution, movies can be distributed directly to thousands of theaters simultaneously. We expect the digital cinema market to become substantial over the next five years. Radyne Comstream has entered the high-speed satellite communications market with various products that have been designed to incorporate the most advanced technologies available. Communications equipment in this segment possesses higher data rate capabilities of approximately 12-155 megabits per second, allowing much more data to be transmitted. The DD-45 and DM-45 is a multi-purpose solution for digital video broadcast and high speed data transmission for use in, among other things, cable system backup/restoral-over-satellite and high data rate links. Radyne Comstream's newest high-speed entrants are the DM-160 and MM-160 that offer an excellent solution for high data rate requirements, such as High Definition Television and to increase the number of television channels that can be transmitted by satellite. Also, our new MM-155 Microwave Modem is ideal for microwave links in news gathering requirements. The DVB-3030 Digital Video Broadcast (DVB) modulators are flexible and programmable, offering full compatibility with digital video standards. Their principal applications are for digital video hub uplinks, mobile satellite news gathering, video distribution and one-way data distribution. They are also high speed and frequency agile and, thus, ideal for use in digital video hub uplinks, flyaway and mobile satellite news gathering applications. GOVERNMENT AND MILITARY MODEMS Additionally, the United States Government has provided a significant market opportunity for Radyne Comstream as the defense budget shrinks and it becomes cost prohibitive for the government to develop its own products. Because of the expected growth in commercial off-the-shelf (COTS) and non-developmental item (NDI) procurement, Radyne Comstream has targeted the US Government as an important revenue source. Radyne Comstream has an agreement with a major government supplier and has recently been awarded a contract to provide a modem for use in the Special Forces Terminal for the US Army. Additionally, we have also been awarded a contract from Datapath to provide modems that interoperate with other Army modems. Radyne Comstream is currently supplying two different modems and is working on a third requirement. The DMD-15G/FM is a universal modem used in the US Army Special -34- Forces Terminal used in support of military operations. This modem interoperates with military equipment that can no longer be procured by the military because of price and age. A second modem is the DMD-15G which interoperates with thousands of military modems that are deployed throughout the world and operate within the defense communication system (DCS), perhaps the largest phone system in the world. MANUFACTURING Radyne Comstream's products are to a certain extent assembled and tested at its Phoenix, Arizona and San Diego, California facilities using subsystems and circuit boards supplied by subcontractors. Some products are completely assembled and tested at subcontractors, including subcontractors in Thailand and in Wales, UK. Although Radyne Comstream believes that it maintains adequate stock to reduce the procurement lead time for certain components, Radyne Comstream's products use a number of specialized chips and customized components or subassemblies produced by a limited number of suppliers. In the event that such suppliers were to be unable or unwilling to fulfill Radyne Comstream's requirements, Radyne Comstream could experience an interruption in production until an alternative source of supply was developed. Radyne Comstream maintains an inventory of certain chips and components and subassemblies to limit the potential for such an interruption. Radyne Comstream believes that there are a number of companies capable of providing replacements for the types of unique chips and customized components and subassemblies used in its products. SALES AND MARKETING Radyne Comstream sells its products through an international sales force with sales and/or service offices in San Diego, Phoenix, Boca Raton, Beijing, Singapore, London and Jakarta. Additionally, international representatives, distributors and systems integrators sell our products supported by Radyne Comstream's sales and marketing personnel. Radyne Comstream's direct sales force is comprised of 14 individuals supported by systems and applications engineers. Direct sales activities are focused on expanding Radyne Comstream's international sales by identifying emerging markets and establishing new customer accounts. Additionally, Radyne Comstream directly targets certain major accounts which may provide entry into new markets or lead to subsequent distribution arrangements. Such major accounts tend to be telecommunications agencies and major corporations in new international markets. Radyne Comstream has a customer service and support group, which primarily supports customers and distributors and is responsible for after-sale support and installation supervision. In certain instances Radyne Comstream uses third party companies for installation and maintenance. -35- On a pro forma basis, Reuters News Service accounted for 9% of Radyne Comstream's sales for the year ended December 31, 1997 and 10% for the nine months ended September 30, 1998. No other customer represented more than 10% of Radyne Comstream's sales for those periods. Radyne Comstream's sales in its principal foreign markets for the periods indicated consisted of the following percentages of total sales.
REGION NINE MONTHS YEAR ENDED - ------ ENDED 9-30-98 12-31-97 ------------- -------- Asia 20% 30% Latin America 13% 11% Europe, Africa and Middle East 29% 23%
On a pro forma basis, export sales, as a percentage of total net sales, were approximately 62% for the nine months ended September 30, 1998 and approximately 64% for the fiscal year ended December 31, 1997. Radyne Comstream believes that this figure may rise in subsequent periods. Radyne Comstream considers its ability to continue to make sales in developing markets to be important to its growth potential. However, Radyne Comstream may not succeed in its efforts to cultivate such markets. RESEARCH AND DEVELOPMENT Radyne Comstream's research and development efforts to date have been devoted to the design and development of new products for the satellite communications and telecommunications industries. Radyne Comstream's future growth depends on increasing the market shares of its new products, adaptation of its existing satellite communications products to new applications, and the introduction of new communications products that will find market acceptance and benefit from Radyne Comstream's established international distribution channels. Accordingly, Radyne Comstream is actively applying its communications expertise to design and develop new hardware and software products and enhance existing products. However, there is no assurance that Radyne Comstream will continue to have access to sufficient capital to fund the necessary research and development or that such efforts, even if adequately funded, will prove successful. Research and development expenses, on a proforma basis, amounted to $9,172,000 in the nine months ended September 30, 1998 and $10,529,000 in the year ended December 31, 1997. During this period a number of new products were either launched or reached an advanced stage of development. -36- In connection with the acquisition of Comstream, the Company expects to record a one-time charge of approximately $4.2 million, which represents the value assigned to purchased in-process research and development. COMPETITION The Satellite Industry Association estimates the global market for satellite ground communications equipment to be in excess of $11 billion per annum. Radyne Comstream estimates that its addressable markets are in excess of $350 million. Radyne Comstream has a number of major competitors in the satellite communications field. These include large companies, such as Hughes Network Systems, NEC and the EFData division of California Microwave, which have significantly larger and more diversified operations and greater financial, marketing, human and other resources than Radyne Comstream. Radyne Comstream estimates that the major competitors in the main markets in which it operates have the following market shares as compared to Radyne Comstream's share:
SATELLITE MODEMS & DATA & AUDIO DIGITAL VIDEO & GOV'T & MILITARY COMPETITOR EARTH STATIONS BROADCAST HIGH SPEED MODEMS - ---------- -------------- --------- ---------- ------ California Microwave/EF Data 33% 25% 15% Hughes Network Systems 10% SSE Telecom 5% 10% NEC 20% Wegener 15% IDC 15% Radyne Comstream 15% 30% 20% 15%
We do not believe that any other single competitor has a greater than 10% market share for any of these product classes. However, the foregoing market share figures represent estimates based on the limited information available to us, and there can be no assurance of precision. We believe that we have been able to compete by concentrating our sales efforts in the international market, utilizing the resources of local distributors, and by emphasizing product features. However, most of Radyne Comstream's competitors offer products which have one or more features or functions similar to those offered by Radyne Comstream. Radyne Comstream believes that the quality, performance and capabilities of its products, its ability to customize certain network functions and the relatively lower overall cost of its products, as compared to the costs generally offered by Radyne Comstream's major competitors, have contributed to Radyne Comstream's ability to compete successfully. However, Radyne Comstream's major competitors have the resources available to develop products with features and functions competitive with those offered by Radyne Comstream. There can be no assurance that such -37- competitors will not successfully develop such products or that Radyne Comstream will be able to maintain a lower cost advantage for its products. Moreover, there can be no assurance that Radyne Comstream will not experience increased competition in the future from these or other competitors currently unknown. EMPLOYEES As of December 15, 1998, Radyne Comstream had 205 full time employees, including 7 executive officers, 180 in engineering, manufacturing and marketing operations, and 18 in administration. None of Radyne Comstream's employees are represented by a union or governed by a collective bargaining agreement, and Radyne Comstream believes that its relationships with its employees are satisfactory. TECHNOLOGY In general, Radyne Comstream believes that improvement of existing products, reliance upon trade secrets, copyrights and unpatented proprietary know-how and the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage. Because patents often provide only narrow protection which may not provide a competitive advantage in areas of rapid technological change and because patent applications require public disclosure of information which may otherwise be subject to trade secret protection, Radyne Comstream has been cautious in obtaining patents on existing products. Radyne Comstream has a number of patents, copyrights, and other intellectual property rights in the form of software and integrated circuit designs. However, Radyne Comstream's technology could be found to infringe upon the intellectual property of others. If Radyne Comstream's technology should be found to impermissibly utilize the intellectual property of others, our ability to utilize the technology could be materially restricted or prohibited. In such event, Radyne Comstream might be required to obtain licenses from third parties to utilize the patents or proprietary rights of others. Any licenses required may not be obtainable on terms acceptable to Radyne Comstream or at all. In addition, in such event, Radyne Comstream could incur substantial costs in defending itself against infringement claims made by third parties or in enforcing its own intellectual property rights. FACILITIES Radyne Comstream's primary facilities consist of a leased 76,000 square foot lab, office and manufacturing facility in Phoenix, Arizona and a leased 66,400 square foot lab, office and manufacturing facility in San Diego, California. The Company's plans include subleasing a certain amount of space in both of these facilities until such time as the space is required for internal use. These leases expire in September, 2008 and February, 2005 respectively, and both leases provide options for renewal. The Company believes that these facilities will provide for expected growth for the foreseeable future. -38- Radyne Comstream also has regional sales offices in the U.K. Singapore, Boca Raton, Florida, China and Indonesia and customer service centers in China, the U.K. and Indonesia. All such facilities are leased. LEGAL PROCEEDINGS Radyne Comstream is a party to a lawsuit initiated by a former employee seeking compensatory and punitive damages sustained as a result of his termination by Radyne Comstream. The lawsuit alleges fraud, labor law violations, breach of contract and breach of a covenant of good faith and fair dealing. Radyne Comstream believes these claims to be without merit and plans to defend against this lawsuit to the fullest extent of the law. DESCRIPTION OF CAPITAL STOCK COMMON STOCK The following summary description of the Common Stock is qualified in its entirety by reference to Radyne Comstream's Certificate of Incorporation. Radyne Comstream is authorized to issue up to 20,000,000 shares of Common Stock, par value $.002 per share, of which 5,931,346 shares are outstanding as of the date hereof. Holders of Common Stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. There is no cumulative voting for election of directors. Holders of Common Stock are entitled to receive dividends ratably when, as and if declared by the Board of Directors out of funds legally available therefor and, upon the liquidation, dissolution or winding up of Radyne Comstream, are entitled to share ratably in all assets remaining after payment of liabilities. Holders of Common Stock have no preemptive rights and have no rights to convert their Common Stock into any other securities. The outstanding Common Stock is validly authorized and issued, fully paid and nonassessable. TRANSFER AGENT Radyne Comstream has appointed Continental Stock Transfer & Trust Company as transfer agent for the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE The sale, or availability for sale, of a substantial number of shares of Common Stock in the public market subsequent to this offering pursuant to Rule 144 under the Securities Act ("Rule 144") or otherwise could materially adversely affect the market price of the Common Stock and could impair Radyne Comstream's ability to raise additional capital through the sale of its equity securities or debt financing. Upon completion of the Rights Offering, if all Rights are fully exercised, there would be approximately 10,676,422 shares of Common Stock issued and outstanding. Of these shares, Radyne Comstream believes that approximately 999,622 -39- would be freely transferable immediately. The remaining approximately 9,676,800 shares would be held by ST and would be eligible for resale, subject to the volume and manner of sale limitations of Rule 144 under the Securities Act. Up to an aggregate of 1,178,957 shares of Common Stock may be purchased by the holders of options outstanding under the Plan. All of the shares issuable upon exercise of such options are covered by a currently effective registration statement on Form S-8. Of these options, 799,082 are presently exercisable and the remaining 379,875 will become exercisable over the next three years. In addition, up to 1,876,695 shares may be issued upon conversion of the note held by Spar. If such shares are issued, Spar is entitled to certain registration rights which would require Radyne Comstream to file a registration statement for such shares. If all of the shares underlying the Spar note are registered by Radyne Comstream and all of the shares issuable upon exercise of options under the Plan are so issued, an additional 3,055,652 shares will be freely tradeable. Prior to this offering, there has been no established public market for Radyne Corp's securities as trading in the Common Stock has been infrequent. Following this offering, Radyne Comstream cannot predict the effect, if any, that sales of shares of Common Stock pursuant to Rule 144 or otherwise, or the availability of such shares for sale, will have on the market price from time to time. Nevertheless, sales by the current stockholders of a substantial number of shares of Common Stock in the public market could materially adversely affect market prices for the Common Stock. In addition, the availability for sale of a substantial number of shares of Common Stock acquired through the exercise of Rights or outstanding options under the Plan could materially adversely affect market prices for the Common Stock. LEGAL MATTERS Certain legal matters will be passed upon for Radyne Comstream by Dorsey & Whitney LLP, New York, New York. EXPERTS The annual financial statements of Radyne Corp. incorporated by reference into this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. In addition, the annual financial statements of Comstream included in this prospectus were audited by Ernst & Young LLP, independent auditors, and have been so included in reliance upon the report of such firm given their authority as experts in accounting and auditing. -40- SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in the Prospectus Summary and under the captions "Risk Factors," "Purpose of the Rights Offering and Use of Proceeds", "Business" and elsewhere in this Prospectus constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of Radyne Comstream, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following general economic and business conditions: the loss of, or the failure to replace, any significant customers; changes in business strategy or development plans; the timing and success of new product introductions; the quality of management; the availability, terms and deployment of capital; the business abilities and judgments of personnel; the availability of qualified personnel; and other factors referenced in this Prospectus. These forward-looking statements speak only as of the date of this Prospectus. Radyne Comstream expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in Radyne Comstream's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. -41- GLOSSARY ACQUISITION The process of a satellite demodulator synchronizing and properly decoding a received satellite signal. ALGORITHM Formula used in digital signal processing. ATM Asynchronous Transfer Mode-Standard for asynchronous transmission/reception of high speed digital signals on an asynchronous basis. C-BAND Standard satellite communications channel at 4 and 6 GHz (GigaHertz). COMPRESSED DIGITAL VIDEO The digitization and bandwidth reduction of a video signal. DAMA Demand Assigned Multiple Access-A control protocol and access method used in satellite communications. DATA RATE The rate at which digital information is transmitted or received. EARTH STATION The facility containing all the necessary equipment for the transmission and reception of satellite signals. FREQUENCY CONVERTER Converts an intermediate frequency signal to the high frequency signal used by the satellite, and vice versa. -42- FREQUENCY TRANSLATOR Translates or converts one satellite frequency to another. IBS International Business Services-A standard specification for the transmission of digital information at data rates below 2.048 Mbps. IDR Intermediate Data Rate-A standard specification for transmission of digital information over the satellite at data rates above 1.544 Mbps. KU-BAND Standard satellite communications channels at 11 and 14 GHz. MODEM Modulator and demodulator-A device that converts signals produced by one type of device (such as a satellite transponder) to a form compatible with another (such as a computer). MUX Multiplexer-Digitally combines multiple digital data streams. OPEN NETWORK Satellite networks where all equipment meets the IBS or IDR specifications. Allows use of equipment from any supplier, guaranteeing that all equipment will be interoperable. SCPC Single channel per carrier. VOICE COMPRESSION Digitization and bandwidth reduction of a voice signal. VSAT Very small aperture terminal. -43- 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 No dealer, salesman, or any other person has been authorized to give any information or to make any representation not contained in this Prospectus in connection with this offering. If given or made, you should not rely upon such information or representation as having been authorized by Radyne Corp. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. You should not assume based on the delivery of this Prospectus or the execution of sales under this Prospectus that the information in this document remains current. --------------------- TABLE OF CONTENTS Where You Can Find More Information ............................. i Summary of the Rights Offering .................................. 3 Risk Factors .................................................... 6 Purpose of the Rights Offering and Use of Proceeds .............. 14 Dilution ........................................................ 15 The Rights Offering ............................................. 17 Certain Federal Income Tax Consequences ......................... 23 Price Range of Common Stock ..................................... 25 Dividend Policy ................................................. 25 Business ........................................................ 26 Description of Capital Stock .................................... 39 Shares Eligible for Future Sales ................................ 39 Legal Matters ................................................... 40 Experts ......................................................... 40 Special Note Regarding Forward-Looking Statements ............... 41 Glossary ........................................................ 42
4,745,076 Shares RADYNE CORP. Common Stock --------------------- PROSPECTUS PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is an itemization of all expenses (subject to future contingencies) incurred or expected to be incurred by Radyne Corp. in connection with the issuance and distribution of the securities being offered hereby (items marked with an asterisk (*) represent estimated expenses): SEC Registration Fee ......................................... Legal Fees and Expenses ...................................... 150,000* Blue Sky Fees (including counsel fees) ....................... 20,000* Accounting Fees and Expenses ................................. 55,000* Transfer Agent and Registrar Fees ............................ 7,500* Printing and Engraving Expenses .............................. 50,000* Miscellaneous ................................................ 12,579* Total ........................................................ 300,000
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS New York Business Corporation Law, Article 7, enables a corporation in its original certificate of incorporation, or an amendment thereto validly approved by stockholders, to eliminate or limit personal liability of members of its Board of Directors for violations of a director's fiduciary duty of care. However, the elimination or limitation shall not apply where there has been bad faith, intentional misconduct or a knowing violation of law, the payment of a dividend or approval of a stock repurchase which is deemed illegal, any other violation of Section 719 of the New York Business Corporation Law, or a financial profit or other advantage to which the director was not legally entitled. Radyne Corp's Certificate of Incorporation includes the following language: "SEVENTH: A director of the Corporation shall not be personally liable to the Corporation or its shareholders for damages for any breach of duty as a director; provided that, except as hereinafter provided, this Article SEVENTH shall neither eliminate nor limit liability: (a) if a judgment or final adjudication adverse to the director establishes that (i) the director's acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law, (ii) the director personally gained in fact a financial profit or other advantage to which the director was not legally entitled, or (iii) the director's acts violated Section 719 of the New York Business Corporation Law; or (b) for any act or omission prior to the effectiveness of this Article SEVENTH. If the Corporation hereafter may by law be permitted to further eliminate or limit the personal liability of directors, then pursuant hereto the liability of a director of the Corporation shall, at such time, automatically be further eliminated or limited to II-1 the fullest extent permitted by law. Any repeal of or modification to the provisions of this Article SEVENTH shall not adversely affect any right or protection of a director of the Corporation existing pursuant to this Article SEVENTH immediately prior to such repeal or modification. EIGHTH: The Corporation may, to the fullest extent permitted by Section 721 through 726 of the Business Corporation Law of New York, indemnify any and all directors and officers whom it shall have power to indemnify under the said sections from and against any and all of the expenses, liabilities or other matters referred to in or covered by such section of the Business Corporation Law, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which the persons so indemnified may be entitled under any By-Law, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his/her official capacity and as to action in another capacity by holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person." ITEM 16. EXHIBITS (a) The following exhibits are filed herewith:
EXHIBIT NO. ----------- 2.1* Stock Purchase Agreement dated August 28, 1998 between Spar Aerospace Limited and Radyne Corp. 5.1 Opinion of Dorsey & Whitney LLP 8.1 Opinion of Dorsey & Whitney LLP 10.1** 1996 Incentive Stock Option Plan 10.2*** Employment Agreement with Robert C. Fitting (Radyne Termsheet) 10.3 Lease between ADI Communication Partners, L.P. and Comstream dated April 23, 1997 10.4 First Amendment to lease between ADI Communication Partners L.P. and Comstream dated July 16, 1997 10.5 Second Amendment to Lease between Kilroy Realty, L.P. and Comstream dated November 18, 1998. 10.6 Indemnity Agreement between Pacific Bell Corporation and Comstream dated November 18, 1998. 10.7**** Lease for facility in Phoenix, Arizona 10.8***** Amendment to 1996 Incentive Stock Option Plan 10.9 Letter Agreement between Spar and Radyne Corp. dated November 18, 1998 13.1 Annual Report to Security Holders on Form 10-K for the year ended December 31, 1997 13.2 Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
II-2 13.3 Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 13.4 Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Ernst & Young LLP 23.3 Consent of Dorsey & Whitney LLP (contained in the opinion filed as Exhibit 5.1) 23.4 Consent of Dorsey & Whitney LLP (contained in the opinion filed as Exhibit 8.1) 24.1 Power of Attorney (set forth on the signature page hereof)
- ---------- * Incorporated by reference from Registrant's Form 8-K filed on August 28, 1998. ** Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on March 12, 1997. *** Incorporated by reference from Registrant's amended Registrant Statement on Form S-1, dated May 8, 1997 and declared effective on May 12, 1997. **** Incorporated by reference from Registrant's Annual Report on Form 10-K for the year Ended December 31, 1997. ***** Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on November 18, 1998. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers of sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(30) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no II-3 more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;" PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statements. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) If the registrant is a foreign private issuer, to file a post-effective amendment to the registration statement to include any financial statements required by Rule 3-19 of this chapter at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(3) of the Act need not be furnished, PROVIDED, that the registrant includes in the prospectus, by means of a post effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Rule 3-19 of this chapter if such financial Statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3. (5) The undersigned registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer and the terms of any subsequent reoffering thereof. (6) The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report, to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest II-4 quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. (7) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Phoenix, Arizona on January 6,1999. RADYNE CORP. By: /s/ Robert C. Fitting -------------------------------------- Robert C. Fitting, President and Chief Executive Officer II-5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert C. Fitting and Lim Ming Seong or any one of them, his true lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place, and stead, in any and all capacities, to sign any and all pre- or post-effective amendments to this Registration Statement, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert C. Fitting - --------------------- Robert C. Fitting Chief Executive Officer, President January 6,1999 /s/ Garry D. Kline - ------------------ Garry D. Kline Vice President-Finance, Chief January 6,1999 Financial Officer /s/ Robert A. Grimes - -------------------- Robert A. Grimes Director January 6,1999 /s/ Lim Ming Seong - ------------------ Lim Ming Seong Chairman of the Board of Directors January 6,1999 /s/ Lee Yip Loi - ----------------- Lee Yip Loi Director January 6,1999 - ----------------- Chan Wee Piak Director January 6,1999 /s/ Dennis Elliott - ------------------ Dennis Elliott Director January 6,1999
EXHIBIT INDEX
Exhibit No. ----------- 5.1 Opinion of Dorsey & Whitney LLP 8.1 Opinion of Dorsey & Whitney LLP 10.3 Lease between ADI Communication Partners, L.P. and Comstream dated April 23, 1997 10.4 First Amendment to Lease between ADI Communication Partners, L.P. and Comstream dated July 16, 1997 10.5 Second Amendment to Lease between Kilroy Realty, L.P. and Comstream dated November 18, 1998 10.6 Indemnity Agreement between Pacific Bell Corporation and Comstream 10.7 Lease for facility in Phoenix, Arizona 10.8 Amendment to 1996 Incentive Stock Option Plan 10.9 Letter Agreement between Spar and Radyne Corp. dated November 18, 1998 13.1 Annual Report to Security Holders on Form 10-K for the year ended December 31, 1997 13.2 Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 13.3 Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 13.4 Quarterly Report on Form 10-0 for the quarter ended September 30, 1998 23.1 Consent of Deloitte & Touche LLP* 23.2 Consent of Ernst & Young LLP* 23.3 Consent of Dorsey & Whitney LLP (contained in the Opinion filed as Exhibit 5.1) 23.4 Consent of Dorsey & Whitney LLP (contained in the Opinion filed as Exhibit 8.1) 24.1 Power of Attorney (set forth on the signature page hereof) * To be filed by amendment.
EX-5.1 2 EXHIBIT 5.1 Exhibit 5.1 Radyne Corp. 5225 South 37th Street Phoenix, AZ 85040 January 8, 1999 Ladies and Gentlemen: We have acted as special counsel to Radyne Corp. (the "Company"), a New York corporation, in connection with the preparation and filing of the Company's Registration Statement on Form S-2 (the "Registration Statement") under the Securities Act of 1933, as amended, relating to the proposed offering by the Company of up to 4,745,076 shares of its common stock, par value $.002 per share (the "Common Stock") issuable upon exercise of 4,745,076 rights (the "Rights") to purchase Common Stock of the Company. We have made such investigation and examined such documents and records (including certificates of certain public officials and certificates furnished by officers of the Company) as we have deemed necessary, and on that basis we are of the following opinion: The shares of the Company's Common Stock issuable upon exercise of the Rights which will be offered by the Company to the public pursuant to the Registration Statement have been duly authorized and, when issued and paid for in the manner described in the Registration Statement, will be validly issued and fully paid and nonassessable (subject to Section 630 of the New York Business Corporation Law). We consent to the use of our name under the caption "Legal Matters" in the prospectus constituting a part of the Registration Statement and to the use of this opinion for filing as exhibit 5.1 to the Registration Statement. In giving this consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ Dorsey & Whitney LLP DORSEY & WHITNEY LLP EX-8.1 3 EXHIBIT 8.1 Exhibit 8.1 Radyne Corp. 5225 South 37th Street Phoenix, AZ 85040 January 8, 1999 Dear Sir or Madam: We have acted as counsel for Radyne Corp. (the "Company") in connection with the preparation and filing under the Securities Act of 1933, as amended (the "Securities Act") and the rules and regulations promulgated thereunder (the "Rules"), of a Registration Statement on Form S-2 (the "Registration Statement"), filed with the Securities and Exchange Commission in connection with a proposed rights offering of the Company's common stock. You have asked us to render our opinion as to matters hereinafter set forth. We have examined originals and copies, certified or otherwise identified to our satisfaction, of all such agreements, certificates and other documents as we have deemed necessary as a basis for this opinion. In such examination we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity with the originals of all documents submitted to us as copies. We have, when relevant facts material to our opinion were not independently established by us, relied to the extent we deemed such reliance proper upon written or oral statements of officers and other representatives of the Company. Based on and subject to the foregoing, the opinion attributed to us in the section entitled "Certain Federal Income Tax Consequences" in the prospectus constituting Part I to the Registration Statement (the "Prospectus") accurately states our opinion with respect to the matters discussed. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the references to our name under the captions "Certain Federal Income Tax Consequences" and "Legal Matters" in the Prospectus. In giving this consent, we do not hereby admit that we come within the category of persons whose consent is required by the Securities Act or the Rules. Very truly yours, /s/ Dorsey & Whitney LLP DORSEY & WHITNEY LLP EX-10.3 4 EXHIBIT 10.3 Exhibit 10.3 LEASE (Bondable Triple Net) ADI COMMUNICATION PARTNERS, L.P., a California limited partnership Landlord COMSTREAM CORPORATION, a Delaware corporation Tenant LEASE THIS LEASE ("Lease") is made as of April 23, 1997, by and between ADI COMMUNICATION PARTNERS, L.P., a California limited partnership ("Landlord"), and COMSTREAM CORPORATION, a Delaware corporation ("Tenant"). RECITALS AND DEFINITIONS "Land" means an approximately 9.85 acre-sized portion of a 10.28 acre parcel of land situated in the City of San Diego, County of San Diego, State of California as described in more detail in the legal description attached to this Lease as EXHIBIT "A", and made a part hereof. "Buildings" means the two (2) two-story, concrete tilt-up commercial and industrial buildings which shall be constructed on the Land by Landlord in accordance with the Plans and Specifications, as that term is defined in Section 2.2 below. "Improvements' means the Buildings and all improvements, machinery, equipment, fixtures and other property, real, personal or mixed (except Tenant's trade fixtures, machinery and equipment) installed or constructed on the Land or in the Buildings by Landlord (including, without limitation, the parking facility and other site improvements and landscaping), together with all additions, alterations and replacements thereof. Improvements shall include all Shell Improvements and Tenant Improvements as those terms are described elsewhere in this Lease. The Improvements shall include approximately 750 individual parking spaces (3.75 spaces per square foot) for the initial Demised Premises (e.g. before exercise of the Expansion Option) and approximately 965 individual parking spaces (3.7 spaces per square foot) (e.g. after exercise of the Expansion Option). It is anticipated, and acknowledged, that no more than 45% of the total overall parking shall be designed for *Compact" vehicles. "Demised Premises" means the Land and the Improvements. Landlord, for and in consideration of the rents, covenants and agreements hereinafter reserved, mentioned and contained on the part of Tenant, its successors and assigns, to be paid, kept, observed and performed under this Lease, hereby leases, rents, lots and demises to Tenant, and upon and subject to the conditions and limitations expressed in this Lease, Tenant takes and hires from Landlord, the Demised Premises. ARTICLE I TERM OF LEASE 1.1 INITIAL TERM. This Lease shall be effective and binding upon the parties hereto upon mutual execution hereof (the "EFFECTIVE DATE"). The term of this Lease (the "INITIAL TERM") 1 shall commence upon March 2, 1998 and shall end eighty-four (84) months after March 2, 1998 (as defined below), subject to extension pursuant to Section 1.2, below. The "COMMENCEMENT DATE" (as that term is used in this Lease) shall mean the date upon which Substantial Completion (as defined in Section 2.3 below) of the Improvements occurs. Substantial Completion of the Improvements and March 2, 1998 are currently anticipated to be February 28, 1998 (the "Target Commencement Date"). Under no circumstances shall March 2, 1998 occur before February 14, 1998. In the event March 2, 1998 is February 28, 1998, the Initial Term of this Lease will end on February 27, 2005. Within ten (10) business days following the completion of the Improvements (including the correction of all items which appear on the Punchlist (as defined in Section 2.3(d) hereof), Tenant and Landlord shall mutually execute a written document acknowledging (i) the completion of the Improvements, (ii) the actual Commencement Date and end of the Initial Term, (iii) the date by which the first Extension Option must be exercised, (iv) any adjustments in Base Rent pursuant to Section 2.9 hereof, and (v) the monthly Base Rent (the "Lease Commencement Memorandum"). 1.2 OPTION TO EXTEND. Tenant shall have two (2) option(s) to extend (the "Extension Options") the Initial Term for (a) consecutive five (5) year period(s) (the foregoing option term(s) shall be referred to hereinafter sometimes as the "EXTENSION TERM(S)"), by delivering a binding written notice of exercise to Landlord ("Extension Notice"), so that Landlord receives the Extension Notice with respect to the Extension Term at least three hundred sixty (360) days prior to the end of the Term. Tenant may exercise the Extension Option(s) only if this Lease is in full force and effect and there is no uncured Event of Default or any breach of Tenant's obligations under this Lease which, with the passage of time and giving of notice, or both, would constitute an Event of Default if not cured within any applicable cure period (an "Incipient Default"), at the time of exercise of the right of renewal or at the time of the commencement of the Extension Term, but Landlord shall have the right at its sole discretion to waive the non-default conditions herein; provided, however, that if an Event of Default or Incipient Default exists at the time Tenant exercises the Extension Option and Landlord does not elect to waive such Event of Default or Incipient Default, Landlord shall provide written notice to Tenant of the existence and nature of such Event of Default and Tenant shall be allowed an amount of time to cure such Event of Default as is otherwise provided for curing defaults of that type under this Lease, and, if timely cured, Tenant's exercise of the Extension Option shall be reinstated effective as of the time of exercise. 1.3 TERM. As used in this Lease, "Term" shall mean the Initial Term, together with any Extension Term. ARTICLE II CONSTRUCTION OF THE IMPROVEMENTS 2.1 THE IMPROVEMENT Landlord agrees to furnish all of the material, labor and equipment as may be reasonably necessary for the construction of the Improvements in a good and workmanlike manner in substantial conformance with the Plans and Specifications (as defined in 2 Section 2.2(a)) and in substantial compliance with all covenants, conditions and restrictions to which the Land is subject and all applicable building laws, ordinances, orders, rules, regulations and requirements of all federal, state and municipal governments with jurisdictional authority over the development of the Land and the construction of the Improvements (the "APPLICABLE LAND USE LAWS AND RESTRICTIONS"). 2.2 PREPARATION OF PLANS AND SPECIFICATIONS. The Plans and Specifications for the development of the Property and the construction of the Improvements shall be developed by Landlord and Tenant in a collaborative effort conducted as follows: (a) As used in this Lease, the term *Plans and Specifications" shall mean collectively the "Preliminary Plans and Specifications,* the "Schematic Design Drawings," the "Design Development Drawings", the "Construction Drawings" (all as defined herein), and all related plans, drawings, specifications and notes developed or prepared in connection therewith. (b) Landlord and Tenant have agreed on a set of preliminary plans and specifications for the Improvements dated as of April 9, 1997, which (i) describe and depict the site plan and interior floor plan configuration for the Buildings and certain preliminary exterior elevations Improvements, and 00 outline the specifications for the interior and exterior -components of the Buildings. These preliminary plans and specifications (the "PRELIMINARY PLANS AND SPECIFICATIONS") are attached to this Lease as Exhibit "B" and Landlord and Tenant intend that they shall serve as the basis upon which the Plans and Specifications will be prepared and finalized, in accordance with the provisions of this Section 2.2. (c) Prior to the execution of this Lease, Landlord and Tenant have agreed on schematic design drawings for the Improvements for the Improvements ("SCHEMATIC DESIGN DRAWINGS"). (d) As soon as is reasonably possible following execution of this Lease, but in no event later than May 2, 1997, Landlord shall submit to Tenant reasonably detailed preliminary construction drawings for the Improvements ("Design Development Drawings") which have been prepared in substantial conformance with the Schematic Design Drawings. Within ton (10) business days after Tenant receives the Design Development Drawings, Tenant shall deliver to Landlord written notice of Tenant's approval or disapproval of the Design Development Drawings. Tenant shall not unreasonably withhold its approval of the Design Development Drawings. If Tenant disapproves any portion of the Design Development Drawings, then Tenant shall specifically and in writing (a) approve those portions which are acceptable to Tenant and (b) disapprove those portions which are not acceptable to Tenant, specifying the reasons for such disapproval and describing in detail the change Tenant requests for each item disapproved. The failure of Tenant to disapprove the Design Development Drawings within the specified time shall be deemed approval thereof. In the event the Design Development Drawings have-not been fully approved by Tenant, and Tenant and Landlord are unable to resolve the basis for Tenant's disapproval after good faith efforts to do so over a period of five (5) business days after delivery of Tenant's notice disapproving 3 the Design Development Drawings, Landlord shall have the right to terminate this Lease by giving Tenant written notice of its election to do so. (e) As soon as is reasonably possible following approval of the Design Development Drawings, but in no event later than June 13, 1997 (as extended by any number of days more than ten (10) business days following Landlord's delivery of the Design Development Drawings to Tenant when the Design Development Drawings are approved by Tenant), Landlord shall submit to Tenant 1/8 or 1/16 scale construction drawings for the Improvements ("Construction Drawings") which have been prepared in substantial conformance with the approved Design Development Drawings. These Construction Drawings shall include all information reasonably necessary to construct the Improvements. Within ten (10) business days after Tenant receives the Construction Drawings, Tenant shall deliver to Landlord written notice of Tenant's approval or disapproval of the Construction Drawings. Tenant shall not unreasonably withhold its approval of the Construction Drawings. If Tenant disapproves any portion of the Construction Drawings, then Tenant shall specifically and in writing (a) approve those portions which are acceptable to Tenant and (b) disapprove those portions which are not acceptable to Tenant, specifying the reasons for such disapproval and describing in detail the change Tenant requests for each item disapproved. The failure of Tenant to disapprove the Construction Drawings within the specified time shall be deemed approval thereof. In the event the Construction Drawings have not been fully approved by Tenant, and Tenant and Landlord are unable to resolve the basis for Tenant's disapproval after good faith efforts to do so over a period of five (5) business days after delivery of Tenant's notice disapproving the Construction Drawings, Landlord shall have the right to terminate this Lease by giving Tenant written notice of its election to do so. (f) Upon approval of the Construction Drawings, the Plans and Specifications shall be deemed approved by Landlord and Tenant and shall, thereafter, be the Plans and Specifications for the construction of the Improvements. Any delay in Landlord obtaining the Building Permit beyond August 6, 1997, which results from a delay in Tenant's approval of the Plans and Specifications (other than because of Landlord's failure to meet its obligations under Section 2.2(d) and (e)) shall be a Tenant-Caused Delay. (g) In the event Landlord and Tenant are unable to resolve Tenant's disapproval of a phase of the development of the Plans and Specifications under subsections (d) or (e), above (a "DESIGN DISPUTE"), they shall resolve those differences through the binding arbitration of a neutral third-party in accordance with the following procedure: Landlord and Tenant shall immediately meet to make a good faith attempt to mutually appoint a single party who shall be a licensed architect ("ARBITRATING ARCHITECT"), with not less than ten (10) years experience in commercial and industrial architecture and who is not employed or otherwise previously affiliated with either party, to arbitrate their differences and resolve the Design Dispute. If Landlord and Tenant are unable to agree upon a single Arbitrating Architect, then each shall, within two (2) business days after the meeting, select an architect that meets the foregoing qualifications. The two (2) architects so appointed shall, within two (2) business days after their appointment, appoint a third architect meeting the foregoing qualifications who shall serve as the Arbitrating Architect. If the two (2) architects so selected 4 cannot agree on the selection of the Arbitrating Architect within the time above specified, then either party, on behalf of both parties, may request the appointment of the Arbitrating Architect to the Presiding Judge of the San Diego County Superior Court. The procedures for arbitrating and resolving the Design Dispute shall be established by the Arbitrating Architect, provided, however, that the parties agree to the use of the rules of the American Arbitration Association regarding resolution of commercial disputes. The determination of the Arbitrating Architect shall be limited solely to the issue of the Design Dispute and shall be made within ten (10) business days of its submission by the parties for arbitration. The decision of the Arbitrating Architect shall be binding on both parties. The costs of the arbitration, including, without limitation, attorneys' fees and costs, witness fees, expert witness fees, and costs of the arbitration proceeding shall be awarded as determined to be reasonable by the Arbitrating Architect. In the event of any judicial enforcement or confirmation proceeding relating to an arbitration award, the prevailing party shall be entitled to recover from the other party all related costs, including attorneys' fees and costs. 2.3 SUBSTANTIAL COMPLETION OF THE IMPROVEMENTS. (a) "SUBSTANTIAL COMPLETION" of the Improvements shall be deemed to have occurred on the earlier to occur of when M (A) the Improvements have been completed in substantial conformance with the Plans and Specifications, subject to the completion of "punch-list" items (the "PUNCHLIST") identified by Landlord and Tenant as described in Section 2.3(c) below, ("punch-list items" being defined to mean minor items needing correction or repair which do not or will not materially interfere with the permitted use of the Demised Premises as described in Section 4.1 hereof, (B) all major systems of the Buildings the installation of which are Landlord's responsibility are in reasonably good working order, and (C) Tenant can physically and legally occupy the Demised Premises (e.g., a permanent certificate of occupancy or temporary certificate of occupancy which is subsequently converted into or replaced without any lapse by a permanent certificate of occupancy, or such alternate certificate, license, permit or other document which is issued by the appropriate agency with legal authority over the occupancy of commercial or industrial structures in the jurisdiction in which the Demised Premises are located ("CERTIFICATE OF OCCUPANCY") has been issued for the Demised Premises, or (ii) the Improvements would have been so completed and Tenant legally entitled to occupy the Demised Premises but for any Tenant-Caused Delays. (b) "TENANT CHANGE ORDER" shall be defined as any change to the Plans and Specifications which is requested by Tenant, including changes which are requested by Tenant during the finalization of the Plans and Specifications which increase the scope of the Improvements from those described in the Preliminary Plans and Specifications, or changes requested by Tenant in the Plans and Specifications after their completion, including during construction of the Improvements. (c) "TENANT-CAUSED DELAY" shall be defined as a delay resulting directly from (i) the failure of Tenant, its officers, directors, partners, agents, employees, or contractors to (A) perform some act or pay some amount within the time provided in this Lease, or (B) reasonably approve or disapprove any draft of the Plans and Specifications within the time period specified in Section 2.2, 5 above, or (ii) any other act or omission by Tenant, its officers, directors, partners, agents, employees, or contractors to the extent it causes a delay in Substantial Completion or in the issuance of the Certificate of Occupancy, including, without limitation, a delay caused by (A) delay in finalization of the Plans and Specifications caused by Tenant, or (B) a Tenant Change Order. (d) WALK-THROUGH AND PUNCHLIST. On or immediately before March 2, 1998, Landlord and Tenant shall conduct a walk-through inspection of the Demised Premises and shall jointly prepare the Punchlist which shall be a list of items which have not been completed in substantial conformance with the Plans and Specifications that need to be corrected. Subject to the last sentence of this subsection (d), Landlord shall cause the Punchlist items to be corrected within thirty (30) days thereafter. Approximately thirty (30) days -following March 2, 1998, Landlord and Tenant shall again conduct a walk-through inspection to determine if any remaining Punchlist items require correction, and Landlord shall cause all such corrective work to be undertaken and completed promptly thereafter. If by the nature of such Punchlist item, more than thirty (30) days was required to effect such correction, Landlord shall not be in default hereunder if such correction has been commenced within thirty (30) days after the item was identified on the Punchlist and is diligently pursued to completion; provided that if any item on the Punchlist has not been corrected within sixty (60) days after such item is identified on the Punchlist, Tenant may cause such item to be corrected and offset the cost of such correction against Tenant's Base Rent next due, provided Tenant has given Landlord written notice of Tenant's intention to do so and Landlord has not corrected such item within five (5) business days following such notice. (e) NO RELIEF FROM PAYMENT OF RENT. The failure of Tenant to take possession of or to occupy the Demised Premises on or after March 2, 1998 shall not serve to relieve Tenant of its obligations or delay Tenant's obligation to pay Rent, Additional Rent, or any other amount to be paid by Tenant to Landlord under this Lease. 2.4 DELAY IN SUBSTANTIAL COMPLETION OR LEASE EXECUTION. Landlord shall diligently proceed with the construction of the Improvements with the intent of completing and delivering the same to Tenant on or before the Target Commencement Date, provided, however, to the extent 0) a Tenant-Caused Delay (as defined in Section 2.3(b) hereof), or (ii) a Force Majeure (as defined below), results in a delay in Substantial Completion of the Improvements, the Target Commencement Date shall be extended for the amount of time the Substantial Completion of the Improvements is delayed thereby. "FORCE MAJEURE" shall be defined as any factor or condition which is outside the control of either Tenant or Landlord and for which neither could have reasonably been anticipated or expected to plan, including, without limitation, (i) unusually inclement weather, or inclement weather which occurs at unusual times, (ii) other acts of God, (iii) labor disputes, (iv) casualties, (v) embargo, (vi) governmental restrictions, (vii) shortages of fuel, labor, or building materials, (viii) civil unrest, (ix) action or non-action of public utilities, or of local, state or federal governments which delay the Substantial Completion of the Demised Premises, and (x) action or non-action of local, state or federal governments which prevent, prohibit or stop construction of the Demised Promises. If Landlord fails to tender possession of the Demised Premises with the Improvements Substantially Completed within ninety (90) days following the 6 Target Commencement Date (as extended by Tenant-Caused Delays and Force-Majeure Delays), Landlord and Tenant agree Tenant will suffer damages which would be difficult to ascertain but a reasonable estimate of which would be Two Thousand Dollars ($2,000.00) per day for each day of delay thereafter. Therefore, in the event of such delay, and as Tenant's sole and exclusive remedy for such delay, Landlord agrees to pay Tenant liquidated damages of Two Thousand Dollars ($2,000.00) per day commencing on the Target Commencement Date (as that date may be extended by Tenant-Caused Delays and Force-Majeure) and continuing on each day thereafter until March 2, 1998. If March 2, 1998 has not occurred (or been deemed to have occurred) within ninety (90) days following the Target Commencement Date (as that date may be extended by Tenant-Caused Delays and Force-Majeure) Tenant may terminate this Lease. 2.5 BUILDING PERMIT FOR THE IMPROVEMENTS. Landlord shall be responsible for obtaining from any relevant and jurisdictional governmental authority necessary (generally an *Authority ), all governmental approvals necessary for the construction of the Improvements, including a building permit ("Building Permit"). The cost, including fees and other charges levied by the Authority, associated with approvals and permits related to the Shell Improvements shall be Shell Improvements Costs and the responsibility of Landlord. If a change to the Plans and Specifications is required by the Authority as a condition to obtaining the Building Permit, such change shall be made to the Plans and Specifications, subject to Tenant's approval, and the cost associated with any such change shall be added, as appropriate, to Shell Improvements Costs and Tenant Improvements Costs. Tenant shall not unreasonably withhold or delay its consent to any such requested change, provided that Tenant may terminate this Lease if any such requested change would materially and adversely alter the utility or functionality of the Demised Premises for Tenant's intended use, provided that Tenant will not seek to terminate this Lease on that basis without giving Landlord thirty (30) days written notice of such intention during which time Landlord may seek to avoid or modify the need for the requested change. Tenant shall cooperate with Landlord as may be reasonably necessary to obtain the Building Permit and any and all other permits required to complete the Improvements. 2.6 CONSTRUCTION WARRANTIES. Landlord shall obtain the manufacturer's warranties for the elements or systems which are part of the Demised Premises and which are customarily given by such manufacturers without additional cost to Landlord and warranties and guaranties from the contractors and subcontractors with respect to the Improvements and which are customarily given by such contractors and subcontractors without additional cost to Landlord. Landlord shall assign to Tenant for the Term of the Lease (or, should Tenant not be legally capable of doing so itself, at Tenant's expense, prosecute on Tenant's behalf), on a non-exclusive basis, all statutory and contractual warranties and guaranties to which Landlord is entitled in connection with the Demised Premises, express or implied, including, without limitation the warranties arising under any construction contract between Landlord and Landlord's contractors and/or subcontractors involved in the construction of the Demised Premises. Other than the assignment to Tenant of such warranties, or as otherwise specifically provided in this Lease, Landlord shall have no obligation or responsibility to Tenant, or its successors, with respect to any condition of the Improvements. Landlord, at no cost or expense to Landlord, shall cooperate with Tenant in the enforcement by 7 Tenant, at Tenant's sole cost and expense, of any such warranties or guaranties. 2.7 CONDITION OF DEMISED PREMISES: LIMITED WARRANTY. Except as specifically provided in this Section 2.7, Landlord makes no warranties or representations with regard to the Demised Promises, or any portion thereof, and Tenant shall accept the Demised Premises in the condition in which they are delivered on March 2, 1998, provided that (i) the Demised Promises shall be constructed in substantial conformance with (A) the Plans and Specifications, and (B) all Applicable Land Use Laws and Restrictions then in effect and (ii) in addition to Landlord's responsibility to correct items identified through the walk-through and Punchlist process established in Section 2.3(d) hereof, the Improvements shall be free of defects in design and construction which could not reasonably be discovered and identified by Tenant during that process (i.e. free of defects in design or construction which remained "latent* as of the completion of the repairs identified on the Punchlist and the final completion of the Improvements), and Landlord shall be responsible, at Landlord's sole cost and expense, for the prompt and diligent repair of any such 'latent" defects which later manifest themselves during the Term. 2.8 TENANT IMPROVEMENTS ALLOWANCES TENANT RESPONSIBILITY. (a) Landlord shall be responsible for constructing, entirely at its expense, subject to the provisions of Section 3.3 of this Lease, the Shell Improvements (as that term is defined below). The Shell Improvements shall consist of, and the term "SHELL IMPROVEMENT" shall be used in this Lease to mean, those components of the Demised Premises which are identified in the Preliminary Plans and Specifications, which are attached to this Lease, as elements of the basic Buildings shall or specifically as "SHELL IMPROVEMENTS," land, land preparation and landscaping, or as otherwise mutually identified by Landlord and Tenant, in writing, concurrent with or subsequent to the execution of this Lease, including all utilities stubbed to the Buildings. The Base Rent specified in this Lease includes Landlord's obligation to complete and deliver to Tenant the Shell Improvements in accordance with this Lease. The cost of constructing the Shell Improvements are referred to in this Lease as the "Shell Improvements-C-9-U." Shell Improvements Cost shall include a developer fee, payable to Landlord, or an affiliate of Landlord (with no direct obligation to Tenant to pay such fee). (b) Landlord shall be responsible for constructing, subject to the provisions of this Section 2.8 and 2.9 below, the Tenant Improvements (as that term is defined below). The Tenant Improvements shall consist of, and the term "TENANT IMPROVEMENTS" shall be used in this Lease to mean, those portions of the Demised Premises which are not identified in the Plans and Specifications as part of the Shell Improvements, or as otherwise mutually identified by Landlord and Tenant, in writing, concurrent with or subsequent to the execution of this Lease. (c) Landlord shall provide an allowance to be applied by Landlord towards paying the costs of designing and constructing the Tenant Improvements (the "TENANT IMPROVEMENTS COST"), which shall be comprised of fees and reimbursables for project programming, design, architecture and engineering, reimbursables, and the direct construction cost (excluding any overhead or profit 8 to Landlord or any affiliate) of the Tenant Improvements paid to the Contractor (as defined below) or others performing such work. The allowance shall be in the amount of Seven Million Dollars ($7,000,000.00) (the "TENANT IMPROVEMENTS ALLOWANCE"). Shell Improvements shall not include the costs of building signage, security systems, specialized cabling or Tenant's moving expenses, such items being Tenant's sole financial responsibility; provided, however, that up to (and no more than) Three Hundred Thousand Dollars ($300,000) of the Tenant Improvements Allowance may be utilized to pay the costs of Tenant's (i) specialized cabling needs, (ii) moving expenses, and (iii) furniture, fixtures and equipment. (d) In the event that the Tenant Improvements Allowance is insufficient in amount to pay the Tenant Improvements Cost, Tenant shall pay such excess to Landlord pursuant to the procedure set forth in Section 2.9 below. (e) Attached to this Lease as EXHIBIT "D" is an estimate of the Tenant Improvements Cost which, based on the Preliminary Plans and Specifications and the Schematic Design Drawings as of the date of this Lease, Landlord and Tenant expect to be incurred in connection with the construction of the Demised Premises (the "TENANT IMPROVEMENTS BUDGET ESTIMATE"). Upon approval of the Plans and Specifications by both parties, Landlord shall provide Tenant with a final estimate of the Tenant Improvements Cost. Within fifteen (115) days prior to the commencement of construction of the Improvements, and no less than monthly thereafter (but not more than ten (10) days after Landlord learns of a cost change) during the course of construction of the Improvements, Landlord shall deliver to Tenant a revised Tenant Improvements Budget Estimate, whether reflecting an increase or a decrease, together with an explanation in reasonable detail of the cause of such cost change and an accounting of actual costs to date ("PERIODIC COST REGION"). Additionally, prior to any Tenant Change Order being effective, Landlord shall provide Tenant with an estimate of the cost of said Tenant Change Order. 2.9 RESPONSIBILITY FOR EXCESS SHELL COSTS AND EXCESS TENANT IMPROVEMENTS COST; TENANT IMPROVEMENTS COSTS SAVINGS. (a) The Base Rent has been determined based on the assumption that (i) the Plans and Specifications will not vary materially in scope from the Preliminary Plans and Specifications, (ii) the Plans and Specifications and Approved Working Drawings, once finalized and approved by Landlord and Tenant, will not be altered as a result of Tenant Change Orders, and (iii) no Shell Improvement Cost or Tenant Improvement Cost will be incurred in connection with the construction of the Demised Premises resulting from Tenant-Caused Delays. (b) Tenant shall be directly responsible, as Additional Rent, for any increases in the cost to Landlord of the construction of the Shell Improvements (including financing costs) ("EXCESS SHELL COSTS"), resulting from (A) Tenant Change Orders, or (B) Tenant-Caused Delays. Tenant shall pay the Increased Shell Costs to Landlord, as Additional Rent, UPON THE EARLIER TO OCCUR OF (i) execution of this Lease if any Excess Shell Costs have been identified by that date, (ii) funding of Landlord's construction loan, provided that Landlord has notified Tenant of Excess Shell Costs 9 prior thereto, which notification shall be in writing and shall include reasonably detailed documentation supporting the calculation of such Excess Shell Costs (an "EXCESS SHELL COST NOTICE"), taking into consideration any amounts previously paid by Tenant to Landlord under this subsection (b), (iii) if later, within five (5) business days after delivery of an Excess Shell Cost Notice to Tenant by Landlord, taking into consideration any amounts previously paid by Tenant to Landlord under this subsection (b), (iv) within five (5) business days after the Final Cost Report, if such report includes Increased Shell Costs which have not been previously paid to Landlord, or (v) as otherwise required by Landlord's construction Lender (as defined in Section 3.4 hereof). (c) Tenant shall be responsible, as Additional Rent, for any Tenant Improvements Costs to the extent they exceed the Tenant Improvements Allowance ("EXCESS TENANT IMPROVEMENTS COSTS"). Tenant shall pay the Excess Tenant Improvements Costs to Landlord UPON THE EARLIER TO OCCUR OF (i) execution of this Lease if the Tenant Improvements Budget Estimate at that time reflects that the Tenant Improvements Allowance will be insufficient to fund all the Tenant Improvements Costs anticipated to be incurred, (ii) funding of Landlord's construction loan if the Tenant Improvements Budget Estimate at that time reflects that the Tenant Improvements Allowance will be insufficient to fund all the Tenant Improvements Costs anticipated to be incurred, taking into consideration any amounts previously paid by Tenant to Landlord under this subsection (c), (iii) within five (5) business days after notification to Tenant by Landlord that it has determined, in a periodic review of the Tenant Improvements Costs during construction of the Tenant Improvements, pursuant to subsection 2.8(e), above, that the Tenant Improvements Allowance will be insufficient to cover all the Tenant Improvements Costs anticipated to be incurred, taking into consideration any amounts previously paid by Tenant to Landlord under this subsection (c), (iv) within five (5) business days after Landlord has notified Tenant that it has made a final determination, pursuant to subsection (a), below, that the Tenant Improvements Allowance was insufficient to cover all the Tenant Improvements Costs which have been incurred, taking into consideration any amounts previously paid by Tenant to Landlord under this subsection (c), or M as otherwise required by Landlord's construction Lender. (d) Landlord shall deposit the funds paid to it by Tenant under subsections (b) or (c) of this Section 2.9 into a segregated account maintained with the construction Lender ("EXCESS FUNDS ACCOUNT"), with interest paid on the balance in the Excess Funds Account at then prevailing money market rates. The Excess Funds Account shall be subject to a collateral pledge in favor of the Lender to secure the availability of those funds to pay Excess Shell Costs and Excess Tenant Improvements Costs. Funds shall be disbursed from the Excess Funds Account to pay Shell Improvements Costs or Tenant Improvements Costs, as applicable, only after funds which are identified for those purposes in the construction loan have been fully disbursed or as otherwise mutually approved by Landlord and Tenant, which approval will not be unreasonably withheld if an alternative arrangement is required by Landlord's construction Lender. Any interest earned on such funds while held in the Excess Funds Account shall be paid by Landlord to Tenant as earned, but no more often than monthly. (e) Within ninety (90) days following Substantial Completion of the 10 Improvements, Landlord shall calculate, and report to Tenant, in writing, M the final Shell Improvements Cost and the final Tenant Improvements Cost, and (ii) the amount of any Excess Shell Costs or Excess Tenant Improvements Costs (the "Final Cost Report"). In the event that there is an amount which has not been paid by Tenant at the time of such final determination (e.g. Excess Shell Improvements Costs or Excess Tenant Improvements Costs) then Tenant shall pay such additional amount to Landlord within five (5) business days following such final determination. Any funds deposited into the Excess Funds Account pursuant to subsection (d), above, and which are ultimately not needed to fund Excess Shell Costs and Excess Tenant Improvements Costs shall be repaid to Tenant at such time as the Lender releases its security interest in that account. (f) In the event the costs incurred by Landlord in the construction of the Tenant Improvements is less than the Tenant Improvements Allowance as indicated by the Final Cost Report, the monthly Base Rent shall be decreased by an amount equal to (i) the Tenant Improvements Allowance, (ii) minus the actual Tenant Improvements Cost, up to Four Hundred Thousand Dollars ($400,000), (iii) multiplied by a percentage factor sufficient to amortize the Tenant Improvements Allowance over the Initial Term at an annual interest rate of ten percent (10%), Ov) divided by 12. (g) All of the Periodic Cost Reports and the Final Cost Report shall include reasonably detailed supporting explanations and documentation. Landlord shall maintain accurate and complete books and records of all Shell Improvement Costs and Tenant Improvements Costs. Tenant shall have the right to inspect, audit and copy such books and records at Landlord's office in San Diego, California. 2.10 CONTRACTOR. Reno Contracting, Inc., a California corporation ("Contractor"), shall act as the general contractor for the construction of the Shell Improvements and the Tenant Improvements. Contractor's contract shall be on a "cost-plus" basis, with Contractor entitled to M reimbursement for direct insurance expenses and direct 'G&A" or "General Conditions" expenses, as provided in the Estimated Budget and (ii) a profit of no more than five percent (5%). Landlord shall cause the Contractor to bid each component of the Improvements to at least three (3) qualified subcontractors and, unless Landlord and Tenant agree otherwise, shall select the lowest qualified bidder. Tenant shall have the right to approve the list of subcontractors to be solicited for bids and to designate subcontractors to participate in the bidding process. Tenant shall also have the right to select subcontractors to perform components of the Improvements if Tenant agrees to pay any Excess Shell Costs or Excess Tenant Improvements Costs attributable to such election, provided such subcontractor is reasonably acceptable to Landlord and Contractor. Landlord represents to Tenant that Contractor is not an affiliate of Landlord nor will Landlord receive compensation from Contractor in connection with the construction of the Improvements. 2.11 RETROFIT ALLOWANCE. Upon the commencement of each Extension Term, if any, Landlord shall provide Tenant with an allowance of One Million Dollars ($1,000,000) (the "Retrofit Allowance") for the construction of new, remodeled or retrofitted Tenant Improvements in the Demised Premises (the "RetroWork"). Prior to requesting portion of the Retrofit Allowance, 11 Tenant shall submit to Landlord detailed plans and specifications for the Retrofit Work for Landlord's approval. The construction of the Retrofit Work shall be subject to the same terms, conditions and procedures as any Work (as defined in Section 19.2 hereof) which is proposed to be performed by Tenant pursuant to Article XIX hereof. The Retrofit Allowance shall be disbursed by Landlord on the same or similar basis as would a customary "construction fund control" as expenses related to such Retrofit Work are incurred and within ten (10) days after (i) Tenant presents Landlord with (A) progress invoices for completed Retrofit Work, (B) conditional partial or final lien releases or waivers for such Retrofit Work, and 00 Landlord's reasonable and prompt determination that the Retrofit Work has been completed (either partially or completely) in accordance with the plans and specifications for such Retrofit Work approved by Landlord pursuant to this Section 2.11. 2.12 TENANT'S ENTRY INTO THE BUILDING PRIOR TO SUBSTANTIAL COMPLETION. Provided that Tenant and its agents, employees and contractors do not materially interfere with the Contractor's work on the Demised Premises (any such interference constituting a basis for a Tenant-Caused Delay), Landlord shall allow and shall require the Contractor to allow, Tenant and Tenant's agent employees and contractors access to the Building prior to Substantial Completion of the Improvements so that Tenant may install its furniture, trade fixtures, data and telecommunications wiring and equipment, photocopy equipment and other business equipment in the Building. Prior to Tenant's entry into the Building as permitted by the terms of this Section 2.12, Tenant shall arrange a schedule with Landlord and the Contractor in order to coordinate the timing of Tenant's entry with the actions of the Contractor. Prior to any such entry, Tenant or its agents and contractors (as applicable) shall provide evidence of insurance reasonably satisfactory to Landlord. Tenant acknowledges that Section 20.3 below shall apply with respect to any and all claims which may arise as a result of the entry by Tenant, its agents, employees and contractors on the Demised Premises in accordance with this Section 2.12. Tenant's responsibilities under Section 6.1 of this Lease shall commence upon such early occupancy as opposed to March 2, 1998. ARTICLE III RENT 3.1 Base Rent. In consideration of the lease OF the Demised Premises evidenced by this Lease, Tenant covenants to pay rent to Landlord, without previous demand therefor and without any right OF set-off or deduction whatsoever except as expressly provided in this Lease, at the office OF Landlord at: ADI Communication Partners, L.P. c/o The Allen Group 4365 Executive Drive, Suite 850 San Diego, CA 92121-2130 Attention: Mr. Steven L. Black or at such other place as Landlord may from time to time designate in writing, a rental for the Initial 12 Term of this Lease as hereinafter set forth, payable monthly, in advance, in equal installments as hereinafter set forth, with the first payment due on March 2, 1998, and continuing on the first day of each month thereafter for the succeeding months during the balance of the Term ("Base Rent"), as follows:
Period Monthly Base Rent Annual Base Rent - ------ ----------------- ---------------- Months 1 - 12 $218,000 $2,616,000 Months 12 - 24 $218,000 $2,616,000 Months 25 - 36 $231,080 $2,772,960 Months 37 - 48 $231,080 $2,772,960 Months 49 - 60 $244,995 $2,939,338 Months 61 - 72 $244,995 $2,939,338 Months 73 - 84 $259,641 $3,115,692
In the event March 2, 1998 occurs on other than the first (1st) day of a month, the Initial Term shall be extended by the number of days remaining in the month in which March 2, 1998 occurs and the first payment of Base Rent due on March 2, 1998 shall be a sum equal to (i) the monthly Base Rent for the month in which March 2, 1998 occurs, prorated based on the number of days in the month in which March 2, 1998 occurs, plus GO the monthly Base Rent for the first full calendar month of the Initial Term. 3.2 BASE RENT DURING EXTENSION TERM. The Base Rent during the Extension Term ("Extension Term Base Rent") shall be an amount equal to the greater of (i) ninety five percent (95%) of the then fair market rental value of the Demised Promises ("Fair Market Rental Value"), as stated on a monthly basis and determined pursuant to this Section 3.2 as of the first (1st) day of the applicable Extension Term, or (ii) the Base Rent during the last month of the Initial Term (or the prior Extension Term as may be applicable), plus an amount sufficient for Tenant to fully amortize, over the Extension Term, in equal monthly installments, the amount of the Retrofit Allowance actually used by Tenant, plus interest on that amount at the annual rate of ten percent (10%). Upon receipt by Landlord of Tenant's Extension Notice under Section 1.2, above, Landlord and Tenant shall meet in an effort to negotiate, in good faith, the Extension Term Base Rent which shall become effective as of the first day of the Extension Term ("Extension Term Commencement Date"). The Extension Term Base Rent shall be increased to an amount equal to 1.06 times the then applicable Extension Term Base Rent, as may have been previously adjusted pursuant to this Section 3.2, every twenty-four (24) months during the Extension Term. If Landlord and Tenant have not agreed upon the Extension Term Base Rent within thirty (30) days after the delivery of Tenant's Extension Notice, the Extension Term Base Rent shall be determined as follows: (a) Landlord and Tenant shall attempt to agree in good faith upon a single appraiser not later than thirty (30) days after delivery of Tenant's Extension Notice. If Landlord and Tenant are unable to agree upon a single appraiser within such time period, then Landlord and Tenant shall each appoint one appraiser not later than five (5) days after the deadline for selecting a single appraiser. Landlord and Tenant shall each give written notice to the other as to the name 13 of the appraiser it has selected, as soon as the selection is made. Within ten (10) days thereafter, the two appointed appraisers shall appoint a third appraiser. All appraisers shall be independent from, and disinterested in, both Landlord and Tenant. (b) The only task which the appraiser(s) shall perform shall be forming and reporting to Landlord and Tenant an opinion of the Fair Market Rental Value of the Demised Premises for use in determining the Extension Term Base Rent. (c) If either Landlord or Tenant fails to appoint its appraiser within the prescribed time period, the single appraiser appointed shall determine the Fair Market Rental Value of the Demised Premises. If both parties fail to appoint appraisers within the prescribed time periods, then the first appraiser thereafter selected by a party shall determine the Fair Market Rental Value of the Demised Premises. (d) Each party shall bear the cost of its own appraiser and the parties shall share equally the cost of any single or third appraiser, if applicable. All appraisers so designated herein shall have at least five (5) years' experience in the appraisal of commercial properties similar to the Demised Premises in the northern commercial/industrial markets of San Diego County and shall be members of professional organizations such as MAI or its equivalent. (e) For the purpose of such appraisal and this subsection (d), the term "Fair Market Rental Value" shall mean the price that a ready and willing single tenant would pay, as of the Extension Term Commencement Date, as annual rent to a ready and willing landlord of a property comparable to the Demised Premises on the terms of this Lease, if such property were exposed for lease on the open market for a reasonable period of time. A "comparable property" shall mean an industrial/commercial two-story concrete tilt-up building located in the Sorrento Mesa sub-market of San Diego (the "Market Area"), with improvements similar in age and character to the Demised Premises, which has been improved with the tenant improvements comparable to those constructed in the Demised Premises; provided, however, that the appraisal shall disregard the value of the equipment which Tenant is entitled to remove at the expiration or termination of the Term of this Lease or the value of the Retrofit Allowance. The appraiser shall give appropriate consideration to all relevant factors, including, without limitation, (i) the fact that this Lease is a "triple net" lease, (ii) rental concessions and tenant improvement allowances generally being offered by landlords of comparable properties, (iii) the age of the Improvements, (iv) the condition of the Demised Premises on the assumption that Tenant has complied with its obligations to maintain and repair the Demised Premises, (v) rental market conditions then in existence, NO whether Landlord will or will not be required to pay a real estate brokerage commission in connection with Tenant's exercise of the Extension Option, and (vii) the fact that the Tenant will be accepting the Demised Premises in an 'As-is" condition. (f) If a single appraiser is chosen, then such appraiser shall determine the Fair Market Rental Value of the Demised Premises. Otherwise, the Fair Market Rental Value of the 14 Demised Premises shall be the arithmetic average of the two (2) appraisals which are closest in amount, and the third appraisal shall be disregarded. (g) Landlord and Tenant shall instruct the appraiser(s), in writing, to complete their written determination of the Fair Market Rental Value not later than thirty (30) days after their selection. If the Fair Market Rental Value has not been determined by such date, then the Fair Market Rental Value shall be determined thereafter, and if it has not been determined by the Extension Term Commencement Date, then Tenant shall continue to pay Landlord monthly installments of Annual Rent in the amount applicable to the Demised Premises immediately prior to the Extension Term Commencement Date until the Fair Market Rental Value is determined. When the Fair Market Rental Value of the Demised Premises is determined, Landlord shall deliver notice thereof to Tenant, and Tenant shall pay to Landlord, within ten (10) days after receipt of such notice, the difference between the monthly installments of Base Rent actually paid by Tenant to Landlord subsequent to the Extension Term Commencement Date and the new monthly installments of Base Rent which are determined to have been actually owing during such period in accordance with this Section 3.2. 3.3 ADDITIONAL OBLIGATIONS; ADDITIONAL RENT. The Base Rent shall be absolutely "net" to Landlord so that this Lease shall yield to Landlord the Base Rent specified in Section 3.1 and that all Impositions, insurance premiums, utility charges, maintenance, repair and replacement expenses, all expenses relating to compliance with all present or future applicable governmental laws, rules and regulations, and all other costs, fees, charges, expenses, reimbursements and obligations of every kind and nature whatsoever relating to the Demised Premises which may arise or become due during the term or by reason of events occurring during the term of this Lease (all such items being sometimes referred to as "Additional Obligations") shall be paid or discharged by Tenant, except to the extent they are expressly the responsibility of Landlord under this Lease. To the extent the following are the obligations of Tenant under this Lease, Tenant hereby agrees to indemnify, defend and save Landlord harmless from and against such Impositions, insurance premiums, utility charges, maintenance, repair and replacement expenses, all expenses relating to compliance with all present and future governmental laws, rules and regulations becoming effective during the Term, and all other costs, fees, charges, expenses, reimbursements and obligations referred to above. Any amounts referred to in this Lease as additional rent (including, without limitation, the Additional Obligations) are referred to collectively as "Additional Rent." 3.4 DELINQUENT RENTAL PAYMENTS. All payments of Base Rent and Additional Rent shall be payable without previous demand therefor and without any right of set-off or deduction whatsoever (except as expressly provided in this Lease), and in case of nonpayment of any item of Additional Rent by Tenant when the same is due, Landlord shall have, in addition to all its other rights and remedies, all of the rights and remedies available to Landlord under the provisions of this Lease or by law in the case of nonpayment of Base Rent. The performance and observance by Tenant of all the terms, covenants, conditions and agreements to be performed or observed by Tenant hereunder shall be performed and observed by Tenant at Tenant's sole cost and expense. Any installment of Base Rent or Additional Rent or any other charges payable by Tenant under the 15 provisions hereof which shall not be paid- within five (5) days after they are due shall, (i) be subject to a late charge of five percent (5%) of the amount due and not timely paid, and 00 bear interest from the date when such payment was due at the lesser of (A) the default rate of interest under Landlord's most senior debt obligation encumbering the Demised Premises, or (B) an annual rate of eighteen percent (18%) per annum, but in no event in excess of the maximum lawful rate permitted to be charged by Landlord against Tenant. Said rate of interest is sometimes hereinafter referred to as the "Maximum Rate of Interest. Notwithstanding the foregoing provisions of this Section 3.4, if any mortgagee under any mortgage, beneficiary under any deed of trust, or ground lessor under any ground lease, which encumbers the Land (a "Lender"), imposes fees, charges, penalties or interest on Landlord for late payments under such instrument which fees, charges, penalties or interest are less in amount than those described in this Section 3.4, Landlord will not impose any late payment charge or interest which is greater than the amounts charged by such Lender. ARTICLE IV USE OF DEMISED PREMISES 4.1 PERMITTED USE. Tenant intends to use the Demised Premises primarily as a corporate headquarters, assembly, warehouse and distribution facility and related lawful purposes, and they shall be used for no other purpose without first securing the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant shall not use or occupy the same, or knowingly permit them to be used or occupied, contrary to any statute, rule, order, ordinance, requirement or regulation applicable thereto, or in any manner which would violate any certificate of occupancy affecting the same, or which would make void or voidable any insurance then in force with respect thereto (provided Tenant has received a copy of the policy) or which would make it impossible to obtain fire or other insurance thereon required to be furnished hereunder by Tenant, or which would cause structural injury to the improvements, or which would constitute a public or private nuisance or waste, and Tenant agrees that it will promptly, upon discovery of any such use, take all necessary steps to compel the discontinuance of such use. 4.2 PRESERVATION OF DEMISED PREMISES. Tenant shall not use, or permit the Demised Premises, or any portion thereof, to be used by Tenant, any third party or the public in such manner as might reasonably tend to impair Landlord's title to the Demised Premises, or any portion thereof, or in such manner as might reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or third persons, or of implied dedication of the Demised Premises, or any portion thereof. Nothing contained in this Lease, and no action or inaction by Landlord, shall be deemed or construed to mean that Landlord has granted to Tenant any right, power or permission to do any act or make any agreement that may create, or give rise to or be the foundation for any right, title, interest, lien, charge or other encumbrance upon the estate of Landlord in the Demised Premises other than as expressly set forth in this Lease. 4.3 HAZARDOUS SUBSTANCES. 16 (a) Subject to Section 4.3(f), Tenant shall at all times and in all respects comply with all federal, state and local laws, ordinances and regulations ("HAZARDOUS MATERIALS LAWS") relating to the industrial hygiene, environmental protection or the use, analysis, generation, manufacture, storage, presence, disposal or transportation of any oil, flammable explosives, asbestos, urea formaldehyde, polychlorinated biphenyls, radioactive materials or waste, or other hazardous, toxic, contaminated or polluting materials, substances or wastes, including without limitation any "hazardous substances," "hazardous wastes,"hazardous materials" or toxic substances" under any such laws, ordinances or regulations (collectively, "Hazardous Materials") at the Demised Premises. (b) Subject to Section 4.3(f), Tenant shall at its own expense procure (other than a certificate of occupancy), maintain in effect and comply with all conditions of any and all permits, licenses and other governmental and regulatory approvals required for Tenant's use of the Demised Premises, including, without limitation, discharge of (appropriately treated) materials or waste into or through any sanitary sewer system serving the Demised Premises. Tenant shall in all respects handle, treat, deal with and manage any and all Hazardous Materials in, on, under or about the Demised Premises in complete conformity with all applicable Hazardous Materials Laws and prudent industry practices regarding the management of such Hazardous Materials. Subject to Section 4.3(f), all reporting obligations imposed by Hazardous Materials Laws are solely the responsibility of Tenant. Upon expiration or earlier termination of this Lease and subject to Section 4.3(f), Tenant shall cause all Hazardous Waste Materials (as defined in 22 CCR 66261.3) to be removed from the Demised Premises and transported for use, storage or disposal in accordance with and in complete compliance with all applicable Hazardous Materials Laws. Tenant shall not take any remedial action in response to the presence of any Hazardous Materials in, on, about or under the Demised Premises or in any Improvements situated on the Land other than in the normal course of Tenant's business operations as now contemplated in accordance with all Hazardous Materials Laws or as necessitated by emergency considerations in accordance with all applicable Hazardous Materials Laws, nor enter into any settlement agreement, consent decree or other compromise in respect to any claims relating to any Hazardous Materials in any way connected with the Demised Premises or the Improvements on the Land without first notifying Landlord of Tenant's intention to do so and affording Landlord ample opportunity to appear, intervene or otherwise appropriately assert and protect Landlord's interest with respect thereto. In addition, at Landlord's request, at the expiration of the term of this Lease, Tenant shall remove all tanks or fixtures which were placed on the Demised Premises during the term of this Lease and which contain, have contained or are contaminated with Hazardous Waste Materials. (c) Tenant shall immediately notify Landlord in writing of (i) any enforcement, cleanup, removal or other governmental or regulatory action instituted, completed or threatened pursuant to any Hazardous Materials Laws; (ii) any claim made or threatened by any person against Landlord or the Demised Premises relating to damage, contribution, cost recovery, compensation, loss or injury resulting from or claimed to result from any Hazardous Materials; and (iii) any non- routine reports made to any environmental agency arising out of or in connection with any Hazardous Materials in, on or about the Demised Premises or with respect to any Hazardous Materials removed from the Demised Premises, including any complaints, notices, warnings, reports or asserted 17 violations in connection therewith. Tenant shall also provide to Landlord, as promptly as possible, and in any event within five (5) business days after Tenant first receives or sends the same, copies of all claims, reports, complaints, notices, warnings or asserted violations from any governmental agency of any Hazardous Materials Laws relating in any way to the Demised Premises or Tenant's use thereof. Upon written request of Landlord (to enable Landlord to defend itself from any claim or charge related to any Hazardous Materials Laws), Tenant shall promptly deliver to Landlord notices of hazardous waste manifests reflecting the legal and proper disposal of all such Hazardous Materials removed from the Demised Premises. Subject to Section 4.3(f), all such manifests shall list the Tenant or its agent as a responsible party and in no way shall attribute responsibility for any such Hazardous Materials to Landlord. (d) Subject to Section 4.3(f), Tenant shall indemnify, defend (with counsel reasonably acceptable to Landlord), protect and hold Landlord and each of Landlord's officers, directors, partners, shareholders, affiliates, employees, agents, attorneys, successors and assigns free and harmless from and against any and all claims, liabilities, damages, costs, penalties, forfeitures, losses or expenses (including attorneys' fees) for death or injury to any person or damage to any property whatsoever (including water tables and atmosphere) to the extent arising or resulting in whole or in part, directly or indirectly, from the presence or discharge of Hazardous Materials in, on, under, upon or from the Demised Premises or the Improvements located thereon or from the transportation or disposal of Hazardous Materials to or from the Demised Premises, to the extent brought onto the Demised Premises by Tenant whether knowingly or unknowingly, the standard herein being one of strict liability. For purposes of the indemnity provided herein, any act or omission of Tenant or its agents, employees, contractors or subcontractors (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to Tenant. Subject to Section 4.3(f), Tenant's obligations hereunder shall include, without limitation, and whether foreseeable or unforeseeable, all costs of any required or necessary repairs, clean-up or detoxification or decontamination of the Demised Premises or the Improvements, and the presence and implementation of any closure, remedial action or other required plans in connection therewith, and shall survive the expiration of or early termination of the term of this Lease. For purposes of the indemnity provided herein, any acts or omissions of Tenant or its employees, agents, customers, sublessees, assignees, contractors or subcontractors (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to Tenant. Nothing in this Section 4.3 shall cause Tenant to be responsible for be for liabilities caused by Hazardous Materials which migrate onto the Demised Premises from neighboring properties. (e) Landlord may, at its expense, commission an environmental audit of the Demised Premises at any time after prior written notice thereof to Tenant; provided that such environmental audit does not unreasonably interfere with Tenant's use of the Demised Premises, or any portion thereof, and provided further that Landlord indemnifies, defends and holds harmless Tenant and its officers, agents, employees and customers from and against any loss, liabilities or damages to Tenant's machinery, equipment, fixtures and personal property, and all liability, loss or damage arising from an injury to the property of Tenant, or its officers, agents, employees or customers, and any death or personal injury to any person or persons to the extent arising out of such 18 environmental audit except for liability, loss or damage caused by Tenant's gross negligence or willful misconduct. However, should Tenant materially breach any of its obligations set forth in this Section 4.3 in a manner that may expose Landlord to material liability, then Landlord shall have the right to require Tenant to undertake and submit to Landlord an environmental audit from an environmental company reasonably acceptable to Landlord, which audit shall evidence Tenant's compliance with this Section 4.3. (f) Landlord represents and warrants that, as of the date of this Lease, and limited to Landlord's actual knowledge, there are, and as of March 2, 1998 there will be, no Hazardous Materials located on the Demised Premises, other than an as required for the normal operation of the Demised Premises and in accordance with all Hazardous Materials Laws. Landlord shall indemnify, defend (with counsel reasonably acceptable to Tenant), protect and hold Tenant and each of Tenant's officers, directors, partners, shareholders, affiliates, employees, agents, attorneys, successors and assigns free and harmless from and against any and all claims, liabilities, damages, costs, penalties, forfeitures, losses or expenses (including attorneys' fees) for death or injury to any person or damage to any property whatsoever (including water tables and atmosphere) arising or resulting in whole or in part, directly or indirectly, from the presence of Hazardous Materials in, on, under, upon or from the Demised Premises or the Improvements located thereon prior to March 2, 1998, or from the transportation or disposal of Hazardous Materials to or from the Demised Premises to the extent caused by Landlord whether knowingly or unknowingly, the standard being one of strict liability. (g) For purposes of the indemnity provided herein, any act or omission of Landlord or its agents, employees, contractors or subcontractors (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to, Landlord. Subject to Section 4.3(f), Landlord's obligations hereunder shall include, without limitation, and whether foreseeable or unforeseeable, all costs of any required or necessary repairs, clean-up or detoxification or decontamination of the Demised Promises or the Improvements, and the presence and implementation of any closure, remedial action or other required plans in connection therewith, and shall survive the expiration of or early termination of the term of this Lease. (h) The obligations of Landlord and Tenant under this Section 4.3 shall survive the expiration or earlier termination of this Lease. ARTICLE V PAYMENT OF TAXES, ASSESSMENTS, ETC. 5.1 PAYMENT OF IMPOSITIONS. (a) Except as provided to the contrary in this Section 5.1 below, Tenant covenants and agrees to pay during the Term of this Lease, as Additional Rent, and before any fine, penalty, interest or cost may be added thereto for the nonpayment thereof, all real estate taxes, regular or special assessments, water rates and charges, sewer rates and charges, including any sum or sums 19 payable for present or future sewer or water capacity, (except as set forth in Section 2.5 above) charges for public utilities, street lighting, excise levies, licenses, permits, inspection fees, other governmental charges and all other charges or burdens of whatsoever kind and nature (including costs, fees and expenses of complying with any restrictive covenants or similar agreements (e.g. CC&R's, private assessment districts or owners' associations) to which the Land is subject as of the date of March 2, 1998), incurred in the use, occupancy, ownership, operation, leasing or possession of the Demised Premises, without particularizing by any known name or by whatever name hereafter called, and whether any of the foregoing be general or special, ordinary or extraordinary, foreseen or unforeseen (all of which are sometimes herein referred to as "Impositions"), which at any time during the Term may have been or may be assessed or levied on the Demised Promises or any portion thereof or any appurtenance thereto, rents or income therefrom, and such easements or rights as may now or hereafter be appurtenant or appertain to the use of the Demised Premises. Tenant shall pay the current portions of all special (or similar) assessments which during the Term of this Lease shall be laid, assessed, levied or imposed upon or become payable or become a lien upon the Demised Premises or any portion thereof; provided, however, that if by law any special assessment is payable (without default) or, at the option of the owner, may be paid (without default) in installments (whether or not interest shall accrue on the unpaid balance of such special assessment), Tenant may (and shall only be obligated to) pay the same, in installments as the same respectively become payable and before any fine, penalty, interest or cost may be added thereto for the nonpayment of any such installment and the interest thereon. (b) Tenant shall pay all Impositions whether heretofore or hereafter levied or assessed upon the Demised Premises or any portion thereof, which are due and payable for periods during the Term of this Lease, including any Extension Term. Landlord shall pay all Impositions which are payable for periods prior to March 2, 1998 and after the termination date of the Term of this Lease. Provisions herein to the contrary notwithstanding, Landlord shall pay that portion of the Impositions and installments of special assessments due and payable in respect to the Demised Premises during the year in which the Initial Term commences and the year in which the Term ends which the number of days in said year not within the Term of this Lease bears to 365, and Tenant shall pay the balance of said current Impositions and current installments of special assessments during said years. (c) Notwithstanding the foregoing provisions of Section 5.1 (a) and (b), Tenant shall not be responsible for (and Landlord shall pay prior to delinquency) any increase in ad valorem property taxes which might result from the sale of the Demised Premises during the Term of the Lease to the extent such property taxes result from the fact that the assessed value of the Demised Premises exceeds the total cost (including the cost of the Land, Shell Improvements, Tenant Improvements, "soft" costs, permits, site improvements, etc.) of the Demised Premises. 5.2 TENANT'S RIGHT TO CONTEST IMPOSITIONS. Tenant shall have the right at its own expense to contest the amount or validity, in whole or in part, of any Imposition by appropriate proceedings diligently conducted in good faith; provided, however, if the payment of such Imposition is necessary to properly appeal such Imposition, Tenant shall pay such imposition before 20 delinquency; and, provided further, if there is then an uncured Event of Default hereunder, Tenant shall have first deposited with Landlord cash or a certificate of deposit payable to Landlord issued by a national bank or federal savings and loan association in the amount of the Imposition so contested and unpaid, together with all interest and penalties which may accrue in Landlord's reasonable judgment in connection therewith, and all charges that may or might be assessed against or become a charge on the Demised Premises or any portion thereof during the pendency of such proceedings. If there is then in an uncured Event of Default hereunder and if during the continuance of such proceedings, Landlord shall, from time to time, reasonably deem the amount deposited, as aforesaid, insufficient, Tenant shall, upon demand of Landlord, make additional deposits of such additional sums of money or such additional certificates of deposit as Landlord may reasonably request. If Tenant is required to make such additional deposits hereunder and Tenant fails to make same, the amount theretofore deposited may be applied by Landlord to the payment, removal and discharge of such Imposition, and the interest, fines and penalties in connection therewith, and any costs, fees (including attorneys' fees) and other liability (including costs incurred by Landlord) accruing in any such proceedings. Upon the termination of any such proceedings, Tenant shall pay the amount of such Imposition or part thereof, if any, as finally determined in such proceedings, the payment of which may have been deferred during the prosecution of such proceedings, together with any costs, fees, including attorneys' fees, interest, penalties, fines and other liability in connection therewith, and upon such payment, if Landlord had previously received any amounts or certificates as a deposit, Landlord shall return all amounts or certificates deposited with it with respect to the contest of such Imposition, as aforesaid, or, at the written direction of Tenant, Landlord shall make such payment out of the funds on deposit with Landlord and the balance, if any, shall be returned to Tenant. Tenant shall be entitled to the refund of any Imposition, penalty, fine and interest thereon received by Landlord which has been paid by Tenant or which has been paid by Landlord but for which Landlord has been previously reimbursed in full by Tenant. Landlord shall not be required to join in any proceedings referred to in this Section 5.2 unless the provisions of any law, rule or regulation at the time in effect shall require that such proceedings be brought by or in the name of Landlord, in which event Landlord shall join in such proceedings or permit the same to be brought in Landlord's name upon compliance with such conditions as Landlord may reasonably require. Landlord shall not ultimately be subject to any liability for the payment of any fees, including attorneys' fees, costs and expenses in connection with such proceedings. Tenant agrees to pay all such fees (including reasonable attorneys' fees), costs and expenses or, on demand, to make reimbursement to Landlord for such payment for fees reasonably incurred by Landlord in connection with such proceedings as provided above. 5.3 LEVIES AND OTHER TAXES. If, at any time during the Term of this Lease, any method of taxation shall be such that there shall be levied, assessed or imposed on Landlord, or on the Base Rent or Additional Rent, or on the Demised Premises, or any portion thereof, a capital levy, gross receipts tax, transaction privilege tax or other tax on the rents received therefrom or a franchise tax, or an assessment, levy or charge measured by or based in whole or in part upon such rents, Tenant covenants to pay and discharge the same, it being the intention of the parties hereto that the rent to be paid hereunder, shall be paid to Landlord absolutely net, without deduction or charge of any nature whatsoever, foreseeable or unforeseeable, ordinary or extraordinary, or of any nature, kind 21 or description, except as in this Lease otherwise expressly provided. Nothing in this Lease contained shall require Tenant to pay any municipal, state or federal net income, franchise, or excess profits taxes assessed against Landlord, or any municipal, state or federal capital levy, estate, succession, inheritance or transfer taxes of Landlord, or corporation franchise taxes imposed upon any corporate owner of the fee of the Demised Premises nor shall anything in this Lease require Tenant to pay any income tax of Landlord or any tax in the nature of income and/or franchise tax or in lieu of income tax. 5.4 EVIDENCE OF PAYMENT. Tenant covenants to furnish Landlord, within thirty (30) days after Landlord requests the same, official receipts of the appropriate taxing authority, or other appropriate proof reasonably satisfactory to Landlord, evidencing the payment of the same. The certificate, advice or bill of the appropriate official designated by law to make or issue the same or to receive payment of any Imposition or other tax, assessment, levy or charge may be relied upon by Landlord as sufficient evidence that such Imposition or other tax, assessment, levy or charge is due and unpaid at the time of the making or issuance of such certificate, advice or bill. 5.5 ESCROW FOR TAXES AND ASSESSMENTS. At Landlord's written demand after any Event of Default (as hereinafter defined) and for as long as such Event of Default is uncured, Tenant shall pay to Landlord the known or estimated yearly real estate taxes and assessments payable with respect to the Demised Premises in monthly payments equal to one-twelfth (11 /12) of the known or estimated yearly real estate taxes and assessments next payable with respect to the Demised Premises. From time to time, Landlord may re-estimate the amount of real estate taxes and assessments, and in such event Landlord shall notify Tenant, in writing, of such re-estimate and fix future monthly installments for the remaining period prior to the next tax and assessment due date in an amount sufficient to pay the re-estimated amount over the balance of such period after giving credit for payments made by Tenant on the previous estimate. If the total monthly payments made by Tenant pursuant to this Section 5.5 shall exceed the amount of payments necessary for said taxes and assessments, such excess shall be credited on subsequent monthly payments of the same nature; but if the total of such monthly payments so made under this paragraph shall be insufficient to pay such taxes and assessments when due, then Tenant shall pay to Landlord such amount as may be necessary to make up the deficiency. Payment by Tenant of real estate taxes and assessments under this Section 5.5 shall be considered as performance of such obligation under the provisions of Section 5.1 hereof. 5.6 LANDLORD'S RIGHT TO CONTEST IMPOSITIONS. In addition to the right of Tenant under Section 5.2 to contest the amount or validity of Impositions, Landlord shall also have the right, but not the obligation, to contest the amount or validity, in whole or in part, of any Impositions not contested by Tenant, by appropriate proceedings conducted in the name of Landlord or in the name of Landlord and Tenant. If Landlord elects to contest the amount or validity, in whole or in part, of any Impositions, such contests by Landlord shall be at Landlord's expense; provided, however, that if the amounts payable by Tenant for Impositions are reduced (or if a proposed increase in such amounts is avoided or reduced) by reason of Landlord's contest of Impositions, Tenant shall reimburse Landlord for the costs reasonably incurred by Landlord in contesting such Impositions, 22 but such reimbursements shall not be in excess of the amount saved by Tenant. ARTICLE VI INSURANCE 6.1 CASUALTY INSURANCE. Tenant, at its sole cost and expense, shall obtain and continuously maintain in full force and effect during the Term of this Lease (including any Extension Term), commencing with March 2, 1998, policies of insurance covering the Demised Premises, including, without limitation, any Buildings constructed, installed or located on the Demised Premises, naming Landlord as an additional insured, against (a) loss or damage by fire; (b) loss or damage from such other risks or hazards now or hereafter embraced by an "Extended Coverage Endorsement, including, but not limited to, windstorm, hail, explosion, vandalism, riot and civil commotion, damage from vehicles, smoke damage, water damage and debris removal; W loss for flood if the Demised Premises are in a designated flood or flood insurance area, (d) loss or damage caused by earthquake, subject to standard deductibles (provided, however, that (i) Tenant shall not be required to maintain earthquake insurance if it is not reasonably obtainable and (ii) Tenant's financial responsibility for the premium associated with earthquake insurance shall not exceed $75,000 per year during the Initial Term or any Option Term, with Landlord having the option of paying any excess premium); and (e) loss or damage from such other risks or hazards of a similar or dissimilar nature which are now or may hereafter be customarily insured against with respect to improvements similar in construction, design, general location, use and occupancy to the Demised Premises or which may be required by Landlord's Lender. At all times, such insurance coverage shall be in an amount equal to one hundred percent (100%) of the then "Full Replacement Cost" of the Improvements. "Full Replacement Cost" shall be interpreted to mean the cost of replacing the Improvements, without deduction for depreciation or wear and tear, including costs attributable to improvements or upgrades to the Improvements required by changes in laws and regulations governing zoning, public access and accommodation, workplace conditions, public health or safety or similar matter, and it shall include, to the extent reasonably obtainable, a reasonable sum for architectural, engineering, legal, administrative and supervisory fees connected with the restoration or replacement of the Improvements in the event of damage thereto or destruction thereof. If a sprinkler system shall be located in the Improvements, sprinkler leakage insurance shall be procured and continuously maintained by Tenant at Tenant's sole cost and expense. Any deductible, self- insured retention or similar limitation on coverage shall be submitted to Landlord for its prior written approval, which shall be granted or withheld in Landlord's reasonable discretion. 6.2 PUBLIC LIABILITY INSURANCE. From and after March 2, 1998 and through the entire Term (including any Extension Term), Tenant, at its sole cost and expense, shall obtain and continuously maintain in full force and effect comprehensive general liability insurance against any loss, liability or damage on, about or relating to the Demised Premises, or any portion thereof, with limits of not less than Three Million Dollars ($3,000,000) in the event of injury to one person, Five Million Dollars ($5,000,000) in respect of any one accident or occurrence, and One Million Dollars $1,000,000) for property damage. Any such insurance obtained and maintained by Tenant shall 23 name Landlord as an additional insured therein or shall include a "loss payee" endorsement in favor of Landlord, and shall be obtained and maintained from and with a reputable and financially sound insurance company authorized to issue such insurance in the state in which the Demised Premises are located. Such insurance shall to the extent reasonably obtainable specifically insure (by contractual liability endorsement) Tenant's obligations under Section 20.3 of this Lease. 6.3 OTHER INSURANCE. (a) During the Term of this Lease, commencing with March 2, 1998, Tenant, at its sole cost and expense, shall obtain and continuously maintain in full force and effect boiler and pressure vessel (including, but not limited to, pressure pipes, steam pipes and condensation return pipes) insurance, provided the Buildings contains a boiler or other pressure vessel or pressure pipes. Landlord shall be named as an additional insured "or loss payee in such policy or policies of insurance. (b) During the Term of this Lease commencing with March 2, 1998, Tenant, at its sole cost and expense, shall obtain and continuously maintain, in full force and effect, loss of use and business interruption or rental interruption coverage for the payment for no less than one (1) year of (i) the Base Rent and 00 those Impositions which will continue to be payable even during a period when the Demised Premises are not operational. (c) During the Term of this Lease, Tenant, at its sole cost and expenses shall obtain and continuously maintain in full force and effect such other insurance in such amounts against other insurable hazards which at the time are commonly insured against in the case of promises and/or buildings or improvements similar in construction, design, general location, use and occupancy to the Demised Premises if required by Landlord's construction or permanent lenders. 6.4 ADDITIONAL INSURANCE PROVISIONS. All policies of insurance required by this Article VI shall comply with the following requirements: (a) They shall be payable to Landlord and, if Landlord so requests shall also be payable to any contract purchaser of the Demised Premises and/or the holder of any mortgages now or hereafter becoming a lien on the fee of the Demised Premises, or any portion thereof, as the interest of such purchaser or holder appears pursuant to a standard named insured or mortgagee clause or as an additional insured. (b) They shall be maintained on an "occurrences" basis. (c) They shall contain deductibles, self-insured retentions or similar limitations on coverage only if previously submitted to Landlord for its prior written approval, which shall be granted or withheld in Landlord's reasonable discretion, subject at all times to the requirements of Landlord's Lender, whose prior written approval shall also be required. In any event, such deductibles, self-insured retentions or similar limitations on coverage shall no higher than those 24 which are customarily maintained for such insurance (casualty or liability) in connection with facilities similar to the Demised Premises. (d) Tenant shall not, on Tenant's own initiative or pursuant to request or requirement of any third party, take out separate insurance concurrent in form or contributing in the event of loss with that required in this Section, unless the requirements of subsection (a) above are satisfied. Tenant shall immediately notify Landlord whenever any such separate insurance is taken out and shall deliver to Landlord original certificates evidencing the same. (e) Each policy required under this Article VI shall have attached thereto (a) an endorsement that such policy shall not be cancelled and that the coverage under such policy will not be materially changed without at least thirty (30) days prior written notice to Landlord or any mortgagee, and (b) to the extent reasonably obtainable an endorsement to the effect that the insurance as to the interest of Landlord or any mortgagee shall not be invalidated by any act or neglect of Landlord or Tenant. (f) They shall be written with companies reasonably satisfactory to Landlord and licensed in the state in which the Demised Promises are located. Such certificates of insurance shall be in a form reasonably acceptable to Landlord and shall be delivered to Landlord no fewer than thirty (30) days prior to March 2, 1998 (or such earlier date as Landlord's Lender may require) and, prior to expiration of such policy, new certificates of insurance shall be delivered to Landlord not less than sixty (60) days prior to the expiration of the then current policy term. (g) They shall be obtained from companies duly licensed to transact business in the state of California, and maintaining during the policy term a "General Policyholders Rating' of at least "A" and financial category rating of "Class W in "Best's Insurance Guide.' 6.5 WAIVER OF SUBROGATION. Landlord and Tenant hereby mutually waive any and all rights of recovery against one another for real or personal property loss or damage occurring to the Demised Premises, or any part thereof, or any personal property therein from perils insured against under the insurance maintained hereunder for the benefit of the respective parties, and to the extent the proceeds of such insurance are actually recovered, and each shall use commercially reasonable efforts to assure that such insurance permits waiver of liability and contains a waiver of subrogation. 6.6 TENANT'S INDEMNIFICATION OF LANDLORD. Tenant may maintain insurance coverage upon all personal property of Tenant or the personal property of others kept, stored or maintained on the Demised Premises against loss or damage by fire, windstorm or other casualties or causes for such amount as Tenant may desire. To the extent Tenant maintains such insurance, Tenant agrees that such policies shall, to the extent obtainable, name Landlord as an "additional insured" and contain a waiver of subrogation clause as to Landlord. 6.7 UNEARNED PREMIUMS. Upon expiration or other termination of the Term of this 25 Lease, the unearned premiums upon any insurance policies or certificates thereof lodged with Landlord by Tenant shall, subject to the provisions of Article XIII hereof, be payable to Tenant, provided that an Event of Default does not then exist (or if an Event of Default does then exist, any excess over the amount required to cure such default shall be so payable to Tenant). 6.8 BLANKET INSURANCE COVERAGE. Nothing in this Article VI shall prevent Tenant from taking out insurance of the kind and in the amount provided for under the preceding paragraphs of this Article VI under a blanket insurance policy or policies (and certificates thereof reasonably satisfactory to Landlord shall be delivered to Landlord) which may cover other properties owned, leased or operated by Tenant as well as the Demised Premises; provided, however, that any such policy of blanket insurance of the kind provided for shall (a) specify therein the amounts thereof exclusively allocated to the Demised Premises (or Tenant shall furnish Landlord and the holder of any fee mortgage with a written statement from the insurers under such policies specifying the amounts of the total insurance exclusively allocated to the Demised Promises), and M not contain any clause which would result in the insured thereunder being required to carry any insurance with respect to the property covered thereby in an amount not less than any specific percentage of the Full Replacement Cost of such property in order to prevent the insured therein named from becoming a co-insurer of any loss with the insurer under such policy; and further provided, however, that such policies of blanket insurance shall, as respects the Demised Premises, contain the various provisions required of such an insurance policy by the foregoing provisions of this Article VI. ARTICLE VII UTILITIES 7.1 PAYMENT OF UTILITIES. During the Term of this Lease, Tenant shall pay, when due, all charges of every nature, kind or description for utilities furnished to the Demised Premises or chargeable against the Demised Premises, including, without limitation, all charges for water, sewage, heat, gas, light, garbage, electricity, telephone, steam, power, or other public or private utility services. 7.2 ADDITIONAL CHARGES. In the event that any charge or fee is required after March 2, 1998 by the state in which the Demised Premises are located, or by any agency, subdivision or instrumentality thereof, or by any utility company furnishing services or utilities to the Demised Premises, or by any private association or organization with jurisdiction over the Demised Promises, as a condition precedent to furnishing or continuing to furnish utilities or services to the Demised Promises, such charge or fee shall be deemed to be a utility charge payable by Tenant. The provisions of this Section 7.2 shall include, but not be limited to, any charges or fees for future water or sewer capacity to serve the Demised Premises, any charges for the underground installation of gas or other utilities or services subsequent to the installation thereof, and other charges relating to the extension of or change in the facilities necessary to provide the Demised Premises with adequate utility services. In the event that Landlord has paid any such charge or fee after March 2, 1998, Tenant shall reimburse Landlord for such utility charge. 26 7.3 LANDLORD'S RESPONSIBILITY UTILITY HOOK-UP CHARGES AND FEES. Notwithstanding anything contained in this Article VII to the contrary, (a) as of March 2, 1998, all utilities contemplated by the Improvements shall be hooked-up and fully operational and functional to the Demised Premises and all capacity, hookup and similar charges shall have been paid by Landlord, except to the extent they constitute Excess Shell Costs or Excess Tenant Improvement Costs; and (b) if any utility or service charge or fee related to capital improvements made during the Term of this Lease, whose tax depreciable life extends beyond the termination date of this Lease, Tenant shall only pay the pro rata portion of such charge or fee to the extent that such tax depreciable life is within the Term of this Lease. ARTICLE VIII REPAIRS AND MAINTENANCE OF DEMISED PREMISES 8.1 TENANT'S RESPONSIBILITIES. Tenant shall, at its own expense, keep the Demised Premises, and every part thereof, including, but not limited to, the grounds, landscaped areas, truck parking and loading and dock areas, the roof surface and roof membrane, drainage swales, gutters, downspouts, glass, interior and exterior portions of the Buildings, and the plumbing, heating, air-conditioning, wiring, elevators and other mechanical systems therein, the facilities thereof and all sidewalks, parking areas, driveways, passageways and alleys adjacent thereto and other appurtenances thereunto belonging, in good order, appearance, condition and repair, free of obstructions, dirt, rubbish, snow and debris and so as to comply fully and at all times with all present and future applicable governmental laws, rules and regulations, and covenants, conditions and restrictions to which the Demised Premises are subject as of March 2, 1998, and consistent with other comparable properties in the Market Area. Tenant agrees to make all replacements and repairs to the Demised Premises necessary to maintain the Demised Premises in the condition described in the preceding sentence. Tenant, at its own expense, shall also seal (paint) the exterior of the Buildings periodically during the Term (including any Extension Term) of this Lease in accordance with the recommendations of the manufacturer of the material used for the exterior of said Buildings. Tenant shall maintain regular service contracts for all of the Demised Premises' (i) mechanical systems (including HVAC), (ii) roof surface and membrane, and (iii) elevator(s), and shall, upon Landlord's request, provide Landlord copies of such contracts or any other maintenance or service contracts maintained by Tenant with respect to the Demised Premises. Any such contract shall be terminable by Tenant (or its successors, including Landlord or a Lender) on not less than thirty (30) days notice to the contractor or shall provide that it does not bind a Lender. All repairs, replacements and renewals shall be at least equal in quality and class to the original work. Because Tenant is undertaking the responsibility for most aspects of the ongoing maintenance of the Demised Promises, and because this Lease contains specifically negotiated "self-help" provisions which allow Tenant, under certain circumstances, to effect repairs which are Landlord's responsibility and offset the cost of those repairs against Bass Rent, Tenant waives any provisions of California law with respect to Landlord's obligations for tenantability of the Demised Premises and Tenant's right to make repairs and deduct the expenses of such repairs from Rent. When used in this Article VIII, "repairs" shall include all necessary replacements, renewals, alterations, additions and betterments. 27 8.2 LANDLORD'S RESPONSIBILITIES; MANAGEMENT FEE. Landlord shall, at its own expense; maintain and keep in good order, condition and repair (i) the structural elements of the roof, (ii) exterior and load-bearing walls (except for painting which shall be Tenant's responsibility), (iii) the Buildings foundations and all underground utilities in good order, condition and repair, except to the extent of damage or failure caused by Tenant (e.g. malfunction of utilities caused by Tenant's use). In consideration of Landlord's responsibilities under this Section 8.2, Tenant shall pay Landlord, as Additional Rent, a monthly management fee equal to one percent (1%) of the then applicable monthly Base Rent, which payment shall be due with each monthly payment of Base Rent. In the event Landlord fails to maintain and keep in good order, condition and repair the above- referenced items, and if such failure continues for ten (10) business days following delivery of written notice by Tenant to Landlord (or such longer period as may be required to complete such repair if it is diligently and continuously pursued), Tenant may cause such item or repair or maintenance to be made and offset the cost thereof against the Base Rent next due. 8.3 SHARING OF EXPENSES OF CAPITAL ITEMS. Certain items of ongoing repair and maintenance which are Tenant's responsibility under Section 8.1, may, under generally acceptable accounting principles consistently applied, be considered to have a reasonable useful life which would extend beyond the end of the Term (a "Capital Item"). Landlord and Tenant shall share the expenses associated with such Capital Items, as follows: (a) Tenant shall pay all expenses related to Capital Items. (b) At any time Tenant intends to incur an expense related to a Capital Item, Tenant shall notify Landlord, in writing, and Landlord shall approve or disapprove such expenditure, which approval shall not be unreasonably withheld or delayed. Landlord shall not be required to approve any expenditure which is not required for the maintenance and operation of the Demised Promises. (c) At that time, Landlord and Tenant shall also agree on the "useful" life of the Capital Item and, shall determine a level per-year useful life allocation (the "Useful Life Allocation") of financial responsibility for that Capital Item. By way of example only, financial responsibility for a Capital Item which requires the expenditure of $50,000 and which has a five-year "useful" life would be assigned a $10,000 per year Useful Life Allocation. (d) The Useful Life Allocation shall be applied to the item of expense related to the Capital Item, until the full amount of such expense has been amortized, although Tenant shall have the responsibility for paying all expenses related to Capital Items when incurred. (e) If, at the end of the Term of Lease, including any Extension Term, there remains any unamortized Useful Life Allocation(s), Landlord shall, within thirty (30) days after the end of the Term, refund to Tenant, such unamortized Useful Life Allocations, in cash. 8.4 TENANT'S WAIVER OF CLAIMS AGAINST LANDLORD. Except as otherwise provided 28 in this Lease, Landlord shall not be required to furnish any services or facilities or to make any repairs or alterations in, about or to the Demised Premises or any improvements hereafter erected thereon and, subject to the same limitations, Tenant hereby assumes the full and sole responsibility for the condition, operation, repair, replacement, maintenance and management of the Demised Promises and all improvements hereafter erected thereon. 8.5 PROHIBITION AGAINST WASTE. Tenant shall not do or suffer any waste, damage, disfigurement or injury to the Demised Promises, or any improvements hereafter erected thereon, or to the fixtures or equipment therein, or permit or suffer any overloading of the floors or other use of the Improvements that would place an undue stress on the same or any portion thereof beyond that for which the same was designed. ARTICLE IX COMPLIANCE WITH APPLICABLE LAWS AND RESTRICTIONS 9.1 COMPLIANCE WITH APPLICABLE LAWS AND RESTRICTIONS. Throughout the Term of this Lease, and at Tenant's sole cost and expense, Tenant shall promptly comply or cause compliance with or remove or cure any violation caused by Tenant of any and all present and future laws, rules and regulations applicable to the Demised Premises and the appropriate departments, commissions, boards, associations and officers enforcing them, and the orders, rules and regulations of the Board of Fire Underwriters where the Demised Premises are situated, or any other governmental body now or hereafter constituted exercising lawful or valid authority over the Demised Premises, or any portion thereof, or exercising authority with respect to the use or manner of use of the Demised Premises, whether or not the compliance, curing or removal of any such violation and the costs and expenses necessitated thereby shall have been foreseen or unforeseen, ordinary or extraordinary, and whether or not the same shall be presently within the contemplation of Landlord or Tenant or shall involve any change of governmental policy or require structural or extraordinary repairs, alterations or additions by Tenant and irrespective of the costs thereof. Tenant shall also comply with, observe and perform all provisions and requirements of all policies of insurance at any time in force with respect to the Demised Premises and required to be obtained and maintained under the terms of Article VI hereof, and Tenant shall comply with all development permits issued by governmental authorities issued in connection with development of the Demised Premises, copies of which shall be supplied to Tenant by Landlord promptly after issuance. Tenant acknowledges that the Land, and thereby the Demised Premises, are or shall be subject to the following additional covenants, restrictions and conditions with which Tenant shall comply throughout the term of this Lease to the same extent as provided above with the covenants, conditions, restrictions, easements and other matters of record as of the date of this Lease. Furthermore, Tenant acknowledges that after the execution of this Lease it is Landlord's intention to allow the Land to be included within the Sorrento Rim Business Park (the "Business Park") and an association of owners of nearby property which is currently expected to be known as the "Sorrento Rim Owner's Association" (the "Association"). Tenant has previously reviewed drafts of the Articles of Incorporation and Bylaws of the Association and a draft of the Declaration of Covenants, 29 Conditions and Restrictions for the Business Park and hereby agrees that this Lease shall be subject to covenants, conditions and restrictions on substantially the same terms as the CC&R's and will execute such documents as may be reasonably necessary to subject this Lease thereto. 9.2 TENANT'S OBLIGATIONS. Notwithstanding that it may be usual and customary for Landlord to assume responsibility and performance of any or all of the obligations set forth in this Article IX, and notwithstanding any order, rule or regulation directed to Landlord to perform, Tenant hereby assumes such obligations because, by nature of this Lease, or as expressly provided under any other provision hereof, the rents and income derived from this Lease by Landlord are "net" rentals not to be diminished by any expense incident to the ownership, occupancy, use, leasing or possession of the Demised Premises or any portion thereof (except as expressly provided in this Lease). 9.3 TENANT'S RIGHT TO CONTEST LAWS AND ORDINANCES. After prior written notice to Landlord, Tenant, at its sole cost and expense and without cost or expense to Landlord, shall have the right to contest the validity or application of any Applicable Laws or Restrictions in the name of Tenant or Landlord, or both, by appropriate legal proceedings diligently conducted but only if compliance with the terms of any such law or ordinance pending the prosecution of any such proceeding, may legally be delayed without incurring of any material lien, charge or liability of any kind against the Demised Premises, or any portion thereof, and without subjecting Landlord or Tenant to any material liability, civil or criminal, for failure so to comply therewith until the final determination of such proceeding; provided, however, if any lien, charge or civil liability would be incurred by reason of any such delay, Tenant nevertheless, on the prior written consent of Landlord, which consent shall not be unreasonably withheld, may contest as aforesaid and delay as aforesaid, provided that such delay would not subject Tenant or Landlord to criminal liability and Tenant (a) furnishes Landlord security, reasonably satisfactory to Landlord, against any loss or injury by reason of any such contest or delay, (b) prosecutes the contest with due diligence and in good faith, and (c) agrees to indemnify, defend and hold harmless Landlord and the Demised Premises from any charge, liability or expense whatsoever. The security furnished to Landlord by Tenant shall be in the form of a cash deposit or a Certificate of Deposit issued by a national bank or federal savings and loan association payable to Landlord. Said deposit shall be held, administered and distributed in accordance with the provisions of Section 5.2 hereof relating to the contest of the amount or validity of any Imposition. If necessary or proper to permit Tenant so to contest the validity or application of any such law or ordinance, Landlord shall, at Tenant's sole cost and expense, including reasonable attorneys' fees incurred by Landlord, execute and deliver any appropriate papers or other documents; provided, however, that Landlord shall not be required to execute any document or consent to any proceeding which would result in the imposition of any cost, charge, expense or penalty on Landlord or the Demised Premises. ARTICLE X MECHANIC'S LIENS AND OTHER LIENS 30 10.1 MECHANIC'S LIENS. (a) Tenant shall keep the Demised Premises free from any liens arising out of work performed, materials furnished and obligations incurred by Tenant. Tenant covenants and agrees that any mechanic's lien filed against the Demised Premises for work claimed to have been done for, or materials claimed to have been furnished to, Tenant shall be discharged by Tenant, by bond or otherwise, within thirty (30) days after the filing thereof, at the sole cost and expense of Tenant. This provision does not apply to any claim or lien arising out of the original construction of the Demised Premises by Landlord pursuant to this Lease. (b) Tenant shall have the right to contest with due diligence the validity or amount of any lien or claimed lien created by Tenant if Tenant shall give to Landlord such security as Landlord may reasonably require to insure payment thereof and prevent any sale, foreclosure or forfeiture of the Demised Premises or any portion thereof by reason of such nonpayment. On final determination of the lien or claim for lien, Tenant shall immediately pay any judgment rendered with all proper costs and charges and shall have the lien released or judgment satisfied at Tenant's own expense, and if Tenant shall fail to do so, Landlord may at its option, pay any such final judgment and clear the Demised Premises therefrom. If Tenant shall fail to contest with due diligence the validity or amount of any such lien or claimed lien created by Tenant, or to give Landlord security as hereinabove provided, Landlord may, but shall not be required to, contest the validity or amount of any such lien or claimed lien or settle or compromise the same without inquiring into the validity of the claim or the reasonableness of the amount thereof. Should any lien be filed against the Demised Premises or should any action of any character affecting the title thereto be commenced, Tenant shall give to Landlord written notice thereof as soon as notice of such lien or action comes to the knowledge of Tenant. (c) Should Tenant fail to discharge any such lien, Landlord may, at Landlord's election, pay such claim or post a bond or otherwise provide security to eliminate the lien as a claim against title, and the cost thereof shall be immediately due from Tenant as Additional Rent. Tenant shall not suffer or permit any mechanic's lien or other lien to be filed against the Demised Premises, or any portion thereof, by reason of work, labor, skill, services, equipment or materials supplied or claimed to have been supplied to the Demised Premises at the request of Tenant, or anyone holding the Demised Premises, or any portion thereof, through or under Tenant. (d) All materialmen, contractors, artisans, mechanics, laborers and any other person now or hereafter furnishing any labor, services, materials, supplies or equipment to Tenant with respect to the Demised Premises, or any portion thereof, are hereby charged with notice that they must look exclusively to Tenant to obtain payment for the same. Notice is hereby given that Landlord shall not be liable for any labor, services, materials, supplies, skill, machinery, fixtures or equipment furnished or to be furnished to Tenant upon credit, and that no mechanic's lien or other lien for any such labor, services, materials, supplies, machinery, fixtures or equipment shall attach to or affect the estate or interest of Landlord in and to the Demised Promises or any portion thereof. 31 10.2 LANDLORD'S INDEMNIFICATION. The provisions of Section 10. 1 above shall not apply to any mechanic's lien or other lien for labor, services, materials, supplies, machinery, fixtures or equipment furnished to the Demised Premises in the performance of Landlord's obligations to construct the Improvements required by the provisions of Article 11 hereof or in the performance of Landlord's other obligations under this Lease, and Landlord does hereby agree to indemnify and defend Tenant against and save Tenant and the Demised Premises and any portion thereof harmless from all losses, costs, damages, expenses, liabilities and obligations, including, without limitation, reasonable attorneys' fees resulting from the assertion, filing, foreclosure or other legal proceedings with respect to any such mechanic's lien or other lien. 10.3 REMOVAL OF LIENS. Except as otherwise provided for in this Article X, Tenant shall not create, permit or suffer, and shall promptly discharge and satisfy of record, any other lien, encumbrance, charge, security interest or other right or interest which shall be or become a lien, encumbrance, charge or security interest upon the Demised Premises, or any portion thereof, or the income therefrom, or on the interest of Landlord or Tenant in the Demised Premises, or any portion thereof, if such lien, encumbrance, charge, security interest or other right or interest shall result from the actions of Tenant or others acting on the behalf of or for Tenant (other than Landlord). ARTICLE XI LANDLORD'S PERFORMANCE OF TENANT'S OBLIGATIONS In the event Tenant fails to pay or discharge any Additional Obligation, Landlord may, but shall not be obligated to, in addition to its remedies in an Event of Default, provide a factually correct written notice of such failure, and if Tenant still fails to cure such failure within ten (10) days after Tenant's receipt of such notice, Landlord may pay or perform the same, and in that event Tenant shall within ten (10) days after invoice reimburse Landlord therefor (together with interest at the Maximum Rate of Interest from the date Landlord made such payment), which amount shall be deemed Additional Rent; provided, however, that Landlord shall be entitled to pay such amount without prior notice to Tenant if Landlord reasonably believes that any further delay would expose Landlord or the Demised Premises to (i) substantial civil or criminal penalties, (ii) a potential default under a mortgage, deed of trust or similar obligation, or (iii) lack of insurance coverage as required hereunder, or is otherwise an emergency. Nothing herein contained shall be deemed as a waiver or release of Tenant from any obligation of Tenant contained in this Lease. ARTICLE XII DEFAULTS OF TENANT 12.1 EVENTS OF DEFAULT. Any one or more of the following events shall be an event of default by Tenant ("Event of Default") under this Lease: (a) Tenant fails to pay any Base Rent or Additional Rent or any other sum 32 required by this Lease to be paid by Tenant when the same becomes due and payable and five (5) days has elapsed following written notice from Landlord of such failure to pay; or (b) Tenant fails to perform or comply with any other term hereof, and such failure shall continue for more than ten (10) days after notice thereof from Landlord, and Tenant shall not within such period commence with due diligence and dispatch the curing of such default, or, having so commenced, shall thereafter fail or neglect to prosecute or complete with due diligence and dispatch the curing of such default; or (c) Tenant makes a general assignment for the benefit of creditors or admits in writing its inability to pay its debts as they become due or files a petition in bankruptcy, or is adjudicated a bankrupt or insolvent, or files a petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law, or regulation, or files an answer admitting or fails to reasonably contest the material allegations of a petition filed against it in any such proceeding, or seeks or consents to or acquiesce in the appointment of any trustee, receiver or liquidator of Tenant or any material part of its properties; or (d) Within ninety (90) days after the commencement of any proceeding against Tenant seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding has not been dismissed, or if, within ninety (90) days after the appointment without the consent or acquiescence of Tenant, of any trustee, receiver or liquidator of Tenant or of any material part of its properties, such appointment has not been vacated; or (e) Tenant permits the abandonment or non-occupancy of the Demised Premises; or (f) Tenant sublets, assigns, mortgages, pledges, transfers or otherwise encumbers or disposes of its interest in the Demised Premises or this Lease, in whole or in part, in violation of Section 15.1 hereof; or (g) Any default under any Guaranty delivered to Landlord hereunder. 12.2 LANDLORD'S REMEDIES. Upon the occurrence of an Event of Default, Landlord, at its option, without further notice or demand to Tenant, shall have, in addition to all other rights and remedies provided in this Lease, at law or in equity, the option to pursue any one or more of the following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever: (a) Terminate this Lease, in which event Tenant shall immediately surrender the Demised Promises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in Base Rent or Additional Rent, enter 33 upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying the Demised Premises or any part thereof, without being liable for prosecution or any claim or damages therefor; and Landlord may recover from Tenant the following: (i) The worth at the time of award of any unpaid Base Rent and Additional Rent which has been earned at the time of such termination; plus (ii) The worth at the time of award of the amount by which the unpaid Base Rent and Additional Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iii) The worth at the time of award of the amount by which the unpaid Base Rent and Additional Rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iv) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom; and (v) Such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. (b) If Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all Base Rent and Additional Rent as they become due. (c) The term "Rent" as used in this Section 12.2 shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others. As used in subsections (i) and (ii), above, the "worth at the time of award' shall be computed at the Maximum Rate of Interest. As used in subsection (iii), above, the "worth at the time of award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Nothing herein shall be deemed to relieve Landlord of its obligation to mitigate its damages following an Event of Default. 12.3 NEW LEASE FOLLOWING TERMINATION. In the event Landlord elects to terminate this Lease and relet the Premises, it may execute any new lease in its own name. Tenant hereunder shall have no right or authority whatsoever to collect any Base Rent, Additional Rent or other sums from such tenant. The proceeds of any such reletting shall be applied as follows: (a) First, to the payment of any indebtedness other than Base Rent or Additional 34 Rent due hereunder from Tenant to Landlord, including but not limited to storage charges or brokerage commissions owing from Tenant to Landlord as the result of such reletting; (b) Second, to the payment of the costs and expenses of reletting the Premises, including alterations and repairs which Landlord deems reasonably necessary and advisable, and reasonable attorneys' fees incurred by Landlord in connection with the retaking of the Demised Premises and such reletting; (c) Third, to the payment of Base Rent, Additional Rent and other charges due and unpaid hereunder; and (d) Fourth, to the payment of future Base Rent, Additional Charges and other damages payable by Tenant under this Lease. 12.4 CUMULATIVE RIGHTS; NO WAIVER. All rights, options and remedies of Landlord contained in this Lease shall be construed and held to be non-exclusive and cumulative. Landlord shall have the right to pursue any or all of such remedies or any other remedy or relief which may be provided by law, whether or not stated in this Lease. No waiver of any Event of Default of Tenant hereunder shall be implied from the acceptance by Lender of any payments due hereunder (except with respect to the amount so collected) or any omission by Landlord party to take any action on account of such Event of Default if such Event of Default persists or is repeated, and no express waiver shall affect defaults other than as specified in said waiver. 12.5 SURRENDER OF DEMISED PREMISES. Upon any expiration or termination of this Lease, Tenant shall quit and peaceably surrender the Demised Premises and all portions thereof to Landlord, and Landlord may, upon or at any time after any such expiration or termination and without further notice, enter upon and reenter the Demised Premises and all portions thereof and possess and repossess itself thereof by force, summary proceeding, ejectment or otherwise, and may dispossess Tenant and remove Tenant and all other persons and property from the Demised Premises and all portions thereof and may have, hold and enjoy the Demised Premises and the right to receive all rental and other income of and from the same. 12.6 INTEREST ON UNPAID AMOUNTS. If Tenant shall commit an Event of Default, Landlord may cure the same, but shall not be required to do so, and in exercising any such right, may employ counsel and pay necessary and incidental costs and expenses, including reasonable attorneys' fees. All reasonable sums so paid by Landlord, and all reasonable and necessary costs and expenses, including reasonable attorneys' fees, in connection with the performance of any such act by Landlord, together with interest thereon at the Maximum Rate of Interest from the date of making such expenditure by Landlord, shall be deemed Additional Rent hereunder and, except as is otherwise expressly provided herein, shall be payable to Landlord within ten (10) days after written demand, and Tenant covenants to pay any such sum or sums, with interest as aforesaid, and Landlord shall have, in addition to any other right or remedy of Landlord, the same rights and remedies in the event of nonpayment thereof by Tenant as in the case of default by Tenant in the payment of monthly Base. 35 Rent. Landlord shall not be limited in the proof of any damages which Landlord may claim against Tenant arising out of or by reason of Tenant's failure to provide and keep in force insurance as aforesaid, to the amount of the insurance premium or premiums not paid or not incurred by Tenant, and which would have been payable upon such insurance, but Landlord shall also be entitled to recover as damages for such breach the uninsured amount of any loss (to the extent of any deficiency between the dollar limits of insurance required by the provisions of this Lease and the dollar limits of the insurance actually carried by Tenant) and reasonable costs and expenses, including reasonable attorneys' fees, suffered or incurred by reason thereof occurring during any period when Tenant shall have failed or neglected to provide insurance as aforesaid. ARTICLE XIII DESTRUCTION AND RESTORATION 13.1 DESTRUCTION AND RESTORATION. (a) Tenant covenants and agrees that, in case of damage to or destruction of the Improvements during the Term, whether by fire or otherwise, subject to the provisions of subsection (b), below, Tenant shall make sufficient funds available to Landlord, and subject to Tenant providing such sufficient funds, Landlord shall promptly restore, repair, replace and rebuild the same as nearly as possible to the condition that the same were in immediately prior to such damage or destruction with such changes or alterations as may be reasonably acceptable to Landlord and Tenant or required by Applicable Land Use Laws and Restrictions then in effect. Tenant shall immediately give Landlord written notice of such damage or destruction upon Tenant's or any assignee's or subtenant's knowledge of the occurrence thereof and specify in such notice, in reasonable detail, the extent thereof. Such restorations, repairs, replacements, rebuilding, changes and alterations, including the cost of temporary repairs for the protection of the Demised Premises, or any portion thereof, pending completion thereof are sometimes hereinafter referred to as the "Restoration." Landlord shall be entitled to recover all "soft" costs incurred in connection with Landlord's performance of the Restoration including a fee competitive with others providing similar services. The Restoration shall be carried on and completed in accordance with the provisions and conditions of Section 13.2 hereof. (b) If the amount of the insurance proceeds recovered from the policy or policies maintained (or required to be maintained) by Tenant, as described in Article VI of this Lease, is reasonably deemed insufficient by a qualified contractor, reasonably acceptable to Tenant and Landlord (or Landlord's lender, as the case may be) to complete the Restoration of such Improvements (exclusive of Tenant's personal property and trade fixtures which shall be restored, repaired or rebuilt, at Tenant's discretion, out of Tenant's separate funds), Tenant shall, upon request of Landlord (or by Landlord's lender, as the case may be), deposit with Landlord (or Landlord's Lender or insurance carrier, if required) a cash deposit equal to fifty percent (50%) of W the reasonable estimate of the amount necessary to complete the Restoration of such Improvements less (ii) the amount of such insurance proceeds available (the "UNFUNDED RESTORATION COST"), with Landlord being responsible for the remaining fifty percent (50%) of the Unfunded Restoration Cost; 36 provided that Landlord shall have no responsibility for any Unfunded Restoration Cost and Tenant shall be fully responsible for any Unfunded Restoration Cost to the extent fl) it is the result of Tenant's failure to maintain the insurance required to be maintained pursuant to Article VI hereof, (i) sufficient insurance proceeds are not available due to an act or omission by Tenant, or (iii) the amount of the Unfunded Restoration Cost is less than Fifty Thousand Dollars ($50,000). Notwithstanding the foregoing, if Landlord is prohibited from effecting the Restoration of the Demised Premises due to applicable governmental laws, rules or regulations then in effect, Landlord shall not be required to effect such Restoration and this Lease shall terminate. The provisions of this Article XIII shall be subject to and superseded by the contrary requirements of any Lender as contained in any mortgage, deed of trust, ground lease or similar instrument of which Tenant has actual or constructive notice. 13.2 APPLICATION OF INSURANCE PROCEEDS. (a) All moneys recovered from the insurance policy or policies maintained (or required to be maintained) by Tenant, shall be paid directly to Landlord (or hold by Landlord's lender, if required) on account of such damage or destruction. Such amounts, less the reasonable costs, if any, incurred by Landlord in recovering such funds, shall be applied to the payment of the costs of the Restoration and shall be paid out from time-to-time as the Restoration progresses upon the written request of Tenant, accompanied by a certificate of the architect or a qualified professional engineer in charge of the Restoration stating that as of the date of such certificate (a) the sum requested is justly due to the contractors, subcontractors, materialmen, laborers, engineers, architects, or persons, firms or corporations furnishing or supplying work, labor, services or materials for such Restoration, and when added to all sums previously paid out does not exceed the value of the Restoration performed to the date of such certificate by all of said parties; M except for the amount, if any, stated in such certificates to be due for work, labor, services or materials, there is no outstanding indebtedness known to the person signing such certificate, after due inquiry, which is then due for work, labor, services or materials in connection with such Restoration, which, if unpaid, might become the basis of a mechanic's lien or similar lien with respect to the Restoration or a lien upon the Demised Premises, or any portion thereof; and (c) the costs, as estimated by the person signing such certificate, of the completion of the Restoration required to be done subsequent to the date of such certificate in order to complete the Restoration do not exceed the sum of the remaining insurance moneys, plus the amount deposited by the parties (as applicable) after payment of the sum requested in such certificate. (b) Subject to the provisions of Section 13.1 (b), hereof, if the insurance moneys and such other sums, if any, deposited with Landlord (or with Landlord's lender) pursuant to Section 13.1 (a) or (b) hereof, shall be insufficient to pay the entire costs of the Restoration, Tenant agrees to pay any deficiency promptly upon demand. Upon completion of the Restoration and payment in full thereof by Tenant, Landlord shall, within a reasonable period of time, turn over to Tenant all insurance moneys or other moneys then remaining upon the parties' joint, good-faith determination that the Restoration has been paid for in full and the damaged or destroyed Buildings and other Improvements repaired, restored or rebuilt as nearly as possible to the condition they were in 37 immediately prior to such damage or destruction, or with such changes or alterations as may be made in conformity with Section 13.1 and Article XIX hereof. 13.3 CONTINUANCE OF TENANT'S OBLIGATIONS. Except as provided for in this Section 13.3 and in Section 13.6, no destruction of or damage to the Demised Premises, or any portion thereof, by fire, casualty or otherwise shall permit Tenant to surrender this Lease or shall relieve Tenant from its liability to pay to Landlord the Base Rent and Additional Rent payable under this Lease or from any of its other obligations under this Lease, and Tenant waives any rights now or hereafter conferred upon Tenant by present or future law or otherwise to quit or surrender this Lease or the Demised Premises, or any portion thereof, to Landlord or to any suspension, diminution, abatement or reduction of rent an account of any such damage or destruction. 13.4 AVAILABILITY OF INSURANCE PROCEEDS. To the extent that any insurance moneys which would otherwise be payable and used in the Restoration of the damaged or destroyed Improvements are paid to any mortgagee of Landlord and applied in payment of or reduction of the sum or sums secured by any such mortgage or mortgages made by Landlord on the Demised Premises, Landlord shall make available, for the purpose of Restoration of such Improvements, an amount equal to the amount payable to its mortgagee out of such proceeds, and such sum shall be applied in the manner provided in Section 13.2 hereof. 13.5 COMPLETION OF RESTORATION. The foregoing provisions of this Article XIII apply only to damage or destruction of the Improvements by fire, casualty or other cause occurring after March 2, 1998. Any such damage or destruction occurring prior to such time shall be restored, repaired, replaced and rebuilt by Landlord. 13.6 TERMINATION OF LEASE. If, within twelve (12) months prior to the expiration of the term of this Lease, the Improvements shall be destroyed or damaged to such an extent that the Restoration thereof is reasonably estimated to take more than sixty (60) days to complete, Tenant shall compute the amount of the net proceeds of the insurance resulting therefrom (to be collected and held by Landlord (or Landlord's lender)), and, provided that no Event of Default of Incipient Default is then in existence, and further provided that Tenant has fully and properly maintained the insurance required to be maintained hereunder, if Tenant shall be unable or unwilling to restore such damage or destruction for occupancy by Tenant, Tenant shall, within thirty (30) days following the occurrence of such destruction or damage, notify Landlord, in writing, of such fact, which notice shall be accompanied by a detailed statement of the nature and extent of such damage or destruction, detailed estimates of the total cost of Restoration, a statement of the amount which may be required to restore such damage or destruction, and a statement of the amount of insurance proceeds which will be available to restore such damage or destruction. Tenant shall hive the option, at that time, to terminate this Lease and surrender the Demised Premises to Landlord by a notice, in writing, addressed to Landlord, specifying such election accompanied by Tenant's payment of the balance of the Base Rent and Additional Rent due for the remainder of the term of this Lease and other charges hereafter specified in this Section 13.6, provided that Tenant shall be entitled to a credit against such amount for the amount of loss of use and business interruption insurance Tenant which 38 is or will be actually paid to Landlord. Upon the giving of such notice and the payment of such amounts (or evidence that such payment will be made), the term of this Lease shall cease and come to an end on a day to be specified in Tenant's notice, which date shall not be more than thirty (30) days after the date of delivery of such notice by Tenant to Landlord. In such event Landlord shall be entitled to the proceeds of all insurance required to be maintained by Tenant hereunder and Tenant shall execute all documents reasonably requested by Landlord to allow such proceeds to be paid to Landlord or as Landlord may otherwise direct (e.g. to Landlord's lender). ARTICLE XIV CONDEMNATION 14.1 CONDEMNATION OF ENTIRE DEMISED PREMISES. If, during the Initial Term of this Lease or any extension or renewal thereof, the entire Demised Premises or the entire Buildings shall be taken as the result of the exercise of the power of eminent domain (hereinafter referred to as the "Proceedings"), this Lease and all right, title and interest of Tenant hereunder shall cease and come to an end on the date of vesting of title pursuant to such Proceedings. In any taking of the Demised Premises, or any portion thereof, whether or not this Lease is terminated as in this Article provided, Tenant shall not be entitled to any portion of the award for the taking of the Demised Premises or damage to the Improvements, except as otherwise provided in Section 14.3 with respect to the restoration of the Improvements, and Tenant hereby waives any right it now has or may have under present or future law to receive any separate award of damages for its interest in the Demised Promises or any portion thereof, except that Tenant shall have, nevertheless, the limited right to prove in the Proceedings and to receive any award which may be made for damages to or condemnation of Tenant's movable trade fixtures and equipment or alterations to the Demised Premises for which Tenant has directly paid (i.e. not Tenant Improvements paid for with the Tenant Improvements Allowance), for goodwill, and for Tenant's relocation costs in connection therewith. 14.2 PARTIAL CONDEMNATION/TERMINATION OF LEASE. If, during the Term of this Lease, an amount of the entire Demised~ Premises is taken in a Proceeding which is less than the entire Demised Premises but is so much that the utility and functionality of the Demised Premises for Tenant's intended use (as described in Section 4. 1, hereof) is materially and adversely affected (including as a result of the taking of a portion of the area of the Demised Premises used for vehicular parking), notwithstanding the restoration of the Demised Premises as provided below, Tenant may, at its option, and subject to the requirements of this Section 14.2 terminate this Lease as to the remainder of the Demised Premises not so taken. Notwithstanding the foregoing, Tenant shall not have the right to terminate this Lease pursuant to the preceding sentence unless (a) the business of Tenant conducted in the portion of the Demised Premises taken cannot reasonably be carried on with substantially the same utility and functionality in the remainder of the Demised Promises, and (b) Tenant (or Landlord for Tenant) cannot construct or secure on the Demised Premises substantially similar space to the space so taken and as a substantially integrated whole with the remaining portion of the Demised Promises. Furthermore, Tenant may terminate this Lease following such a taking if (i) the remainder of the Demised Premises cannot be restored as described 39 in this Section 14.2 within one hundred eighty 0 80) days, or (ii) Tenant is deprived of the use of the Demised Premises for more than ninety (90) consecutive days, following the date of vesting of title in such Proceedings. Such termination as to the remainder of the Demised Premises shall be effected by notice in writing given not more than thirty (30) days after the date of vesting of title in such Proceedings, and shall specify a date no more than thirty (30) days after the giving of such notice as the date for such termination. Upon the date specified in such notice, the Term of this Lease, and all right, title and interest of Tenant hereunder, shall cease and come to an and. If this Lease is terminated as provided in this Section 14.2, Landlord shall be entitled to and shall receive the total award made in such Proceedings, Tenant hereby assigning any interest in such award, damages, and compensation to Landlord, and Tenant hereby waiving any right Tenant now has or may have under present or future law to receive any separate award of damages for its interest in the Demised Premises or any portion thereof or its interest in this Lease, except as otherwise provided in Section 14.1. The right of Tenant to terminate this Lease as provided in this Section 14.2, shall not cure or otherwise release Tenant from any then existing breach of Tenant's performance of any of the terms, covenants or conditions of this Lease an its part to be performed. In the event that Tenant elects not to terminate this Lease as to the remainder of the Demised Premises, the rights and obligations of Landlord and Tenant shall be governed by the provisions of Section 14.3 hereof. 14.3 PARTIAL CONDEMNATION /CONTINUATION OF LEASE. If this Lease is not terminated as provided in Section 14.2 hereof, then this Lease shall, upon vesting of title in the Proceedings, terminate as to the parts so taken, and Tenant shall have no claim or interest in the award, damages, consequential damages and compensation, or any part thereof except as otherwise provided in Section 14.1, Tenant hereby waiving any right Tenant now has or may have under present or future law to receive any separate award of damages for its interest in the Demised Premises or any portion thereof or its interest in this Lease, except as otherwise provided in Section 14.1 and except that Tenant shall have the right to apply to Landlord for reimbursement as hereinafter provided from such funds as specified in this Section 14.3. The net amount of the award (after deduction of all costs and expenses, including attorneys' fees) shall be held by Landlord (or Landlord's lender) and applied as hereinafter provided. Landlord, in such case, covenants and agrees, at Landlord's sole cost and expense promptly to restore that portion of the Improvements on the Demised Premises not so taken to a complete architectural and mechanical unit for the use and occupancy of Tenant as provided in this Lease. In the event that the net amount of the award (after deduction of all costs and expenses, including attorneys' fees) that may be received by Landlord in any such Proceedings for physical damage to the Improvements as a result of such taking, and held by Landlord (or Landlord's lender) for restoration of the Demised Premises, is insufficient to pay all costs of such restoration work, Landlord shall pay the difference. Tenant shall not be liable for any additional sum. 14.4 CONTINUANCE OF OBLIGATIONS. In the event of any termination of this Lease or any part thereof as a result of any such Proceedings, Tenant shall pay to Landlord all Base Rent, all Additional Rent and other charges payable hereunder with respect to that portion of the Demised Premises so taken in such Proceedings with respect to which this Lease shall have terminated justly apportioned to the date of such termination. From and after the date of vesting of possession in such Proceedings, Tenant shall continue to pay the Base Rent, Additional Rent and other charges payable 40 hereunder as in this Lease provided to be paid by Tenant, subject to an abatement of a just and proportionate part of the Base Rent according to the extent and nature of such taking as provided for in Sections 14.3 and 14.5 hereof in respect to the Demised Premises remaining after such taking. 14.5 ADJUSTMENT OF RENT. In the event of a partial taking of the Demised Premises under Sections 14.2 or 14.3 hereof in which case this Lease is not terminated, the Base Rent for the period from and after the date of vesting of title in such Proceedings, until the termination of this Lease, shall be reduced to a sum equal to the product of the Base Rent provided for herein multiplied by a fraction, the numerator of which is the total square footage of the Buildings after such taking and after the same shall have been restored to a complete architectural unit, and the denominator of which is the total square footage of the Buildings prior to such taking. ARTICLE XV ASSIGNMENT, SUBLETTING, ETC. 15.1 RESTRICTION ON TRANSFER. Tenant shall not sublet the Demised Premises or any portion thereof, nor assign, mortgage, pledge, transfer or otherwise encumber or dispose of this Lease or any interest therein, or in any manner assign, mortgage, pledge, transfer or otherwise encumber or dispose of its interest or estate in the Demised Premises or any portion thereof (a - -Transfer") without obtaining Landlord's prior written consent in each and every instance. For purposes of this Lease a Transfer shall be deemed to include 0) any sale or similar transfer of more than fifty percent (50%) of the outstanding voting securities of Tenant, or (ii) a sale of substantially all of the assets of Tenant. Landlord's consent to a Transfer under this Section 15. 1 shall not be unreasonably withheld or delayed, provided the following conditions are complied with: (a) Any Transfer of this Lease shall transfer to the assignee all of Tenant's right, title and interest in this Lease and all of Tenant's estate or interest in the Demised Premises. (b) At the time of any Transfer and at the time Tenant requests Landlord's written consent thereto, this Lease must be in full force and effect without any uncured Event of Default or Incipient Default thereunder on the part of Tenant. (c) Any such transferee shall assume, by written, recordable instrument, in form and content satisfactory to Landlord, the due performance of all of Tenant's obligations under this Lease from and after the time of the effective date of the assignment, and such assumption agreement shall state that the same is made by the transferee for the express benefit of Landlord as a third party beneficiary thereof. A copy of the assignment and assumption agreement, both in form and content satisfactory to Landlord, fully executed and acknowledged by transferee, together with a certified copy of a properly executed corporate resolution (if the transferee be a corporation) authorizing the execution and delivery of such assumption agreement, shall be sent to Landlord ten (10) days prior to the effective date of such assignment. No Transfer shall relieve Tenant from any of Tenant's obligations contained in this Lease and Tenant shall remain fully liable hereunder. 41 (d) In the case of a subletting, a copy of any sublease fully executed and acknowledged by Tenant and the sublessee shall be mailed to Landlord ten (10) days prior to the effective date of such subletting, which sublease shall be in form and content acceptable to Landlord. Each sublease permitted under this Section 15.1 shall contain provisions to the effect that (i) such sublease is only for actual use and occupancy by the sublessee; (i) such sublease is subject and subordinate to all of the terms, covenants and conditions of this Lease and to all of the rights of Landlord thereunder; and (iii) in the event this Lease shall terminate before the expiration of such sublease, the sublessee thereunder will, at Landlord's option, attorn to Landlord and waive any rights the sublessee may have to terminate the sublease or to surrender possession thereunder as a result of the termination of this Lease. (e) Any and all compensation paid to Tenant, in whatever form, in consideration of such Transfer, including any differential between Base Rent and rent paid to Tenant by such transferee, or any assignment fee or any other amount which can be attributed to the Transfer shall be paid directly by such transferee to Landlord. (f) Tenant agrees to pay on behalf of Landlord any and all reasonable costs of Landlord, including reasonable attorneys' fees paid or payable to outside counsel, occasioned by such assignment or subletting. 15.2 TRANSFER TO AFFILIATES; SALE OR MERGER; COLLATERAL ASSIGNMENT. Notwithstanding the foregoing provisions of Section 15.1, Tenant shall be permitted to assign its rights under this Lease, without prior consent, in connection with (i) an initial public offering of Tenant's stock, (ii) the sale or transfer of substantially all of the assets of Tenant or the merger of Tenant into another entity, provided the buyer, transferee or merged entity has a shareholder's equity which is, as of the date of such sale or transfer, at least as much as is Tenant's as of the date of this Lease and has a shareholder's equity-to-debt ratio of no less than 1:1, or (iii) the granting of a security interest in, or a collateral assignment of, Tenant's rights under this Lease in connection with indebtedness incurred by Tenant to a bona fide third party lender in an arms-length transaction, provided, that in any such case Tenant shall be required to give Landlord written notice of that assignment or subletting within thirty (30) days thereafter, including written evidence of the identity of the assignee or sublessee (actual or deemed) and, if applicable, its affiliation with Tenant and the terms Of such assignment. On the foreclosure or assignment-in-lieu of foreclosure of a collateral assignment (e.g. leasehold deed of trust) of Tenant's interest in this Lease (as permitted above), Landlord shall enter into a new lease ("Now Lease") with the successor to Tenant's interest in this Lease ("Successor") on the same terms and conditions expressed in this Lease, effective as of the date of the foreclosure or assignment-in-lieu of foreclosure, and for the balance of the Term thereafter, provided the Successor also executes the New Lease. No Transfer under this Section 15.2 shall relieve Tenant from any of Tenant's obligations contained in this Lease and Tenant shall remain fully liable hereunder. 15.3 RESTRICTION AGAINST FURTHER ASSIGNMENT. Notwithstanding anything contained in this Lease to the contrary and notwithstanding any consent by Landlord to any Transfer of Tenant's 42 interest in the Demised Premises or any portion thereof or to any assignment of this Lease or of Tenant's interest or estate in the Demised Premises, except as provided in Sections 15.1 and 15.2 above, no sublessee shall assign its sublease nor further sublease the Demised Premises or any portion thereof, and no assignee shall further assign its interest in this Lease or its interest or estate in the Demised Premises or any portion thereof, nor sublease the Demised Premises or any portion thereof, without Landlord's prior written consent in each and every instance, which consent shall be granted or withheld in Landlord's reasonable discretion. 15.4 TENANT'S FAILURE TO COMPLY. Tenant's failure to comply with all of the foregoing provisions and conditions of this Article XV shall, at Landlord's option, render any purported assignment or subletting null and void and of no force and effect. ARTICLE XVI SUBORDINATION, NONDISTURBANCE, NOTICE TO MORTGAGEE AND ATTORNMENT 16.1 SUBORDINATION BY TENANT. This Lease and all rights of Tenant therein and all interest or estate of Tenant in the Demised Premises or any portion thereof shall be subject and subordinate to the lien of any mortgage, dead of trust, security instrument or other document of like nature (collectively, "Mortgage"), which at any time after the date of this Lease may be placed upon the Demised Premises or any portion thereof, and to each and every advance made under any such Mortgage. Tenant agrees at any time hereafter, to execute and deliver to Landlord any instruments, releases or other documents that may be reasonably required for the purpose of subjecting and subordinating this Lease to the lien of any such Mortgage. It is agreed, nevertheless, that so long as an Event of Default does not exist, that such subordination agreement or other instrument, release or document shall not interfere with, hinder or molest Tenant's right to quiet enjoyment under this Lease, shall not modify the terms of this Lease, nor the right of Tenant to continue to occupy the Demised Premises and all portions thereof, and to conduct its business thereon in accordance with the covenants, conditions, provisions, terms and agreements of this Lease. The lien of any such Mortgage shall not cover Tenant's trade fixtures or other personal property located in or on the Demised Premises. Landlord shall deliver to Tenant a commercially reasonable nondisturbance agreement executed by all lenders having a lien on the Demised Premises on March 2, 1998 as a condition precedent in Tenant's favor, and from each future lender as a condition to Tenant's subordination or attornment hereunder. 16.2 LANDLORD'S DEFAULT. In the event of any act or omission of Landlord constituting a default by Landlord, other than Landlord's failure to have the Improvements substantially completed on a timely basis as provided in Article 11 and to make the same fully available to Tenant as therein provided, Tenant shall not exercise any remedy until Tenant has given Landlord and any mortgagee whose name and address have been previously provided to Tenant prior written notice of such act or omission and until a 30-day period of time to allow Landlord or the mortgagee to remedy such act or omission shall have elapsed following the giving of such notice; 43 provided, however, if such act or omission cannot with due diligence and in good faith be remedied within such 30-day period, Landlord and/or mortgagee shall be allowed such further period of time as may be reasonably necessary provided that it shall have commenced remedying the same with due diligence and in good faith within said 30-day period. In the event any act or omission of Landlord which constitutes a Landlord's default hereunder results in an immediate threat of bodily harm to Tenant's employees, agents or invitees or damage to Tenant's property, or exposes Tenant to criminal liability, Tenant may proceed to cure the default without prior notice to Landlord or its mortgagee and offset the cost thereof against Base Rent next due and payable; provided, however, in that event Tenant shall give written notice to Landlord and its mortgagee as soon as possible after commencement of such cure. Nothing herein contained shall be construed or interpreted as requiring any mortgagee to remedy such act or omission. 16.3 ATTORNMENT. Subject to Section 16.1 above, if any mortgagee shall succeed to the rights of Landlord under this Lease or to ownership of the Demised Premises, whether through possession or foreclosure or the delivery of a deed to the Demised Promises, then, upon the written request of such mortgagee so succeeding to Landlord's rights hereunder, Tenant shall attorn to and recognize such mortgagee as Tenant's landlord under this Lease, and shall promptly execute and deliver any instrument that such mortgagee may reasonably request to evidence such attornment (whether before or after making of the mortgage). In the event of any other transfer of Landlord's interest hereunder, upon the written request of the transferee and Landlord, Tenant shall attorn to and recognize such transferee as Tenant's landlord under this Lease and shall promptly -execute and deliver any instrument that such transferee and Landlord may reasonably request to evidence such attornment. ARTICLE XVII SIGNS Tenant shall be allowed Buildings signage during the Term of this Lease, provided that such sign or signs (a) do not cause any structural damage or other material damage to the Buildings; (b) comply with and do not violate applicable governmental laws, ordinances, rules or regulations; (c) comply with and do not violate any existing restrictions affecting the Demised Premises and which are of a matter of record as of the date of this Lease; (d) are compatible with the architecture of the Buildings and the landscaped area adjacent thereto, and (e) the design, size and location of such signs have been mutually approved by Landlord and Tenant, which approval shall not be unreasonably withheld or delayed. The cost of such signs shall be entirely Tenant's separate expense. ARTICLE XVIII FINANCIAL STATEMENTS OF TENANT From time to time, at Landlord's request, Tenant shall provide Landlord with Tenant's 44 most recent financial statements in form and content reasonably satisfactory to Landlord and Landlord's lenders (which, if Tenant is an entity which files periodic financial disclosures to securities regulatory authorities, shall be those which are periodically filed with those authorities). Landlord may provide copies of those financial statements to current and prospective lenders, investors and buyers, identified in writing to Tenant, for examination and review. Landlord shall keep all such financial statements strictly confidential and may provide copies of such financial statements to such other parties only upon receiving in return a covenant from each recipient that such recipient shall keep the financial statements confidential except with the prior written consent of Tenant. ARTICLE XIX CHANGES AND ALTERATIONS Tenant shall not have the right to make such changes or alterations, structural or otherwise, to the Buildings, improvements and fixtures hereafter erected on the Demised Premises without first complying with the following conditions: (a) PERMITS. No change or alteration shall be undertaken until Tenant shall have procured and paid for, so far as the same may be required from time to time, all municipal, state and federal permits and authorizations of the various governmental bodies and departments having jurisdiction thereof, and Landlord agrees to join in the application for such permits or authorizations whenever such action is necessary, all at Tenant's sole cost and expense, provided such applications do not cause Landlord to become liable for any cost, fees or expenses. (b) LANDLORD APPROVAL; COMPLIANCE WITH PLANS AND SPECIFICATIONS. Before commencing any change, alteration, restoration or construction (hereinafter sometimes referred to as "WORK") involving in the aggregate an estimated cost of more than Fifty Thousand and No/100ths Dollars ($50,000) or which, in Landlord's reasonable judgment, would alter the mechanical, structural or electrical components of the Demised Promises, Tenant shall obtain Landlord's prior written consent, which consent shall not be unreasonably withheld; 00 furnish Landlord with detailed plans and specifications of the proposed change or alteration, which shall also be subject to Landlord's prior written approval, which shall not be unreasonably withheld; (iii) obtain Landlord's prior written approval of a licensed architect or licensed professional engineer selected and paid for by Tenant who shall approve any such work (hereinafter referred to as "ALTERATIONS ARCHITECT OR ENGINEER"); and (v) obtain Landlord's prior written approval (which shall not be unreasonably withheld or delayed) of detailed plans and specifications prepared and approved in writing by said Alterations Architect or Engineer and of each amendment and change thereto, and (v) for any Work involving in the aggregate an estimated cost of more than Fifty Thousand Dollars 050,000), furnish to Landlord a surety company performance bond issued by a surety company licensed to do business in the state in which the Demised Premises are located and reasonably acceptable to Landlord in an amount equal to the estimated cost of such work guaranteeing the completion thereof within a reasonable time thereafter (1) free and clear of all mechanic's liens or 45 other liens, encumbrances, security interests and charges, and (2) in accordance with the plans and specifications approved by Landlord. (c) VALUE MAINTAINED. Any change or alteration shall, when completed, be of such character so as not to reduce the value of the Demised Premises or the Buildings to which such change or alteration is made below its value or utility to Landlord immediately before such change or alteration, nor shall such change or alteration reduce the area or cubic content of the Buildings to use without Landlord's express written consent. (d) COMPLIANCE WITH LAWS. All Work done in connection with any change or alteration shall be done promptly and in a good and workmanlike manner and in compliance with all building and zoning laws of the place in which the Demised Premises are situated, and in compliance with all laws, ordinances, orders, rules, regulations and requirements of all federal, state and municipal governments and appropriate departments, commissions, boards and officers thereof, and in accordance with the orders, rules and regulations of the Board of Fire Underwriters where the Demised Premises are located or any other body exercising similar functions. The cost of any such change or alteration shall be paid in cash so that the Demised Premises and all portions thereof shall at all times be free of liens for labor and materials supplied to the Demised Premises or any portion thereof. The Work or any change or alteration shall be prosecuted with reasonable dispatch, delays due to strikes, lockouts, acts of God, inability to obtain labor or materials, governmental restrictions or similar causes beyond the control of Tenant excepted. Tenant or Tenant's contractor or subcontractor shall obtain and maintain at its sole cost and expense during the performance of the Work workers' compensation insurance covering all persons employed in connection with the Work and with respect to which death or injury claims could be asserted against Landlord or Tenant or against the Demised Premises or any interest therein, together with comprehensive general liability insurance for the mutual benefit of Landlord and Tenant with limits of not less than One Million Dollars ($1,000,000.00) in the event of injury to one person, Three Million Dollars ($3,000,000.00) in respect to any one accident or occurrence, and Five Hundred Thousand Dollars ($500,000.00) for property damage, and the fire insurance with "extended coverage" endorsement required by Section 6.1 hereof shall be supplemented with "builder's risk" insurance on a completed value form or other comparable coverage on the Work if the cost of such work will be in excess of Fifty Thousand Dollars ($50,000.00). All such insurance shall be in a company or companies authorized to do business in the state in which the Demised Premises are located and reasonably satisfactory to Landlord, and all such policies of insurance or certificates of insurance shall be delivered to Landlord endorsed "Premium Paid' by the company or agency issuing the same, or with other evidence of payment of the premium satisfactory to Landlord. (e) PROPERTY OF LANDLORD. All improvements and alterations (other than Tenant's movable trade fixtures, furniture and equipment) made or installed by Tenant shall, immediately upon completion or installation thereof, become the property of Landlord without payment therefor by Landlord, and shall be surrendered to Landlord on the expiration of the Term of this Lease unless and to the extent Tenant removes the same upon termination or expiration of the Term in which event they shall remain the property of Tenant. In no event shall Tenant be obligated to remove all 46 or any part of such improvements or alterations. (f) LOCATION OF IMPROVEMENTS. No change, alteration, restoration or new construction shall be in, or connect the Improvements with, any property, building or other improvement located outside the boundaries of the parcel of land described in Exhibit "A" attached hereto, nor shall the same obstruct or interfere with any existing easement. (g) REMOVAL OF IMPROVEMENTS. As a condition to granting approval for any changes or alterations, Landlord may require Tenant, by written notice to Tenant given at or prior to the time of granting such approval, to remove any improvements, additions or installations installed by Tenant in the Demised Premises at Tenant's sole cost and expense at the end of the term of this Lease and repair and restore any damage caused by the installation and removal of such improvements, additions, or installations; provided, however, the only improvements, additions or installations which Tenant shall remove shall be those specified in such notice and those Tenant elects to remove pursuant to subsection 19(e) above. Tenant shall not be obligated to remove any improvements, additions or installations installed by Tenant which did not require Landlord's prior approval as provided for in this Section 1 9(g). (h) NOTICE TO LANDLORD. Regardless of whether Landlord's consent is required to any change or alteration to the Demised Premises made or to be made by Tenant, such changes or alterations shall not be commenced until two (2) business days notice after Landlord has received notice from Tenant stating the date such changes or alterations are to commence so that Landlord can post and record an appropriate notice of nonresponsibility. ARTICLE XX MISCELLANEOUS PROVISIONS 20.1 ENTRY BY LANDLORD. Tenant agrees to permit Landlord and authorized representatives of Landlord to enter upon the Demised Premises at all reasonable times during ordinary business hours upon at least one (1) business day's advance notice to Tenant for the purpose of inspecting the same and making any repairs required to be made thereto by Landlord under the terms of this Lease, or as required to be made thereto by Tenant under the terms of this Lease provided that Landlord shall have first given written notice to Tenant to make such repairs and Tenant shall have failed to make such repairs within thirty (30) days after notice, and provided further, that Landlord shall be allowed to enter upon the Demised Premises during an emergency. Nothing herein contained shall imply any duty upon the part of Landlord to do any such work which, under any provision of this Lease, Tenant may be required to perform, and the performance thereof by Landlord shall not constitute a waiver of Tenant's default in failing to perform the same. Landlord may, during the progress of any work, keep and store upon the Demised Premises all necessary materials, tools and equipment in areas designated by Tenant. Landlord shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business or other damage to Tenant by reason of making such repairs or the performance of any such work in or about the 47 Demised Premises or on account of bringing material, supplies and equipment into, upon or through the Demised Premises during the course thereof, and the obligations of Tenant under this Lease shall not be thereby affected in any manner whatsoever; except that Landlord shall use its best efforts to not unreasonably interfere with Tenant's use of the Demised Premises, or any portion thereof, by reason of Landlord's making such repairs or the performance of any such work in or about the Demised Premises or on account of bringing materials, supplies and equipment into, upon or through the Demised Premises during the course thereof. Tenant may accompany Landlord on any inspection or entry by Landlord. 20.2 EXHIBITION OF DEMISED PREMISES. Landlord is hereby given the right during usual business hours upon at least one (1) business days' advance notice to Tenant at any time during the Term of this Lease to enter upon the Demised Premises and to exhibit the same for the purpose of mortgaging or selling the same. During the final year of the Term, Landlord shall be entitled (i) to display on the Demised Promises in such manner as to not unreasonably interfere with Tenant's business, signs reasonably approved as to design and location by Tenant indicating that the Demised Premises are for rent and/or sale and suitably identifying Landlord or its agent, and (ii) upon at least two (2) business days' advance notice to Tenant, to exhibit the Demised Premises to prospective tenants. 20.3 INDEMNIFICATION BY TENANT. To the fullest extent allowed by law, Tenant shall at all times indemnify, defend and hold Landlord harmless against and from any and all claims by or on behalf of any person or persons, firm or firms, corporation or corporations, arising from the conduct or management, or from any work or things whatsoever done in or about the Demised Premises during the Term of this Lease, other than as a result of the sole gross negligence or willful misconduct of Landlord or its officers, agents, employees, contractors or subcontractors, or as a result of Landlord's breach of its obligations under this Lease, and Tenant shall further indemnify, defend and hold Landlord harmless against and from any and all claims arising during the Term of this Lease from any condition of the Improvements (other than defects in construction of the initial Improvements) or other items Landlord is required to repair or maintain, or of any passageways or space therein, other than as a result of the sole gross negligence or willful misconduct of Landlord or its officers, employees, agents, contractors or subcontractors or as a result of Landlord's breach of its obligations under this Lease, or arising from any act or negligence of Tenant, its agents, servants, employees or licenses, or arising from any accident, injury or damage whatsoever caused to any person, firm or corporation occurring during the Term of this Lease in or about the Demised Premises, other than as a result of the sole gross negligence or willful misconduct of Landlord or its officers, employees, agents, contractors or subcontractors, or as a result of Landlord's breach of its obligations under this Lease, and from and against all costs, attorneys' fees, expenses and liabilities incurred in or about any such claim or action or proceeding brought thereon; and in case any action or proceeding be brought against Landlord by reason of any such claim, Tenant, upon notice from Landlord, covenants to defend such action or proceeding by counsel reasonably satisfactory to Landlord. Tenant's obligations under this Section 20.3 shall be insured by contractual liability endorsement on Tenant's policies of insurance required under the provisions of Section 6.2 hereof to the extent reasonably obtainable. 48 20.4 NOTICES. All notices, demands and requests which may be or are required to be given, demanded or requested by either party to the other shall be in writing, and shall be sent by United States registered or certified mail, postage prepaid, by an independent overnight courier service marked for next business day delivery, or by telephonic facsimile transmission with automatic written time and date confirmation of delivery transmitted between the hours of 9:00 a.m. and 5:00 p.m. (time zone of recipient, but only if confirmed within two (2) business days by receipt of a mailed or personally delivered copy), and addressed as follows: To Landlord: ADI Communication Partners, L.P. c/o The Allen Group 4365 Executive Drive, Suite 850 San Diego, California 92122-2130 Attention: Mr. Steven L. Black Facsimile: 619-550-1935 To Tenant: ComStream Corporation 10180 Barnes Canyon Road San Diego, California 92121 Attention: General Counsel Facsimile: 619-657-5702 or at such other place as a party hereto may from time to time designate by written notice thereof to the other. Notices, demands and requests which shall be served upon Landlord by Tenant, or upon Tenant by Landlord, in the manner aforesaid, shall be deemed received three (3) days after delivery to United States mail, one (1) business day after delivery to an overnight courier service, or at the time such notice, demand or request shall be transmitted by facsimile (if confirmed as written above). 20.5 QUIET ENJOYMENT. Landlord covenants and agrees that Tenant, upon paying the Base Rent and Additional Rent and upon' observing and keeping the covenants, agreements and conditions of this Lease on its part to be kept, observed and performed, shall lawfully and quietly hold, occupy and enjoy the Demised Promises (subject to the provisions of this Lease) during the Term of this Lease without hindrance or molestation by Landlord or by any person or persons claiming under Landlord. 20.6 LANDLORD'S CONTINUING OBLIGATIONS. The term "Landlord," as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of the fee of the Demised Promises, and in the event of any transfer or transfers or conveyance, the then grantor shall be 49 automatically freed and relieved from and after the date of such transfer or conveyance of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed, provided that any funds in the hands of such landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee, and any amount then due and payable to Tenant by Landlord or the then grantor under any provision of this Lease, shall be paid to Tenant, and further provided that the now Landlord expressly assumes in writing for the benefit of Tenant all obligations of Landlord under this Lease. The covenants and obligations contained in this Lease on the part of Landlord shall, subject to the aforesaid, be binding on Landlord's successors and assigns during and in respect of their respective successive periods of ownership. Nothing herein contained shall be construed as relieving Landlord of its obligations under Article 11 of this Lease or releasing Landlord from any obligation to complete the cure of any breach by Landlord during the period of its ownership of the Demised Premises. 20.7 ESTOPPEL. Either Tenant or Landlord shall, without charge at any time and from time to time, within ten (10) business days after written request by the other, certify by written instrument, duly executed, ' acknowledged and delivered to any mortgagee, assignee of a mortgagee, proposed mortgagee, purchaser or proposed purchaser, or any other person dealing with Landlord, Tenant or the Demised Premises: (a) That this Lease (and all guaranties, if any) is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect, as modified and stating the modifications); (b) The dates to which the Base Rent or Additional Rent have been paid in advance. (c) Whether or not there are then existing any breaches or defaults by such party or the other party known by such party under any of the covenants, conditions, provisions, terms or agreements of this Lease, and specifying such breach or default, if any, or any set-offs or defenses against the enforcement of any covenant, condition, provision, term or agreement of this Lease (or of any guaranties) upon the part of Landlord or Tenant (or any guarantor), as the case may be, to be performed or complied with (and, if so, specifying the same and the steps being taken to remedy the same); and (d) Such other statements or certificates as Landlord, Tenant or any mortgagee may reasonably request. It is the intention of the parties hereto that any statement delivered pursuant to this Section 20.7 may be relied upon by any of such parties dealing with Landlord, Tenant or the Demised Premises. Failure by Tenant to timely respond to such request shall be deemed Tenant's certification of the accuracy of such matters. 50 20.8 DELIVERY OF CORPORATE DOCUMENTS. In the event that Tenant is a corporation or similar business entity (e.g., limited partnership, limited liability company or limited liability partnership), Tenant shall, without charge to Landlord, at any time and from time to time within ten (10) business days after written request by Landlord, deliver to Landlord, in connection with any proposed sale or mortgage of the Demised Premises, the following instruments and documents: (a) Certificate of Good Standing in the state of incorporation of Tenant and in the state in which the Demised Promises are located issued by the appropriate state authority and bearing a current date; (b) A copy of Tenant's articles of incorporation and by-laws (or partnership or operating agreement, as the case may be) and any amendments or modifications thereof certified by the secretary or assistant secretary (or managing partner or member, as the case may be) of Tenant; (c) A written and certified confirmation from the secretary or assistant secretary (or managing partner or member, as the case may be) that 0) this Lease has been duly authorized by all necessary corporate action and is a valid and binding agreement enforceable in accordance with its terms; and (ii) Tenant is a duly organized and validly existing corporation under the laws of its state of incorporation, is duly authorized to carry on its business, and is in good standing under the laws of the state in which the Demised Premises are located, if different from the state of incorporation. 20.9 MEMORANDUM OF LEASE. Upon March 2, 1998, the parties shall execute, acknowledge and deliver to each other, a Memorandum of Lease in the form attached hereto as Exhibit "C" and made a part hereof. Such Memorandum of Lease may be recorded by either party, at their sold cost and expense. 20.10 SEVERABILITY. If any covenant, condition, provision, term or agreement of this Lease shall, to any extent, be held invalid or unenforceable, the remaining covenants, conditions, provisions, terms and agreements of this Lease shall not be affected thereby, but each covenant, condition, provisions, term or agreement of this Lease shall be valid and in force to the fullest extent permitted by law. 20.11 SUCCESSORS AND ASSIGNS. The covenants and agreements herein contained shall bind and inure to the benefit of Landlord, its successors and assigns, and Tenant and its permitted successors and assigns. 20.12 CAPTIONS. The caption of each article of this Lease is for convenience and reference only, and in no way defines, limits or describes the scope or intent of such article or of this Lease. 20.13 RELATIONSHIP OF PARTIES. This Lease does not create the relationship of principal and agent, partnership, joint venture, or any association or relationship between Landlord 51 and Tenant, the sole relationship between Landlord and Tenant being that of landlord and tenant. 20.14 ENTIRE AGREEMENT. All preliminary and contemporaneous negotiations are merged into and incorporated in this Lease. This Lease, together with the exhibits attached hereto, contains the entire agreement between the parties and shall not be modified or amended in any manner except by any instrument in writing executed by the parties hereto. 20.15 NO MERGER. There shall be no merger of this Lease or of the leasehold estate created by this Lease with any other estate or interest in the Demised Premises by reason of the fact that the same person, firm, corporation or other entity may acquire, hold or own, directly or indirectly, (a) this Lease or the leasehold interest created by this Lease or any interest therein, and (b) any such other estate or interest in the Demised Promises, or any portion thereof. No such merger shall occur unless and until all persons, firms, corporations or other entities having an interest (including a security interest) in (1) this Lease or the leasehold estate created thereby, and (2) any such other estate or interest in the Demised Premises, or any portion thereof, shall join in a written instrument expressly affecting such merger and shall duly record the same. 20.16 POSSESSION AND USE. Tenant acknowledges that the Demised Premises are the property of Landlord and that Tenant has only the right to possession and use thereof upon the covenants, conditions, provisions, terms and agreements set forth in this Lease. 20.17 SURRENDER OF DEMISED PREMISES. Subject to the other provisions of this Lease, at the expiration of the Term of this Lease, Tenant shall surrender the Demised Premises in the same condition as they were in upon delivery of possession thereto at March 2, 1998, reasonable wear and tear, casualty and condemnation excepted, and shall surrender all keys to the Demised Premises to Landlord at the place then fixed for the payment of Base Rent, and shall inform Landlord of ' all combinations on locks, safes and vaults, if any. Tenant shall at such time remove all of its property therefrom and all alterations and improvements placed thereon by Tenant if so requested by Landlord or otherwise allowed, subject to Sections 19(e) and (g). Tenant shall repair any damage to the Demised Premises caused by such removal, and any and all such property not so removed shall, at Landlord's option, become the exclusive property of Landlord or be disposed of by Landlord, at Tenant's cost and expense, without further notice to or demand upon Tenant, subject to applicable law and Sections 19(e) and (g). All property of Tenant not removed on or before the last day of the Term of this Lease shall be deemed abandoned in accordance with, and subject to, applicable law. 20.18 HOLDING OVER. In the event Tenant remains in possession of the Demised Premises after expiration of this Lease and without the execution of a new lease, it shall be deemed to be occupying the Demised Premises as a tenant from month-to-month, subject to all the provisions, conditions and obligations of this Lease insofar as the same can be applicable to a month-to-month tenancy, except that the Base Rent shall be escalated to one hundred and fifteen percent 0 15 %) of the then current Base Rent for the Demised Premises for the first three (3) months of such 52 tenancy and one hundred fifty percent (150%) of such amount thereafter, and from and after such three (3) month period, Tenant shall indemnify, defend and hold Landlord harmless against loss or liability resulting from the delay by Tenant in so surrendering the Demised Premises, including without limitation any claim made by any succeeding occupant founded on such delay. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of this Lease. 20.19 SURVIVAL. All obligations of either party (together with interest or money obligations at the Maximum Rate of Interest) accruing prior to expiration of the Term of this Lease shall survive the expiration or other termination of this Lease. 20.20 BROKER'S COMMISSION. Tenant and Landlord represent that they have dealt only with (i) C13 Commercial Real Estate Group, Inc., as brokers in connection with this Lease. Landlord shall be responsible for paying the commissions owing to such brokers under separate written agreements between Landlord and such brokers. Tenant and Landlord will indemnify, defend and hold the other harmless from and against any loss, cost or expense, including, but not limited to, reasonable attorneys' fees and court costs, resulting from any claim for a fee or commission by any other broker or finder resulting from their own actions. 20.21 APPLICABLE LAW. This Lease shall be governed and interpreted in accordance with the laws of the State of California. 20.22 COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall be deemed an original and all of which, when taken together, shall constitute a single instrument. 20.23 EXPANSION OPTION. Provision has been made on the Land for the construction of an additional building of approximately 56,000 square feet in size as illustrated on the site plan which is included as part of the Preliminary Plans and Specifications (the "EXPANSION BUILDING"). At any time within twelve 0 2) months following March 2, 1998 (the "EXPANSION EXERCISE PERIOD"), Tenant shall have the option (the "EXPANSION OPTION") of requiring Landlord to construct the Expansion Building and leasing it to Tenant on the same terms and conditions as Tenant leases the Demised Premises with the Term of the lease of the Expansion Building ending concurrently with the Term of this Lease, with the exception that the monthly Base Rent shall be an amount equal to One Dollar and Six Cents ($1.06) per square foot of the Expansion Building ("EXPANSION RENT"). The Expansion Rent shall be increased every twenty-four (24) months during the Initial Term to an amount equal to the product of (i) the then applicable Expansion Rent, as may have been previously adjusted, and (iii) 1.06. The Expansion Option may be exercised by Tenant's delivery to Landlord by the first (1st) anniversary of March 2, 1998 of a written and irrevocable notice of exercise ("EXERCISE NOTICE"). Upon the receipt of the Exercise Notice, Landlord and Tenant shall meet and begin the development of plans and specifications for the construction of Tenant Improvements in the Expansion Building. The provisions of this Lease for the development of the Plans and Specifications shall apply to the development of the Plans and Specifications for the Expansion 53 Building.' Tenant shall be responsible for the cost of all Tenant Improvements constructed in the Expansion Building, provided that Landlord shall provide Tenant with an additional Tenant Improvements Allowance of Twenty-Five Dollars ($25.00) per square foot of the Expansion Building on the same basis as the original Tenant Improvements Allowance was provided in connection with the construction of the Demised Premises. All other terms and conditions of this Lease shall apply to the Expansion Building. Tenant and Landlord shall promptly execute such supplementary documents or amendments to this Lease as Landlord or Tenant shall deem reasonably necessary to document the addition of the Expansion Building to the Demised Premises and the terms and conditions under which it is leased to Tenant. 20.24 RIGHT OF FIRST OFFER ON EXPANSION BUILDING. Landlord reserves the right to construct the Expansion Building and to remove from the definition of Land herein that portion of the Land which is used for and dedicated to the use of the Expansion Building. If, after the Expansion Exercise Period, Landlord has constructed the Expansion Building and Tenant did not timely and properly exercise its rights under the Expansion Option, then Landlord shall be free to lease the Expansion Building or any portion thereof to tenants other than Tenant. Notwithstanding the foregoing, before leasing any portion of the Expansion Building to a tenant other than Tenant, Landlord shall first deliver to Tenant a written notice of the terms and conditions under which Landlord proposes to lease Expansion Building space to tenants ("LEASING NOTICE"). Tenant shall have fifteen (15) days following receipt of the Leasing Notice within which to deliver to Landlord notice of Tenant's acceptance of those terms and conditions ("TENANT'S ACCEPTANCE") and identifying how much of the Expansion Building (if less than the entire Expansion Building) Tenant elects to lease from Landlord ("EXPANSION SPACE"), at which time this Lease shall be deemed amended to include the Expansion Space into the definition of Demised Premises and all other terms and conditions of this Lease shall prevail with respect to the Expansion Space, with the exception of those terms and conditions contained in the Leasing Notice which differ from the terms and conditions of this Lease (e.g. Base Rent, Term, Tenant Improvement Allowance (if any), etc.), which different terms and conditions shall apply to the Expansion Space in lieu of the terms of this Lease. Tenant and Landlord shall promptly execute such supplementary documents or amendments to this Lease as Landlord or Tenant shall deem reasonably necessary to document the addition of the Expansion Space to the Demised Premises and the terms and conditions under which it is leased to Tenant. If Tenant rejects the Leasing Notice or fails to deliver Tenant's Acceptance in a timely manner, Landlord shall be free to offer the Expansion Building to other tenants, provided that if Landlord wishes to offer the Expansion Building to other tenants (i) on terms more favorable than those contained in the Leasing Notice, or (ii) on any terms and more than one (1) year has passed since Tenant was last delivered a Leasing Notice, Landlord shall first offer the Expansion Building to Tenant pursuant to the same procedures described in this Section 20.24. 20.25 LEASE SECURITY - LETTER OF CREDIT. In addition to its primary obligation under this Lease, Tenant shall provide additional security against an Event of Default under this Lease in the form of a One Million Four Hundred Thousand Dollar ($1,400,000) Irrevocable Standby Letter of Credit ("LC"), naming Landlord as the payee thereunder, with terms as described in more detail below. The LC shall be delivered to Landlord concurrent with the recordation of Landlord's 54 construction loan, provided that Tenant has had at least five (5) days advance notice from Landlord of the date of such recordation, and shall be held by Landlord until such time as both W Tenant's Equity Balance, calculated as defined below, exceeds its Debt Balance, also as defined below, and 00 Tenant's Equity Balance exceeds $20,000,000. (a) TERMS OF LETTER OF CREDIT. The LC shall be an irrevocable standby letter of credit, issued by Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal or an equivalent rated bank, in a form which meets international treaty standards for letters of credit. The LC shall be for a twelve (12) month term. The LC shall be drawable by Landlord upon presentation of a sight draft or demand to the LC issuer. Landlord may present such a sight draft or demand if (i) the LC has not been renewed and replaced by Tenant by thirty (30) days prior to the expiry date of the then effective LC, or (ii) Tenant defaults under the Lease and, as a result of such default, the Lease is terminated. Proceeds of the drawn LC shall be applied to damages or charges to which Landlord is entitled under the Lease as a result of Tenant's default. The LC is not intended to represent liquidated damages for Tenant's default, but only a mechanism for paying the damages or charges to which Landlord may be entitled. Landlord shall be entitled to grant a security interest in, or make a collateral assignment of, Landlord's rights under the LC in connection with mortgage indebtedness incurred by Landlord to a bona fide third party institutional lender in an arms-length transaction. (b) RETURN OF LETTER OF CREDIT. The Letter of Credit shall be returned to Tenant upon receipt by Landlord of written certification from Tenant's CFO or CEO that (i) the Equity Balance of Tenant exceeds the Debt Balance and (ii) the Equity Balance of Tenant exceeds $20,000,000. The certification shall contain reasonably adequate back-up information to evidence the calculation of Equity Balance and Debt Balance. I (i) EQUITY BALANCE. Equity Balance shall equal Tenant's share capital plus retained earnings as reflected in Tenant's annual and certified financial statements. Retained earnings shall be calculated pursuant to U.S. GAAP. A Goodwill adjustment (to the extent it is not reflected in retained earnings) of approximately $25,000,000 which applies to the Goodwill created in the acquisition of Tenant by Comtel in 1992, is the only major expected GAAP adjustment to the Retained Earnings balance as of December 31, 1996. (ii) Debt Balance. Debt Balance shall equal the "Investment Control" intercompany debt due to Tenant's parent corporation at the time calculated for purposes of this Section 20.25. (c) Tenant and Landlord shall execute such documents as may be reasonably necessary to document and perfect the security arrangements described above. 20.26 RECONFIGURATION OF LAND; EASEMENT FOR OFF-SITE PARKING. Landlord and Tenant acknowledge that the Land is currently comprised of three separate legal lots. A portion of one of these three lots (Lot 4) is intended to be used as the site of the Expansion Building (the "EXCESS LAND") which will be located on a lot adjacent to the Land (Lot 3). It is Landlord's intention, 55 at some time after the execution of this Lease and the recordation of the Memorandum of Lease, to adjust the lot line between Lot 4 and the adjacent Lot 3 with the result that the size of the three lots comprising the Land will be reduced to approximately 9.85 acres. If, and to the extent, it is not feasible to locate all 750 parking spaces which are part of the Demised Premises on the Land as then configured, Landlord shall arrange for access to parking spaces on the Excess Land or on Lot 3 so as to provide Tenant with the required parking. Tenant shall cooperate with Landlord in connection with the reconfiguration of the Land and the Excess Land, including the execution of such documents as may be reasonably necessary in connection therewith. 20.27 TITLE INSURANCE. Tenant's obligations under this Lease shall be subject to and expressly conditioned on Tenant being able to obtain, at Tenant's sole cost and expense, a leasehold policy of title insurance from First American Title Company ("TITLE COMPANY") which insures that Tenant's leasehold interest granted pursuant to this Lease is subject only to W non-delinquent real property taxes and assessments for the current year; (ii) all exceptions to title disclosed in a preliminary title report which Tenant shall obtain from Title Company promptly following execution of this Lease and to which Tenant does not object, (iii) standard printed exceptions, customarily set forth in Title Company's leasehold policy of title insurance, and (iv) any other lien voluntarily imposed or agreed to by Tenant as of the date of this Lease or arising from Tenant's acts or omissions ("LEASEHOLD POLICY"). It is the intention of the parties that this condition precedent is established as an accommodation to Tenant to allow it to make arrangements to obtain the Leasehold Policy. Accordingly, Tenant shall not object to any item which appears in the preliminary title report which does not materially and adversely affect the utility and functionality of Tenant's use of the Demised Premises as contemplated in this Lease and shall exercise its best efforts to obtain such Leasehold Policy and to pay the costs and premiums associated therewith. Tenant shall be deemed to have obtained the Leasehold Policy, and this condition satisfied, unless Landlord receives written notice from Tenant fifteen 0 5) days following the date of this Lease that Tenant has been unable to obtain such Leasehold Policy and the reasons it has been unable to do so. If Landlord cannot correct such matters as may be needed to be corrected in order for Tenant to obtain the Leasehold Policy within thirty (30) days following receipt of such notice, then this Lease shall automatically terminate. 20.28 ATTORNEYS' FEES. In the event of any litigation, arbitration, mediation or any other action taken by either party to this Lease to enforce any provision of this Lease, enforce any remedy available upon default under this Lease, or seek a declaration of the rights of a party under this Lease, the prevailing party shall be entitled to recover in such action such attorneys' fees and costs as may be reasonably incurred, including, without limitation, the costs of reasonable investigation, preparation and professional or expert consultation, travel expenses, costs on appeal, court reporter fees and expenses, incurred by reason of such litigation, arbitration or other action. All other attorneys' fees and cost relating to this Agreement and the transactions described herein shall be borne by the party incurring the same. 56 IN WITNESS WHEREOF, each of the parties hereto have caused this Lease to be duly executed as of the day and year first above written. LANDLORD: ADI COMMUNICATION PARTNERS, L.P. a California limited partnership By: Allen Development, Inc., a California corporation Its General Partner By: /s/ Steven L. Black ------------------- Name: Steven L. Black Its: President TENANT: COMSTREAM CORPORATION a Delaware corporation By: /s/ Donna S. Birks ------------------- Name: Donna S. Birks Its: VP & CFO 57 Exhibit "A" LEGAL DESCRIPTION OF PROPERTY Parcels 4, 5 & 6 of Parcel Map No. 17755, in the City of San Diego, County of San Diego, State of California, filed in the Office of the County Recorder of San Diego County, September 17, 1996, as File No. 1996-47 4607 of Official Records. 58 Exhibit "13" PRELIMINARY PLANS AND SPECIFICATIONS 59 EX-10.4 5 EXHIBIT 10.4 Exhibit 10.4 AMENDMENT TO LEASE This Amendment to Lease ("Amendment") is entered into as of June 16, 1997, by and between ADI COMMUNICATION PARTNERS. L.P., a California limited partnership ("Landlord"), and COMSTREAM CORPORATION, a Delaware corporation ("Tenant"), with reference to that certain Lease dated as of April 23, 1997, by and between Landlord and Tenant ("Lease"). RECITALS A. Pursuant to Section 20.25 of the Lease, Tenant is required to deliver to Landlord an Irrevocable Standby Letter of Credit ("LC"), naming Landlord as the payee thereunder, in the amount of One Million Four Hundred Thousand Dollar ($1,400,000) as additional security against an Event of Default under the Lease. B. Landlord and Tenant have agreed that additional provisions should be added t the Lease to address certain issues regarding the LC, including, without limitation, how proceeds drawn by Landlord on the LC will be applied. NOW, THEREFORE, Landlord and Tenant agree to amend the Lease as follows: AGREEMENT 1. AMENDMENT OF LETTER OF CREDIT. Section 20.26 of the Lease is hereby amended to add the following as subsection (d): "(d) If (i) the LC is drawn by Landlord because it was not renewed by Tenant in a timely manner as required by subsection (a)(i), above, or (ii) the LC is drawn by Landlord because an Event of Default by Tenant occurs under the Lease and, as a result of such an Event of Default, the Lease is terminated, as provided in subsection (a)(ii), above, the amount drawn shall be held by Landlord as security for Tenant's faithful performance of its obligations under this Lease. When such funds are drawn they shall be invested by Landlord in investment grade fixed income securities (e.g. United States government securities) with a maturity of not more than six (6) months, with interest thereon paid as received by Landlord to Tenant. Such funds shall be paid to Landlord only upon a final determination, either by mutual agreement of Landlord and Tenant, or by the judgment of a court of competent jurisdiction, of the amount of monetary damages to which Landlord is entitled as a result of such Event of Default, if any, following an Event of Default by Tenant which results in a termination of the Lease. Any such funds held by Landlord which exceed such amount of monetary damages to which Landlord is determined to be entitled shall be promptly refunded to Tenant." 2. RATIFICATION OF LEASE; NO OTHER MODIFICATIONS. Except as expressly amended and modified by this Amendment, Landlord and Tenant hereby ratify and affirm the terms and provisions of the Lease in its entirety. Except as otherwise amended by this Amendment, all other provisions of the Lease are unmodified hereby. 3. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, each of the parties hereto have caused this Amendment to Lease to be duly executed as of the day and year first above written. LANDLORD: TENANT: ADI COMMUNICATION PARTNERS, L.P. COMSTREAM CORPORATION a California limited partnership a Delaware corporation By: Allen Development, Inc. By: /s/ Vina Saycocie a California corporation ----------------- Its General Partner Name: Vina Saycocie Its: VP Finance and CFO By: /s/ Steven L. Black ------------------------- Name: Steven L. Black Its: President 2 EX-10.5 6 EXHIBIT 10.5 Exhibit 10.5 SECOND AMENDMENT TO LEASE This SECOND AMENDMENT TO LEASE ("Amendment") is made to be effective as of the 18th day of November, 1998, by and between KILROY REALTY, L.P., a Delaware limited partnership ("Landlord") and COMSTREAM CORPORATION, a Delaware corporation ("Tenant"), with reference to the following facts: R E C I T A L S : A. ADI Communication Partners, L.P., a California limited partnership, Landlord's predecessor-in-interest, and Tenant entered into that certain Lease (Bondable Triple Net) dated April 23, 1997 ("Original Lease") with respect to certain premises located in San Diego, California and more particularly described in the Lease ("Demised Premises"), upon which two (2) 2-story concrete tilt-up commercial and industrial buildings ("Buildings") and certain other related improvements were previously constructed by Landlord pursuant to the Original Lease. The Original Lease was amended by that certain First Amendment dated July 16, 1997 ("Amendment"). The Original Lease and the Amendment are hereinafter collectively referred to as the "Lease." B. Capitalized terms used in this Amendment and not otherwise defined herein shall have the meaning ascribed to them in the Lease. C. Tenant desires to vacate, in its entirety, the approximately 132,600 rentable square foot Building known as "Building A" ("Building A") and certain portions of the Land and consolidate its business operations into the approximately 66,400 rentable square foot Building known as "Building B" ("Building B"). D. Landlord is willing to allow Tenant to so consolidate its operations and reduce the Demised Premises on certain conditions, including the condition that Landlord enter into a replacement lease for Building A on terms acceptable to Landlord. E. Concurrently with Landlord's execution of this Amendment, Landlord is entering into a lease ("Pac Bell Lease") with Pacific Bell ("Pac Bell") regarding Pac Bell's lease of Building A in its entirety and certain portions of the Land and Improvements, as more particularly provided below. F. Landlord and Tenant now desire to amend the Lease, subject to the terms and conditions set forth herein, to (i) reflect Tenant's agreement to deliver to Landlord (for its concurrent delivery to Pac Bell) possession of the "Initial Surrender Space" described below on or before November 26, 1998; (ii) redefine the Demised Premises by eliminating Building A and certain portions of the Land on the "Surrender Date" described below, (iii) reduce the Monthly Base Rent payable under the Lease as of March 1, 1999 ("Rent Adjustment Date"), (iv) reduce the amount of 1 the LC currently required under Section 20.25 of the Lease to $462,000, (v) provide Tenant with a $300,000 tenant improvement allowance ("New Allowance") and concurrently therewith, provide for the repayment by Tenant to Landlord of such New Allowance over the remaining Initial Term; (vi) provide for Tenant's delivery to Landlord of a $2,000,000 payment as partial consideration for Landlord's agreement to reduce the Demised Premises and enter into this Amendment which consideration shall be payable in two installments, the first of which shall be due and payable upon the Rent Adjustment Date and the second of which shall be due on or before September 1, 1999 and shall be secured by a $1,000,000 irrevocable standby letter of credit ("New LC"), and (vii) make certain other modifications to the Lease, as more particularly set forth below. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree to amend the Lease, as follows: 1. DEMISED PREMISES. Tenant hereby agrees to vacate and surrender to Landlord, on or prior to November 26, 1998, possession of the approximately 33,000 square feet of Building A ("Initial Surrender Space") depicted on the site plan attached hereto AS EXHIBIT "A" ("Site Plan"). In addition, on or before December 15, 1998 ("Surrender Date"), Tenant hereby covenants and agrees to vacate, in its entirety, the balance of Building A and surrender the balance of Building A to Landlord. Effective as of the Surrender Date, the "Demised Premises," as described in the Lease, are hereby redefined to consist solely of Building B and the portion of the Land (and related Improvements constructed thereon) more particularly depicted on the Site Plan, subject, however, to Tenant's continuing obligation to pay Monthly Base Rent, until the Rent Adjustment Date, as more particularly set forth in Paragraph 3 below. As a result thereof, effective as of the Surrender Date, all references in the Lease to the Demised Premises shall mean the Demised Premises depicted on the Site Plan and, any references in the Lease to (1) Buildings shall instead mean Building B and (ii) the Land shall mean the Land depicted as the Demised Premises on the Site Plan. In connection with the reduction of the Demised Premises to Building B and the portion of the Land depicted on the Site Plan, Tenant shall be required to perform, at Tenant's sole cost and expense, the work described in EXHIBIT "B" attached hereto ("Sur-render Work"). All of the Surrender Work shall be completed in its entirety by Tenant on or before January 31, 1999. All of such Surrender Work shall be performed in compliance with Article XIX of the Lease (to the extent Article XIX is applicable to such Surrender Work). Pacific Cornerstone Architects ("PCA") shall have the opportunity to review, on behalf of Landlord, any required plans and specifications for any such Surrender Work and the Building B Improvements described below. The costs incurred by PCA in connection with such review shall be applied against the New Allowance. Following such reconfiguration of the parking areas, Tenant shall (notwithstanding anything to the contrary contained in the definition of Improvements contained in the Lease), during the balance of the Term, be entitled solely to the use of the 144 parking spaces identified on the Site Plan (with the balance thereof to be for the sole use of the tenant(s) of Building A and any Expansion Building(s) constructed within the Project by Landlord); provided, however, in the event Tenant elects, at its option and at Its sole cost and expense, to modify the parking areas around the Building B truck doors, the parking spaces allocated for Tenant's exclusive use may be increased to up to a maximum of 178 spaces. Such election may be made at any time during the Term by 2 Tenant, subject to the requirements, to the extent applicable, of Article XIX of the Lease. Tenant shall not permit any of its employees, contractors, agents, visitors or invitees to use any parking spaces in the Project other than such parking spaces allocated to Tenant as set forth above and as identified on the Site Plan. 2. COMMENCEMENT DATE. Landlord and Tenant hereby acknowledge that the Commencement Date of the Lease occurred on March 2, 1998. As a result thereof, the Initial Term of this Lease shall end on February 28, 2005. 3. RENT. Effective as of the Rent Adjustment Date (but subject to adjustment pursuant to Paragraph 4 below and the "Credit" described in Paragraph I I below), the Base Rent schedule set forth in Section 3.1 of the Lease is hereby deleted in its entirety and the following Base Rent schedule is inserted in lieu thereof-
Period Monthly Base Rent Annual Base Rent - ------------------------------------------------------------------------- Rent Adjustment Date- $72,447 $ 869,364 02/29/00 03/01/00-02/28/02 $76,794 $ 921,528 03/01/02-02/29/04 $81,402 $ 976,824 03/01/04-02/28/05 $86,286 $1,035,432
From and after the Rent Adjustment Date, Tenant shall no longer be obligated to pay any rent or other charges with respect to Building A nor any portion of the Land no longer part of the Demised Premises; provided, however, Tenant shall, as partial consideration for Landlord's agreement to enter into this Amendment and reduce the Demised Premises, until the Rent Adjustment Date, continue to be solely responsible for all Monthly Base Rent payable with respect to the original Demised Premises (including Building A); subject, however, to the Credit described in Paragraph 11 below. Following the Surrender Date, Tenant shall no longer have any obligations with respect to the portions of the Demised Premises no longer leased by Tenant (i.e., Building A and portions of the Land no longer included in the Demised Premises) with the exception of (i) Tenant's obligation to complete the Surrender Work; (ii) Tenant's obligation to pay all Monthly Base Rent due with respect thereto until the Rent Adjustment Date, and (iii) any other obligations which expressly survive the expiration or earlier termination of the Term of the Lease to the extent such obligations arise on or before the Surrender Date. Tenant acknowledges that the Impositions payable with respect to the original Demised Premises through the Surrender Date will include supplemental taxes reflecting the increased value of the Demised Premises as a result of the prior construction of the Buildings and other improvements thereon whether or not such supplemental tax bill is delivered by the taxing authority prior to or after the Surrender Date. 3 4. NEW ALLOWANCE. Landlord shall provide Tenant with the New Allowance in the amount of $300,000, which New Allowance shall be utilized by Tenant solely for the costs of improving Building B for Tenant's consolidated business operations ("Building B Improvements"). Notwithstanding the foregoing, Landlord hereby agrees that up to $75,000 of the New Allowance may be used by Tenant for the cost of performing the portion of the Surrender Work relating to the necessary modifications to the parking lots as more particularly described IN EXHIBIT "B." The Building B Improvements shall be constructed in compliance with the requirements of Article XIX of the Lease. Notwithstanding anything to the contrary contained in the Lease, Tenant shall not be required to remove the Building B Improvements at the expiration or earlier termination of the Lease. Further, Tenant shall only be required to remove any subsequent alterations or other improvements constructed to Building B to the extent required under the Lease; provided, however, in the event of any Transfer by Tenant pursuant to Article XV of the Lease, Landlord shall have the right to reasonably require that any subsequent alterations made to the Premises by or on behalf of such transferee be removed at the expiration or earlier termination of the Lease ("Landlord's Removal Election"). Landlord's Removal Election shall be set forth in a written notice delivered concurrently with Landlord's approval of the plans for any such alterations Tenant shall be solely responsible for obtaining, at Tenant's sole cost and expense, from any Authority all necessary governmental approvals and permits subject to the New Allowance. Landlord shall reasonably cooperate with Tenant in connection with obtaining such approvals. In the event the New Allowance is insufficient to pay for the entire cost of the Building )3 Improvements, Tenant shall be solely responsible for such excess. As a result of the New Allowance, the Monthly Base Rent payable under this Lease shall be increased, as of the Rent Adjustment Date, by an amount equal to (i) the New Allowance disbursed to Tenant, (ii) multiplied by a percentage factor sufficient to amortize the New Allowance over the remaining Initial Tenn (approximately 72 months) at an annual interest rate of 10%, (iii) divided by 12. Any undisbursed New Allowance remaining following the construction of the Building B Improvements shall belong to Landlord. With the exception of the New Allowance, Landlord shall have no obligation to contribute any allowance or make any improvements with respect to the Demised Premises and the consolidation of Tenant into the reduced Demised Premises described herein. 5. REDUCTION OF LETTER OF Credit. Within five (5) days after full execution of this Amendment by Landlord and Tenant, the LC required as additional security against an Event or Default under this Lease by Tenant shall be replaced with the New LC in the amount of $462,000. The form of the New LC shall be identical to the forrn of the existing LC, as more particularly provided in Section 20.25(a) of the Lease. In addition, Section 20.25(b) of the Lease is hereby deleted in its entirety and the following is hereby inserted in lieu thereof- "(b) RETURN OF NEW LC. The New LC shall be returned to Tenant at such time as Tenant meets the following financial requirements for a period of four (4) consecutive quarters: (i) Tenant shall have annual revenues of not less than $40,000,000; 4 (ii) Tenant shall have annual operating income (before interest payments and taxes) of not less than $2,000,000; and (iii) Tenant's debt to equity ratio shall not be greater than 1:2. Notwithstanding the foregoing, in the event that the New LC has been returned to Tenant as a result of Tenant meeting all of tile foregoing financial requirements and Tenant's financial coridition subsequently falls to meet all of such requirements, Landlord shall be entitled to require that a New LC in the amount of $462,000 be reestablished on the terms and provisions set forth in this Section 20.25 in which event Tenant shall, within five (5) days of written notice from Landlord, deliver the New LC to Landlord in the form required hereunder." 6. CONSIDERATION FOR REDUCTION OF TENANT'S OBLIGATIONS. As partial consideration for Landlord agreeing to enter into this Amendment and reduce the size of the Demised Premises by removing Building A and other certain portions of the Land from the Lease as of the Surrender Date, Tenant hereby covenants and agrees to pay to Landlord the sum of $2,000,000 ("Amendment Consideration"). The first $1,000,000 of the Amendment Consideration shall be payable by Tenant to Landlord, in cash or by cashier's check or wire transfer of funds ("Cash") on or before the Rent Adjustment Date. Concurrently with Tenant's execution hereof, Tenant shall deliver evidence to Landlord that Tenant has the ftinds available to pay the Amendment Consideration and shall reasonably demonstrate to Landlord that such funds shall remain available to pay the Amendment Consideration as and when required hereunder. The second $ 1,000,000 installment of the Amendment Consideration shall be payable by Tenant to Landlord in Cash on or before September 1, 1999. As additional security to ensure Tenant's payment of the Amendment Consideration, Tenant shall deliver to Landlord, within five (5) days after full execution of this Amendment by Landlord and Tenant, a $ 1,000,000 irrevocable standby letter of credit ("Amendment Consideration LC") naming Landlord as the payee thereunder. The Amendment Consideration LC shall be held by Landlord until such time as Tenant has paid to Landlord, in full, the $2,000,000 Amendment Consideration. The Amendment Consideration LC shall be an irrevocable standby letter of credit, issued by Citibank or another federally insured bank reasonably acceptable to Landlord, and shall be in a form and content reasonably acceptable to Landlord. Tenant shall pay all expenses, points and/or fees incurred by Tenant in obtaining the Amendment Consideration LC. The Amendment Consideration LC shall have an expiration date of September 30, 1999. Landlord may present a site draft or demand with respect to the Amendment Consideration LC if Tenant fails to deliver to Landlord the first S 1,000,000 installment of the Amendment Consideration on or before the Rent Adjustment Date or falls to deliver to Landlord the second installment of the Amendment Consideration on or before September 1, 1999. Landlord shall be entitled to grant a security interest in, or make a collateral assignment of, Landlord's rIghts under the Amendment Consideration LC in connection with mortgage indebtedness incur-red by Landlord to a bona fide third party institutional lender at an arm's length transaction. Landlord and Tenant shall execute such documents as may be reasonably 5 necessary to document and perfect the security arrangements described hereinabove. The Amendment Consideration LC shall be returned to Tenant upon receipt by Landlord of the entire $2,000,000 Amendment Consideration. 7. NON-APPLICABILITY OF CERTAIN TERMS OF THE Lease. Notwithstanding anything to the contrary contained in this Amendment or the Lease, Landlord and Tenant hereby acknowledge and agree that: (i) Tenant shall relinquish its signage rights witli respect to Building A and any existing monument or other freestanding signs for Building A on or before the Surrender Date. Tenant sliall, at Tenant's sole cost and expense, promptly repair any and all damage caused to Building A in connection with such removal. (ii) Section 20.23 of the Lease (Expansion Option) is liereby deleted in its entirety as Tenant shall no longer have any riglits with respect to "Parcel C" identified on the Site Plan with the exception of Tenant's exclusive night to use the 24 parking spaces, which spaces are part of Tenant's 144 total spaces (subject to Tenant's right to increase such total up to 178 spaces pursuant to Paragraph I above) located on Parcel C (as depicted on the Site Plan) for the balance of the Term. (iii) Section 20.24 of the Lease (Right of First Offer on Expansion Building) is hereby deleted in its entirety as Tenant no longer has any right of first offer with respect to any building hereinafter constructed on said Parcel C. (iv) Section 20.26 of the Lease (Reconfiguration of Land) is hereby deleted in its entirety. kI8. IMPOSITIONS. The following new Section 5.7 is inserted at the end of Article V: "5.7 SEPARATE ASSESSMENT. In the event the Improvements on the Demised Premises or the Land are not separately assessed, but a part of a larger parcel ("Larger Parcel") for assessment purposes, Tenant shall pay, as its share of Impositions, all Impositions with respect to all Improvements on the Demised Premises plus Tenant's Share of Impositions on the realty underlying the Large Parcel. For purposes of this Lease Landlord and Tenant agree that Tenant's Share of Impositions on the realty underlying the Larger Parcel shall equal the square footage of the realty comprising Land depicted on Site Plan divided by the total square footage of the realty comprising the Larger Parcel. Landlord shall deliver to Tenant, contemporaneously with delivery of the bill therefore, the calculations and assumptions made by Landlord in determining Tenant's share of such impositions." 9. NOTICES. Landlord hereby amends its notices infori-nation contained in the Lease as follows: To Landlord: Kilroy Realty, L.P. 6 2250 East Imperial Highway, Suite 1200 El Segundo, California 92045 Attn: Nadine Kirk Facsimile: (310) 322-8790 with a copy to: Kilroy Realty, L.P. 2250 East Imperial Highway, Suite 1200 El Segundo, California 92045 Attn: Jeff Hawken Facsimile: (310) 322-5981 with an additional copy to: Kilroy Realty, L.P.San Diego, California 92121 Attn: Steve Scott Facsimile: (619) 550-1935 To Tenant: ComStream Corporation 6340 Sequence DriveSan Diego, California 92121 Attn: President Facsimile: (619) 657-5401 10. AMENDED AND RESTATED MEMORANDUM OF LEASE. Landlord and Tenant previously recorded a Memorandum of Lease against the Land originally leased by Tenant. Promptly after the Surrender Date, Landlord and Tenant shall execute an Amended and Restated Memorandum of Lease in a form similar to Exhibit "C" to the Lease modifying the legal description of the Land to be consistent with the reduced Land leased by Tenant as of the Surrender Date. 11. CREDIT. Notwithstanding anything to the contrary contained herein, on February 1, 1999, Landlord shall provide Tenant with a credit against Monthly Base Rent, Impositions and other charges due under this Lease in an amount equal to $120,000 ("Credit"). 12. COMMON AREA PAYMENTS. As more particularly depicted on the Site Plan, when Pac Bell solely occupies Building A, there will exist certain common area between Building A and Building B consisting of a plaza, walkways and certain other improvements (collectively, "Common Area"). Pursuant to the Pac Bell Lease, Pac Bell (or Landlord) will be required to maintain and repair the Common Area in good condition. Tenant hereby agrees to reimburse Landlord, within 15 days of Tenant's receipt of an invoice therefor (accompanied by reasonable supporting documentation), for 33.3% of the reasonable costs actually incurred in connection with such maintenance and repair of the Common Area. Such reimbursement obligations shall constitute Additional Obligations under the Lease. Tenant hereby grants Pac Bell and Landlord an irrevocable license to enter upon the 7 portion of the Common Area located on the Land and further agrees that Pac Bell's or Landlord's entering upon the Land to perform such maintenance and repair obligations shall not constitute a breach of Landlord's quiet enjoyment covenant under the Lease; provided, Landlord agrees to use (and cause Pac Bell to use) its commercially reasonable efforts not to interfere with Tenant's business operations in connection therewith. 13. RETROFIT ALLOWANCE. Landlord and Tenant agree that the Retrofit Allowance described in Section 2.11 of the Lease is hereby reduced to equal $335,000. As more particularly set forth in said Section 2.11, such reduced Retrofit Allowance shall be provided to Tenant upon the commencement of each Extension Term. Such Retrofit Allowance shall be repaid as part of Base Rent as more particularly set forth in Section 3.2 of the Lease. 14. LEGAL DESCRIPTION. Exhibit 'W' of the Lease is hereby deleted in its entirety. The Land leased to Tenant shall, as of the Surrender Date, consist of Land depicted as part of the Demised Premises upon the Site Plan attached hereto as EXHIBIT "A". 15. HAZARDOUS MATERIALS. Landlord and Tenant acknowledge and agree that, notwithstanding Tenant's complete vacation of Building A as of the Surrender Date, the covenants, representations and indemnities a f Landlord and Tenant with respect to Hazardous Materials shall survive the expiration of the Lease with respect to Building A; provided, however, Tenant shall not be responsible for the introduction of Hazardous Materials to Building A from and after the Surrender Date unless such Hazardous Materials are so introduced to Building A by Tenant or Tenants employees, agents, contractors or invitees. 16. COUNTERPARTS- This Amendment may be executed in multiple counterparts, all of which together shall constitute one and the same Amendment. 17. EFFECT OF AMENDMENT This Amendment and all. terms herein are effective as of the date hereof subject to the terms and conditions set forth herein. Except as expressly amended hereby, all terms and conditions of the Lease shall CONTINUE IN FULL FORCE AND EFFECT throughout the Lease Term, The Lease, as amended hereby, constitutes the entire agreement of the parties and no further modification of the Lease shall be binding and effective unless evidenced by an AGREEMENT, IN WRITING, signed by both Landlord and Tenant. IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date fast above written, 8 "Landlord" KILROY REALTY, L.P., a Delaware limited partnershipBy By: Kilroy Realty Corporation Kilroy Realty Corporation, a Maryland corporation a Maryland corporation Its General Partner Its General Partner By:__/s/_Jeffrey L. Hawken______ By:___/s/ Steven L. Black Name:__Jeffrey L. Hawken_______ Name: Steven L. Black Its:_____EVP & COO___________ Its: Executive Vice President "Tenant" COMSTREAM CORPORATION a Delaware corporation By:__/s/Jamie Crichton______ By:_/s/ Jamie Crichton__________________ Name: Jamie Crichton Name: Jamie Crichton Title: Vice President/Secretary Title: Chief Financial Officer 9 EXHIBIT "B" SURRENDER WORK Tenant shall cause all of the following Surrender Work to be completed in its entirety on or before the applicable dates described in the Amendment to which this Exhibit "B" is attached: I . Tenant shall vacate, in its entirety, Building A and deliver Building A to Landlord in the same condition as they were upon delivery of possession thereof at the Commencement Date, reasonable wear and tear, casualty and condemnation excepted, and shall surrender all keys to the Demised Premises to Landlord at the address set forth in the Lease and shall inform Landlord of all combinations on locks, safes and vaults, if any. Tenant shall move all of its property therefrom and all alterations and improvements placed therein by Tenant. Tenant shall repair any material damage to the Demised Premises caused as a result of Tenant's vacation, including but not limited to, in connection with the removal of its lab area cable trays, all materially damaged ceiling tiles, floor tiles, walls and other Building A interior improvements damaged during Tenant's occupancy of Building A and during the course of Tenant's vacation of Building A. 2. Tenant shall remove the existing volleyball court and Tenant's satellite farm and shall relocate Tenant's satellite equipment to the roof of Building B. In connection with such removal, Tenant shall cause the areas previously occupied by such volleyball court and such satellite farm to be paved and improved to match the balance of the parking areas to create an additional approximately 34 parking spaces. Tenant's satellite equipment shall be installed, replaced, repaired, removed, operated and maintained in compliance with all governmental laws, rules and regulations. Landlord shall reasonably approve the location of such satellite equipment on the roof of Building B. Such satellite equipment shall be reasonably screened and located on roof pads such that there shall be no penetrations of the roof of Building B except for installation of a roof Jack in connection therewith. All costs of installation, operation and maintenance of the satellite equipment and any necessary related equipment shall be borne by Tenant. Landlord shall not have any obligations with respect to the satellite equipment. Landlord makes no representation that the satellite equipment will be able to receive or transmit communication signals without interference or disturbance and Tenant agrees that Landlord shall not be liable to Tenant therefor. Tenant shall be solely responsible for any damage caused as a result of the installation, operation, maintenance or removal of the satellite equipment. Such satellite equipment shall remain the sole property of Tenant and Tenant shall remove the satellite equipment and related equipment at Tenant's sole expense upon the expiration or earlier termination of the Lease or upon the imposition of any governmental law or regulation which may require removal, and shall repair Building B upon such removal to the extent required by such work or removal. If Tenant falls to remove such satellite equipment and repair Building B within ten (10) days after the expiration or earlier tennination of the Lease, Landlord may do so at Tenant's expense. 10 3. Tenant shall reconfigure the parking area and related Improvements utilized by Building A and Building B in accordance with the Site Nan attached to the Amendment as EXHIBIT "A." 4. All of the Surrender Work shall be performed in a good and workmanlike manner and free of defects. Tenant shall be solely responsible at its cost and expense to repair any defects arising with respect to the Surrender Work during the Term. The obligation to repair any such defects shall survive the expiration or earlier termination of the Lease. The materials and specifications for any Surrender Work relating to the parking areas and other areas outside of Building B (e.g., paving of the areas occupied by the volleyball court) shall be consistent with the existing surrounding improvements. 11 EX-10.6 7 EXHIBIT 10.6 Exhibit 10.6 INDEMNITY AGREEMENT This Indemnity Agreement is made as of November 20, 1998, by Pacific Bell Corporation, a California corporation ("PacBell"), in favor of ComStream Corporation, a Delaware corporation "ComStream"), who agree as follows: 1. RECITALS. ComStream and ADI Communication Partners, L.P., predecessor-in-interest to Kilroy Realty, L.P. ("Landlord"), entered into the Lease dated as of April 23, 1997, as amended by the First Amendment dated as of July 16, 1997, and the Second Amendment to Lease dated as of November 1 , 1998 (the "Lease"). Pursuant to the Lease, ComStream leased from Landlord the property described in the Lease (the "Original Premises"), but has agreed under the Lease to vacate, on or before November 27, 1998, that portion of the Original Premises consisting of approximately 33,000 square-feet described and depicted on the attached Exhibit "A" (the "Vacated Space"). Landlord and PacBell have entered into an agreement whereby Landlord is granting PacBell the rights to occupy the Vacated Space commencing on November 27, 1998. As partial consideration for ComStream's agreement to vacate the Vacated Space, ComStream has requested this Indemnity. 2. INDEMNITY. PacBell shall defend, indemnify, and hold ComStream harmless from and against all costs, liabilities, claims, and damages ("Obligations") occurring within the Vacated Space or arising out of PacBell's occupancy of, or operation out of, the Vacated Space between November 27, 1998, and December 15, 1998, inclusive, including Obligations to Landlord or others under the Lease. The foregoing Indemnity EXCLUDES, however, Base Rent and the Additional Obligations (as defined in the Lease) and other Obligations which ComStream would have incurred under the Lease regardless of PacBell's occupancy of, or operation out of, the Vacated Space. For purposes of this Indemnity, PacBell is responsible for the acts and omissions of its officers, agents, employees, independent contractors, clients, guests, and other third parties (but only to the extent such other third parties' acts, omissions, or presence at the Original Premises relate solely to PacBell's occupancy of the Vacated Space). ComStream shall defend, indemnify and hold PacBell harmless from and against all Obligations occurring within the Original Premises other than the Vacated Space between November 27, 1998, and December 15, 1998, inclusive, or arising out of ComStream's occupancy of, or operation out of, the Original Premises other than the Vacated Space. For purposes of this Indemnity, ComStream is responsible for the acts and omissions of its officers, agents, employees, independent contractors, clients, guests, and other third parties (but only to the extent such other third parties' acts, omissions, or presence at the Original Premises relate solely to ComStream's occupancy of the Original Premises other than the Vacated Space). 1 3. MISCELLANEOUS. Each party to this Agreement shall execute and deliver all instruments and documents and take all actions as may be reasonably required or appropriate to carry out the purposes of this Agreement. The prevailing party(ies) in any litigation, arbitration, mediation, bankruptcy, insolvency or other proceeding ("Proceeding") relating to the enforcement or interpretation of this Agreement may recover from the unsuccessful party(ies) all costs, expenses, and actual attorneys' fees (including expert witness and other consultants' fees and costs) relating to or arising out of (a) the Proceeding (whether or not the Proceeding proceeds to judgment), and (b) any post-judgment or post-award proceeding including, without limitation, one to enforce or collect any judgment or award resulting from the Proceeding. All such judgments and awards shall contain a specific provision for the recovery of all such subsequently incurred costs, expenses, and actual attorney's fees. Each provision of this Agreement is valid and enforceable to the fullest extent permitted by law. If any provision of this Agreement (or the application of such provision to any person or circumstance) is or becomes invalid or unenforceable, the remainder of this Agreement, and the application of such provision to persons or circumstances other than those as to which it is held invalid or unenforceable, are not affected by such invalidity or unenforceability. Each of the individuals signing below on behalf of an entity represents and warrants that it is fully authorized to do so on behalf of such entity. This Agreement is effective only if PacBell enters into a lease agreement with Landlord relating to the Vacated Space. (STAMP) PACIFIC BELL, a California corporation By: /s/William M. Miller COMSTREAM CORPORATION, a Delaware corporation By: /s/ James Crichton, Vice President and CFO By: /s/ James Crichton, Secretary 2 November 18, 1998 Mr. Mark Steinman Senior Vice President & Chief Financial Officer Spar Aerospace Limited 121 King Street West Suite 1800 Toronto, Canada M5H 4C2 Dear Mark: Please find enclosed the Second Amendment to Lease ("Amendment") dated November 18, 1998 between Kilroy Realty and ComStream Corporation regarding the Sequence Drive real estate. The total costs pursuant to this Amendment are estimated to be $US 2,570,000 and are described in Schedule A. Radyne Corp. hereby releases Spar Aerospace Limited ("Spar") from any and all liabilities or obligations under the Lease dated April 23, 1997 between ADI Communication Partners, L.P., and ComStream Corporation as amended June 16, 1997 and November 18, 1998 (collectively, the "Lease") and under the Stock Purchase Agreement dated as of August 28, 1998 between Radyne Corp. and Spar with respect to the Lease under the following terms and conditions: 1. Spar agrees to pay to ComStream or its successor $US 980,000 by wire transfer on or before March 1, 1999. 2. Spar shall continue to be responsible for the rent and operating costs for Building B through December 15, 1998 and afterwards shall have no such responsibility. 3. Spar agrees to reimburse ComStream for 50% of actual costs incurred in connection with completion of the Surrender Work (as described in Exhibit B to the Amendment) to a maximum of $US 75,000, 50% of any commissions paid to CB Commercial Ward in connection with the Amendment to a maximum of $70,000, and 50% of legal fees paid to Soloman Ward in connection with the Amendment to a maximum of $US 3,500. Such amounts will be paid to ComStream within ten business days of receipt of invoices by Spar. 4. Spar agrees to reimburse ComStream for 50% of the costs of Building A during the period of December 16, 1998 to February 28, 1999, which amount shall be reduced by 50% of the credit described in paragraph H of the Amendment. The estimated amount shall be paid to ComStream in two installments; $US 68,000 shall be payable on January 1, 1999 and $US 68,500 shall be payable on February 1, 1999. If the foregoing accurately describes your understanding, please sign in the space provided below. Sincerely, /s/ Jamie Crichton - ------------------ Jamie Crichton Vice President & CFO 3 AGREED AND ACCEPTED: / S / Mark C. Steinman - --------------------------------------- Date: 26 November 1998 Mark C. Steinman Senior Vice President & CFO Spar Aerospace Limited / S /Robert C. Fitting - --------------------------------------- Date: 18 November 1998 Robert Fitting President Radyne Corp. 4 Schedule A ESTIMATED LEASE AMENDMENT COST ($000S)
Total Spar Radyne ------------------------------- Cost ComStream - --------------------------------------------------------------------------------------------------------- A. Cash buyout 1. March 1, 1999 payment $ 1,000.0 $ 980.0 $ 20.0 2. September 1, 1999 payment (undiscounted) $ 1,000.0 $ 1,000.0 ------------------------------------------- $ 2,000.0 $ 980.0 $ 1,020.0 B. Estimated Surrender Work costs: 1. Return volleyball court, satellite farm and loading dock areas to parking to create additional 40 spaces 2. Remove lab area cable trays and replace ceiling tiles $ 150.0 $ 75.0 $ 75.0 C. CB commission (as if building B sublease $ 140.0 $ 70.0 $ 70.0 was successful) D. Rent payments for Sequence A during vacant period $ 273.0 $ 136.5 $ 136.5 of 12/16/98 thru 2/28/99 E. Legal $ 7.0 $ 3.5 $ 3.5 ------------------------------------------- $ 2,570.0 $1,265.0 $ 1,305.0 ------------------------------------------- -------------------------------------------
NOTES 1. Between the Closing date of the Spar/Radyne transaction and 12/15/98, Spar would continue to fund the Building B costs and Radyne-Com Stream would fund the Building A costs as per the Stock Purchase Agreement. 2. Commencing December 15, 1998, Radyne-ComStream would occupy and fund Building B. Schedule B SEQUENCE A COSTS DURING VACANCY PERIOD (December 16, 1998 to February 28, 1999)
BLDG A SF 132600 Rent $ 145,260 Costs of vacant space 2.5 months $ 363,151 Prorated amount of rent credit (90,000) -------------- $ 273,151 -------------- --------------
SUMMARY OF CREDIT TO TENANT DESCRIBED IN PARAGRAPH 11 OF THE AMENDMENT NOV 26TH TO DEC 15TH
"Rent" (33,000 SF *$1.10 per month * 19/31 days 22,000 Operating costs 8,000 -------------- 30,000 DEC 16TH TO FEB 28TH "Rent" (33,000 SF * $1.10 per month for 2.5 months) 90,000 -------------- 120,000 -------------- --------------
EX-13.1 8 EXHIBIT 13.1 Exhibit 13.1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR COMMISSION FILE NUMBER ENDED DECEMBER 31, 1997 0-11685
------------------------ RADYNE CORP. (Exact name of Registrant as specified in its charter) NEW YORK 11-2569467 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization)
5225 S. 37TH STREET, PHOENIX, ARIZONA 85040 (Address of Principal Executive Offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (602) 437-9620 SECURITIES REGISTERED UNDER SECTION 12 (B) OF THE EXCHANGE ACT: NONE SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK, $.002 PAR VALUE ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting stock held by non-affiliates (deemed by the registrant to be persons, along with members of their families, known to the registrant to beneficially own, exclusive of shares subject to options, less than 5% of the outstanding shares of the registrant's common stock) of the registrant as of March 4, 1998 was approximately $1,388,000. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a Court. Yes _X_ No ____ As of March 10, 1998, there were 5,931,346 shares of the registrant's common stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS All statements, other than statements of historical fact, included in the Letter of the President included in the Annual Report to Stockholders and in this Form 10-K, including without limitation the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business", are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Various economic and competitive factors could cause actual results to differ materially from those discussed in such forward-looking statements, including factors which are outside of the control of the Company, such as interest rates, foreign exchange rates and changes in raw material costs, along with other factors noted in this Form 10-K with respect to the Company's business. ITEM 1. BUSINESS GENERAL Radyne was incorporated in the State of New York on November 25, 1980. The Company's current address is 5225 South 37th Street, Phoenix, Arizona 85040 and its telephone number is (602) 437-9620. Radyne has been involved in the advanced design and production of digital data communications equipment and associated equipment for satellite telecommunications systems for over seventeen years. Since the Company's inception in 1980, Radyne has established itself as a supplier in the satellite ground equipment business. Radyne designs, manufactures and sells satellite modems, frequency converters, ancillary products and equipment racks containing integrated modems and supporting equipment for data communications. Although the Company was forced to file for Chapter 11 bankruptcy protection in April 1994, it successfully emerged from bankruptcy in December of that year upon the acquisition of approximately 91% of its Common Stock by Engineering and Technical Services, Inc. ("ETS"), then a major customer of Radyne. On August 12, 1996, ETS was acquired by Singapore Technologies Pte Ltd through its indirect wholly owned subsidiary, Stetsys US, Inc. ("ST"). As a result, approximately 91% of the Company's Common Stock is now held by ST and an affiliate thereof. See "Bankruptcy Reorganization" below. In 1995, ETS caused Radyne to install a new management team, which promptly moved the Company's operations from New York to Phoenix, Arizona and commenced the hiring of an almost all new staff of engineering, sales and support personnel, with funding advanced by ETS and subsequently ST and its affiliates. The new Radyne team has reinstituted Radyne's research, development and marketing programs and reinvigorated its product line. On June 16, 1997, the Company completed an offering of its Common Stock to its shareholders of record ("Rights Offering"). The Company sold a total of 2,171,625 shares of its Common Stock, including 144,100 shares to Directors and employees of the Company and its affiliates and 1,976,000 shares to an affiliate of ST, for $2.50 per share. The total proceeds of the Rights Offering were $5,429,063, partially offset by $335,696 in associated costs. OPERATING STRATEGY Radyne's operating strategy is to (i) continue to build on the experience, skills and customer access of its new management team, (ii) capitalize on its development of smaller, less costly satellite modems, and (iii) expand into market segments, such as rural telephone, private networks, government networks and compressed television transmission. See "Target Markets" below. 1 The Company's engineering staff and support facilities are dedicated to (i) maintaining the state-of-the-art status of Radyne's traditional products for the satellite ground equipment segment of the market, (ii) designing and enhancing products for emerging markets, such as rural telephony for developing areas, high-speed satellite communications, government data equipment and the growing private network market, and (iii) providing special configurations to satisfy customers' special needs. Radyne's modems cover data rates from 2.4 Kilobytes per second to 155 Megabytes per second. The Company's frequency converters handle all three frequency bands used in satellite communications. Radyne believes that most of its current line of modems and converters are smaller and lower priced than the previous generation of products, enabling large system installation in significantly less rack space than the products of the Company's competitors. The Company also markets redundancy switches which operate in conjunction with satellite modems and converters and provide automatic fault monitoring and switch over to standby equipment in the event of modem or converter failure. Radyne's line of frequency converter products is usable in virtually all earth stations for the conversion of intermediate frequencies to microwave frequencies for satellite transmission. These converters are competitively priced, small in size and offer either single, dual or all three bands used in the satellite industry. In addition to being offered to commercial customers, there is a military market for the three-band units. The Company's newer products include a low cost modem with expanded features and super fast acquisition capabilities, making it attractive for use in both private networks and rural telephone systems being offered in China, Indonesia and India, and a line of satellite frequency translators presently used for testing in satellite earth stations. The development of digital compression technology has allowed the transmission of television in a small bandwidth, which has made TV transmission by satellite more economical than ever before. Video compression allows many times more channels on a satellite than was previously the case, thus producing a market of major interest. This compression technology is used for transmission of TV to network facilities, distribution of cable TV to cable companies, high definition TV distribution and video teleconferencing. Radyne has developed modulator products to be used in conjunction with compression equipment and has been shipping these products for over one and one-half years with exceptional market acceptance. BANKRUPTCY REORGANIZATION In December 1994, Radyne emerged from protection under Chapter 11 of the Bankruptcy Code. The Company believes that the reasons for Radyne having sought bankruptcy protection have been neutralized by its new management team and interim financing sources. When Radyne filed its bankruptcy petition in April 1994, it was suffering from severe cash flow problems due to shrinking sales. Years of uninspired management and the failure to maintain the sort of research and development program which is necessitated by the fast-moving data communications industry had left Radyne with an aging product line and an inability to access emerging markets. On April 28, 1994, Radyne filed a petition for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Eastern District of New York. Under Chapter 11, certain claims against the Company in existence prior to the filing were stayed while the Company continued business operations as debtor-in-possession. Claims secured against the Company's assets were also stayed, although the holders of such claims had the right to move the court for relief from the stay prior to the Company's reorganization plan being confirmed. Secured claims were secured primarily by liens on all of the Company's assets. The Company received approval from the Bankruptcy Court to pay certain of its pre-petition obligations, employee wages and benefits. Tax claims were rescheduled for payment in equal quarterly 2 installments of $9,600, with interest at 7%, over six years. A portion of these tax claims is the sole remaining pre-petition liability of the Company. On December 16, 1994, the Bankruptcy Court confirmed the Company's Plan of Reorganization effective at the close of business on December 16, 1994. The Plan, which has been consummated, called for the establishment of an escrow account from which to pay claims and provided for the following: (1) Exchange of Debt for Common Stock--The Company issued 17,000,000 (prior to a 1-for-5 Reverse Split) shares of previously authorized but unissued Common Stock to Radyne Florida (a special purpose subsidiary of ETS), which had previously purchased the Company's secured bank debt and the position of certain holders of secured promissory notes. This issuance of stock gave Radyne Florida approximately 91% of the Company's outstanding Common Stock. In exchange for the stock, the Company was discharged of $2,350,000 of debt owed to Radyne Florida. In addition, the 1,750,000 warrants held by Radyne Florida (purchased with the secured promissory notes) were cancelled. (2) Cancellation of Debt--Unsecured claims and capitalized lease obligations were settled as follows:
ORIGINAL TYPE OF CLAIM AMOUNT REDUCTIONS COMPROMISED - --------------------------------------------------- ------------ ------------ ------------- Accounts payable, accrued expenses, and capitalized lease obligations................................ $ 1,483,343 $ 1,111,872 $ 371,471 Convertible debentures and bridge notes............ 487,885 439,225 48,660 Taxes.............................................. 309,143 99,866 209,277 ------------ ------------ ------------- $ 2,280,371 $ 1,650,963 $ 629,408 ------------ ------------ ------------- ------------ ------------ -------------
(3) Other Claims--Priority Claims for wages of $53,786 were paid in full. Holders of the Company's Common Stock and options to purchase the Company's Common Stock had their interests significantly diluted by the distribution of Common Stock to Radyne Florida. Holders of warrants to purchase the Company's Common Stock exchanged the warrants for an aggregate of 53,437 shares of Common Stock. TARGET MARKETS Radyne has historically operated in an industry that has relatively few customers. Today, fewer than 1,000 customers make up the market for satellite data communication subsystems. Radyne's target markets include international telecommunications, high speed satellite communications, rural telephony and private network DAMA (demand assigned multiple access) users, as well as the United States Government. Currently, Radyne has a presence in the international telecommunications market, the DAMA products market and, with its new DM-45/DD-45 and MM-155 modems, the High- Speed Video Conferencing and High Definition Television markets but anticipates movement into the other markets in the near future. Of course, there can be no assurance that Radyne will succeed in capturing a significant share of these other markets. The international telecommunications market includes users of IDR (intermediate data rate), IBS (international business service) and open network satellite equipment. The IDR environment is primarily for voice traffic, while IBS is specific to business data traffic. In addition, the market includes customers for MUX (multiplexers), switches and peripheral equipment. The international telecommunications market should provide substantial business opportunities for Radyne in the near future. To illustrate the magnitude of the potential market for Radyne's satellite modems alone, the projected growth in transponders can be depicted as follows. A transponder is the part of the satellite that receives an uplink signal at one frequency, converts that signal's frequency, amplifies it and then retransmits the signal to the ground. 3 Satellites have an average of 24 transponders each. For each transponder, an average of 50 modems is required (25 on the transmitting side and 25 on the receiving end). Rural telephony and private network DAMA products require special communications equipment which is efficient for low traffic volume at many different locations. DAMA products allow many users to access the same channel on demand. Radyne serves the DAMA products segment of the market with its DMD-2400 modem. The DMD-2400 can be utilized in both rural telephony and private network systems. Rural telephony can be described as an intra-country telecommunications network linking many small villages or islands in a country like the Philippines, for example, ultimately allowing the villages to communicate with each other and the world. A private network can be described as a network in the commercial world. For example, many banks and other financial institutions, airlines, and large and multi-unit corporations have the need for satellite communications and may be linked via private networks. Additionally, the Company has developed the new DMD-2401 VSAT/SCPC Modem, which has enhanced features, to compliment the DMD-2400 products and to address other user requirements. The Company sells its DAMA/VSAT compatible products to system integrators (customers who make a business of supplying turnkey earth station operations for their customers), domestically and abroad, as components to systems that they have designed, as well as directly to end users. The Company offers these products for sale on a global basis and believes their use to be global. Radyne has entered the high-speed satellite communications market with various products that have been designed to incorporate the most advanced technologies available. Communications equipment in this segment possesses higher data rate capabilities of approximately 12-155 megabits per second, allowing much more data to be transmitted. Over the last year and one-half, the Company has introduced products such as the DVB- 3000 and DVB-3030 for the Digital Television industry, which are ideal for use in digital video hub uplinks, flyaway and mobile satellite news gathering applications. The DD-45 and DM-45 is a multi-purpose solution for Digital Video Broadcast and High Speed data transmission for use in, among other things, cable system backup/restoral-over-satellite and high data rate links. The Company's newest high-speed entrants are the DM-160 and MM-160 that offer an excellent solution for high data rate requirements. Also, our new MM-155 Microwave Modem is ideal for microwave link upgrades. Additionally, the United States Government has provided a significant market opportunity for Radyne as the defense budget shrinks and it becomes cost prohibitive for the government to develop its own products. Because of the expected growth in commercial off-the-shelf (COTS) and non-developmental item (NDI) procurement, Radyne has targeted the US Government as an important revenue source. PRINCIPAL PRODUCTS The following is a brief description of the Company's principal product lines. RCS-10/DMD-10 MODEM AND REDUNDANCY CONTROL SYSTEM The RCS-10 represents the new generation system which is replacing the RCS5000 family in Radyne's product line. It serves the same functions as the RCS5000, but with a number of notable improvements. Up to 30 modems can be combined in a single rack and each redundancy switch can control up to 10 modems. In addition to an expanded data rate range (9.6 Kbps to 8.448 Mbps compared to the RCS5000's 64 Kbps to 8.448 Mbps), the RCS-10 offers an improved display and menu structure and more options. DMD-4500 IBS/IDR SATELLITE MODEM This standard satellite modem provides selectable functions for Intelsat IDR, IBS and closed network services and is easily programmable by earth station personnel. Data rates may be selected in 8 Kbps steps between 48 Kbps and 8.448 Mbps. The DMD- 4500 can be used with a variety of redundancy switches and other options. 4 DMD-2401 SATELLITE MODEM (NEW PRODUCT) The DMD-2401 is a low cost, light weight (8 pounds), fast acquisition (under 20 second) modem. It is capable of data rates ranging from 9.6 Kbps to 2.048 Mbps in steps of 1 Bps. Digital signal processing eliminates virtually all on-board adjustments. This modem is designed to perform as both ends of a single channel per carrier link or as a VSAT remote site modem in a hub system. Its other applications include video conferencing, long distance learning, paging and news gathering. DVB-3000 AND DVB-3030 DIGITAL BROADCAST MODULATORS The DVB-3000 AND DVB-3030 are flexible, programmable digital video satellite modulators offering full compatibility with digital video standards. Their principal applications are for digital video hub uplinks, mobile satellite news gathering, video distribution and one-way data distribution. The DVB-3000 AND DVB-3030 are high speed, offering programmable data rates ranging from 1.0 to 30.0 Mbps and fixed data rates of 30 to 50 Mbps. They are frequency agile with a base range of 50 to 90 MHz and an optional range of 100 to 180 MHz in steps of 1.0 Hz. CONVERTERS, TRANSLATORS AND OTHER MICROWAVE PRODUCTS Radyne has a complete line of synthesized frequency up converters and down converters. The SFC6400 C-Band Up Converter converts data or video signals in the IF range of 50-180 MHz to uplink frequencies between 5.845 and 6.420 GHz. The SFC4200 C-Band Down Converter converts microwave carriers in the 3.62 to 4.20 GHz range to the IF range of 50-180 MHz. The Company believes that its SFC1450 Ku-Band Up Converter and the SFC1275G Ku-Band Global Down Converter offer low phase noise, superior standard transmit output compression and the only down converter to receive data and detect carrier power simultaneously. The SFC1468 Tri-Band Synthesized Up Converter is capable of converting signals in the IF range of 50-180 MHz to C, X and Ku band microwave uplink carriers. The SFC1274G Tri-Band Synthesized Down Converter does the reverse. The Company also offers a full line of Loop Test Translators, including C-Band, Ku-Band, X-Band and Tri-Band models. These are self contained frequency converters which perform transmit to receive loopback testing of earth station equipment. Following is a comparison of sales, by product category:
TWELVE MONTHS SIX MONTHS TWELVE MONTHS PRODUCT CATEGORY ENDED 12-31-97 ENDED 12-31-96 ENDED 6-30-96 - --------------------------------------------- -------------- -------------- -------------- Modems and Peripherals....................... $ 11,605,016 $ 4,453,807 $ 3,626,398 Microwave Products........................... $ 1,841,836 $ 451,252 $ 203,125 -------------- -------------- -------------- Totals....................................... $ 13,446,852 $ 4,905,059 $ 3,829,523
MANUFACTURING The Company's products are to a certain extent assembled and tested at its Phoenix, Arizona facilities using subsystems and circuit boards supplied by subcontractors. Although the Company believes that it maintains adequate stock to reduce the procurement lead time for certain components, the Company's products use a number of specialized chips and customized components or subassemblies produced by a limited number of suppliers. In light of previous financial difficulties, Radyne had experienced some inflexibility on the part of certain suppliers in regard to credit terms for delivered components. Due to the Company's most recent history of credit performance, this inflexibility has subsided during the last fiscal period and the Company now enjoys an overall good working relationship with its vendors. However, in the event that such suppliers were to be unable or unwilling to fulfill the Company's requirements, the Company could experience an interruption in production until an alternative source of supply was developed. The Company maintains an inventory of certain chips and components and subassemblies to 5 limit the potential for such an interruption. The Company believes that there are a number of companies capable of providing replacements for the types of unique chips and customized components and subassemblies used in its products. SALES AND MARKETING The Company sells its products through international representatives, distributors and systems integrators which are supported by the Company's sales and marketing personnel. In-house direct sales by the Company are targeted toward large accounts, new accounts and the establishment of distributors in new markets. The Company has recently established new distribution or representation arrangements in the Middle East, South America, Asia and the Pacific Rim. The Company's direct sales force is comprised of 10 individuals in the marketing department, supported by systems and applications engineers. Direct sales activities are focused on expanding the Company's international sales by identifying emerging markets and establishing new distributor accounts. Additionally, the Company directly targets certain major accounts which may provide entry into new markets or lead to subsequent distribution arrangements. Such major accounts tend to be telecommunications agencies and major corporations in new international markets. The Company has a customer service and support group, which primarily supports distributors and is responsible for after-sale support and installation supervision. In certain instances the Company uses third party companies for installation and maintenance. Significant customers for the periods ended as indicated were as follows:
SIX-MONTHS TWELVE-MONTHS DECEMBER 31, TWELVE- MONTHS SIX-MONTHS DECEMBER 31, 1997 1996 JUNE 30, 1996 JUNE 30, 1995 --------------------- --------------------- --------------- --------------- Customer A............... 2.5% 1.6% 6.4% 22.0% Customer B............... 1.1 -0- -0- 15.3 Customer C............... 1.1 6.3 8.1 14.2 Customer D............... 2.7 15.6 12.7 11.7 Customer E............... 2.2 18.3 -0- -0- Customer F............... 14.5 -0- -0- -0-
No other customers represented more than 10% of the Company's sales. The Company's sales in its principal foreign markets for the year ended December 31, 1997 and for the six-month period ended December 31, 1996 consisted of the following percentages of total sales:
TWELVE MONTHS SIX MONTHS TWELVE MONTHS REGION ENDED 12-31-97 ENDED 12-31-96 ENDED 6-30-96 - --------------------------------------------- ------------------- ------------------- ------------------- Asia......................................... 32% 31% 24% Latin America................................ 12% 25% 6% Europe....................................... 7% 9% 20%
Export sales, as a percentage of total net sales, were about 46% in the six and one half month period ended June 30, 1995, about 50% in the fiscal year ended June 30, 1996, about 66% for the six month period ended December 31, 1996, and approximately 55% for the fiscal year ended December 31, 1997. The Company believes that this figure may rise in subsequent periods. The Company considers its ability to continue to make sales in developing markets to be important to its growth potential. However, there can be no assurance that the Company will succeed in its efforts to cultivate such markets. 6 COMPETITION The Company has a number of major competitors in the satellite communications field. These include large companies, such as Hughes Network Systems, NEC, the EFData division of California Microwave and Spar Aerospace, which have significantly larger and more diversified operations and greater financial, marketing, human and other resources than Radyne. The Company estimates that the major competitors, in the main markets in which it operates, have the following market shares as compared to the Company's share:
VSAT GOV'T DATA COMPETITOR INTELSAT DIGITAL VIDEO NETWORKS EQUIPMENT - ----------------------------------------------- ------------- ----------------- ------------- --------------- EFData......................................... 35% 5% 25% 35% Comstream/Spar................................. 10 10 10 5 Hughes Network................................. 10 0 0 0 NEC............................................ 10 10 0 0 SSE/Fairchild.................................. 10 0 5 15 Radyne......................................... 15 25 5 5
The Company does not believe that any other single competitor has a greater than 10% market share for any of these product classes. However, the foregoing market share figures represent estimates based on the limited information available to the Company, and there can be no assurance of precision. The Company believes that it has been able to compete by concentrating its sales efforts in the international market, utilizing the resources of local distributors, and by emphasizing product features. However, most of the Company's competitors offer products which have one or more features or functions similar to those offered by the Company. The Company believes that the quality, performance and capabilities of its products, its ability to customize certain network functions and the relatively lower overall cost of its products, as compared to the costs generally offered by the Company's major competitors, have contributed to Radyne's ability to compete successfully. However, the Company's major competitors have the resources available to develop products with features and functions competitive with those offered by the Company. There can be no assurance that such competitors will not successfully develop such products or that the Company will be able to maintain a lower cost advantage for its products. Moreover, there can be no assurance that the Company will not experience increased competition in the future from these or other competitors currently unknown. EMPLOYEES As of February 5, 1998, the Company had 75 full time employees, including two executive officers, 55 in engineering, manufacturing and marketing operations, and 18 in administration. None of the Company's employees are represented by a union or governed by a collective bargaining agreement, and the Company believes that its relations with its employees are satisfactory. TECHNOLOGY The Company believes that improvement of existing products, reliance upon trade secrets, copyrights and unpatented proprietary know-how and the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage. Because patents often provide only narrow protection which may not provide a competitive advantage in areas of rapid technological change and because patent applications require public disclosure of information which may otherwise be subject to trade secret protection, Radyne has not obtained, and has no present intention to obtain, patents on existing products. However, there can be no assurance that the Company's technology will not be found to infringe upon the intellectual property of others. If the Company's technology should be found to impermissibly utilize the intellectual property of others, the Company's ability to utilize the technology could be materially restricted or prohibited. In such event, the Company might be required to obtain 7 licenses from third parties to utilize the patents or proprietary rights of others. No assurance can be given that any licenses required could be obtained on terms acceptable to the Company or at all. In addition, in such event, the Company could incur substantial costs in defending itself against infringement claims made by third parties or in enforcing its own intellectual property rights. ITEM 2. PROPERTIES The Company's sole office and production facility consists of a 16,337 square foot facility in Phoenix, Arizona. This facility is leased at an annual cost of approximately $88,000. The fixed term of the lease expires on March 30, 1998, after which the term becomes month-to-month at a 25% increase in rental rate. On November 6, 1997, the Board of Directors authorized the Company to enter into a contract for a new facility, which is expected to be available for occupancy in July 1998. The term of the lease is 10 years with options to renew. The lease provides for rent in the amount of $45,000 per month, subject to a nominal increase dependant upon costs of tenant improvements, for the first year with an escalation of 3% per year during years 2 through 10 (Note 9). The building is approximately 65,000 square feet in size (and is expandable to some degree) and the Company believes that this new facility will provide for the company's expected growth for the next ten years. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of securities holders during the three months ended December 31, 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded in the over-the-counter market under the OTC Bulletin Board symbol "RADN" (prior to the January 1997 1-for-5 Reverse Split, the symbol was "RDYN"). However, there is no established trading market as actual transactions are infrequent. The following table sets forth the range of high and low trading prices as reported by the National Quotation Bureau, Inc. for the periods indicated. It should be noted that these quotations relate, to some extent, to periods prior to the Reverse Split. All pre-split quotations have accordingly been multiplied by 5. At March 24, 1998, the Company had approximately 450 shareholders of record. The Company believes that the number of beneficial owners is actually in excess of 1,300, due to the fact that a large number of shares are held in street name.
HIGH LOW ----------- --- 1996: First Quarter................................................................ 55/8 21/2 Second Quarter............................................................... 67/8 33/4 Third Quarter................................................................ 97/32 41/16 Fourth Quarter............................................................... 10 5 1997: First Quarter................................................................ 6 31/8 Second Quarter............................................................... 31/4 3 Third Quarter................................................................ 103/4 5 Fourth Quarter............................................................... 101/2 4
8 The Company has not paid dividends on the Common Stock since inception and does not intend to pay any dividends to its stockholders in the foreseeable future. The Company currently intends to reinvest earnings, if any, in the development and expansion of its business. The declaration of dividends in the future will be at the election of the Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors. ITEM 6. SELECTED FINANCIAL DATA The following selected statement of operations data for the year ended December 31, 1997,the six month period ended December 31, 1996, the year ended June 30, 1996, the six and one-half month period ended June 30, 1995 and the ten and one-half months ended December 16, 1994 and the selected balance sheet data at those dates, are derived from the Financial Statements of the Company and notes thereto audited by Deloitte & Touche LLP, independent certified public accountants for the Company. The selected statement of operations data for the year ended January 31, 1994 and the selected balance sheet data at January 31, 1994 are derived from the unaudited financial statements of the Company. These unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring accruals necessary for a fair presentation of the financial position and results of operations for the periods presented. Per share data and shares outstanding reflect an adjustment for the effects of the 1-for-5 reverse split of the Company's common stock, which became effective on January 9, 1997. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements of the Company and notes thereto included elsewhere in this 10-K Annual Report. 9 STATEMENT OF OPERATIONS DATA PREDECESSOR COMPANY (1)
SIX MONTHS SIX-AND-ONE-HALF TEN-AND-ONE-HALF YEAR ENDED ENDED YEAR ENDED MONTHS ENDED MONTHS ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, DECEMBER 16, 1997 1996 1996 1995 1994 ------------- ------------- ------------- ---------------- ---------------- Net Sales.............................. $ 13,446,852 $ 4,905,059 $ 3,829,523 $ 1,861,262 $ 2,569,396 Cost of Sales.......................... 8,022,262 4,052,433 2,559,350 1,228,747 2,229,329 Gross Profit (loss).................... 5,424,590 852,626 1,270,173 632,515 340,067 Selling, general and administrative expense.............................. 4,242,138 1,437,971 1,843,576 961,162 1,658,388 Asset impairment charge (2)............ 421,000 Professional fees related to reorganization....................... 600,198 Research and development............... 2,262,066 808,025 1,794,823 Operating income (loss)................ (1,079,614) (1,814,370) (2,368,226) (328,647) (1,918,519) Interest expense....................... 677,102 255,604 256,871 36,209 118,235 Income (loss) before fresh start adjustments and extraordinary items................................ $ (1,756,716) $ (2,069,974) $ (2,625,097) $ (364,856) $ (2,036,754) Fresh start adjustments................ 1,598,841 Loss before extraordinary items and taxes on income...................... $ (1,756,716) $ (2,069,974) $ (2,625,097) $ (364,856) $ (437,913) Extraordinary items (3)................ 2,699,156 Income (loss) before taxes............. (1,756,716) (2,069,974) (2,625,097) (364,856) 2,261,243 Net loss per share before extraordinary items................................ (0.35) (0.55) (0.70) (0.10) (1.33) Net Income (loss) per share............ (0.35) (0.55) (0.70) (0.10) 6.87 Weighted avg. number of outstanding shares............................... 5,012,664 3,750,699 3,742,227 3,729,721 329,020 YEAR ENDED JANUARY 31, 1994 ------------- Net Sales.............................. $ 4,966,617 Cost of Sales.......................... 5,620,108 Gross Profit (loss).................... (653,491) Selling, general and administrative expense.............................. 3,363,893 Asset impairment charge (2)............ Professional fees related to reorganization....................... Research and development............... 785,679 Operating income (loss)................ (4,803,063) Interest expense....................... 634,061 Income (loss) before fresh start adjustments and extraordinary items................................ $ (5,437,124) Fresh start adjustments................ Loss before extraordinary items and taxes on income...................... $ (5,437,124) Extraordinary items (3)................ Income (loss) before taxes............. (5,437,124) Net loss per share before extraordinary items................................ (21.30) Net Income (loss) per share............ (21.30) Weighted avg. number of outstanding shares............................... 255,169
- ------------------------ (1) The Company petitioned for bankruptcy protection in April 1994 and operated as a debtor-in-possession until December 16, 1994. (2) Consists of the writedown of designs and drawings in light of the introduction of replacement products. (3) Consists of $1,062,667 gain on exchange of debt for common stock and $1,636,489 gain on debt forgiveness. BALANCE SHEET DATA PREDECESSOR COMPANY
AT 12/31/97 AT 12/31/96 AT 6/30/96 AT 6/30/95 AT 12/16/94 ------------ ------------ ------------ ------------ ----------- Cash and cash equivalents............................ 569,692 186,488 971 2,109 256,398 Working capital (deficit)............................ 1,654,857 (5,851,527) (4,082,987) (1,343,018) (977,678) Total assets......................................... 10,231,617 6,572,917 3,272,686 3,452,999 3,084,394 Long-term liabilities................................ 4,649,404 161,968 130,414 168,304 192,603 Total liabilities.................................... 11,381,678 11,019,543 5,669,338 3,264,554 2,531,093 Stockholder equity (deficit)......................... (1,150,061) (4,446,626) (2,396,652) 188,445 553,301 AT 1/31/94 ------------ Cash and cash equivalents............................ 84,467 Working capital (deficit)............................ (2,284,575) Total assets......................................... 1,354,933 Long-term liabilities................................ 188,123 Total liabilities.................................... 3,612,875 Stockholder equity (deficit)......................... (2,257,942)
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL In reviewing the following material, the reader should take note of the fact that the respective periods being compared are of various durations. This is due to several changes in the Company's fiscal year. Upon emergence from bankruptcy on December 16, 1994, the predecessor company's fiscal year ended on that date. The adoption of the fiscal year of the Company's new parent (ETS) at that time created a fiscal period from December 17, 1994 through June 30, 1995, followed by a full year ended June 30, 1996. Upon becoming a subsidiary of ST in August of 1996, the Company adopted ST's fiscal year (the calendar year), creating a stub fiscal period from July 1 through December 31, 1996. RESULTS OF OPERATIONS FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1996. The Company's net sales increased 174% to $13,447,000 during the twelve month period ended December 31, 1997 from $4,905,000 during the six months ended December 31, 1996. This increase is primarily attributable to the increased time frame of the current period relative to the prior period and to the introduction of the Company's new product lines which have experienced exceptional market acceptance. The Company's cost of sales as a percentage of net sales decreased to 60% during the twelve months ended December 31, 1997 from 83% for the six months ended December 31, 1996. During the six months ended December 31, 1996, adjustments to inventory of approximately $491,000 (10% of sales) for obsolescence, of which $364,000 was related to the introduction of new products (which essentially rendered one entire older product line obsolete), and $340,000 (7% of sales) for start-up costs related to the introduction of new products were included in the cost of sales as old product lines were replaced with new product lines. These products included a new generation modem sub-system which makes use of the Company's proprietary technology from older products while adding features and reducing future manufacturing costs. Also, the Company has introduced and shipped new "Digital Video Broadcast" modems which have experienced exceptional acceptance in the marketplace. The Company is obligated to pay royalties to Merit Microwave, Inc. ("Merit") on sales of certain translator products developed by Merit. The royalty rate ranges from five to ten percent of the selling price. During the period ended December 31, 1997, the Company accrued $5,600 for royalty expenses, which were included in direct cost of goods sold. Selling, general and administrative costs increased to $4,242,000 or 32% of sales during the twelve months ended December 31, 1997 from $1,438,000 or 29% of sales for the six months ended December 31, 1996. The increase in expenses as a percentage of sales was primarily attributable to company growth and market expenses incurred for market penetration. The increase in pure dollars is also attributable to the increased time frame of the current period over the prior period. The Company recorded an "asset impairment charge" of $421,000 during the six months ended December 31, 1996, to reflect a valuation adjustment to Designs and Drawings which were partially impaired due to the introduction of new product lines. The valuation of designs and drawings is the result of adjustments made by the Company to adopt Fresh Start reporting in accordance with AICPA Statement of Position ("SOP") 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE, and represents the excess reorganization value that has been applied to the acquired technology supporting the Company's products (Note 1 to the Financial Statements). Amortization of designs and drawings is computed using the straight-line method over an estimated useful life of 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) four to seven years. The remaining asset carries a net book value of $472,000 and will be amortized using the straight-line method over the remaining estimated useful life of one to four years. Research and development expenditures increased to $2,262,000 (17% of sales) during the twelve months ended December 31, 1997 from $808,000 (16% of sales) for the six months ended December 31, 1996. The increase in expenses was primarily attributable to the increased time frame of the current period over the prior period and to major development programs instituted during the fiscal year ended December 31, 1997. It is anticipated that the Company will continue to experience high R&D expenses as it positions itself, through the introduction of new products, to gain market share. As of the last day of the fiscal period, the Company held approximately $600,000 worth of inventory, in the form of finished goods in a ready-to-ship status (Note 3), on the shipping dock for two orders placed with the Company which were to be purchased with funds underlying international letters of credit. Due to unexpected difficulties, the letters of credit were not received by the end of the period reported on herein and so the products were not shipped. Subsequent to the year end, only one of those letters of credit has been received, for approximately one-half of the inventory (and about $450,000 in sales) while the other letter of credit is still pending. The pending letter of credit is to be issued by an Indonesian bank and it is possible that this letter of credit will not materialize, in which case the Company will be forced to sell these goods to other customers. The impact of these delayed letters of credit was to delay shipment, and revenue recognition, of approximately $945,000 in sales. Interest expense net of interest income increased to $677,000 (5% of sales) during the twelve months ended December 31, 1997 from $256,000 (5% of sales) for the six months ended December 31, 1996. The large increase in expense was primarily attributable to the increased time frame of the current period over the prior period. For the period ended December 31, 1997, the Company did not provide for income taxes, due to the net loss. The Company also did not provide for income taxes, for the six months ended December 31, 1996, due to net operating losses. For the twelve month period ended December 31, 1997, the Company had a net loss of ($1,757,000) as compared with a net loss of ($2,070,000) in the six month period ended December 31, 1996. The decrease was primarily attributable to increased sales with a lower percentage of cost of sales. "New Orders Booked" (firm, fixed orders from customers) for the twelve months ended December 31, 1997 were $15,788,000 as compared to $5,939,000 for the year ended December 31, 1996. This increase was as a result of the increased time frame of the current period over the prior period coupled with the increased effort, on the part of the Company, to rejuvenate its marketing strategy. The Company's "Backlog" of orders to be shipped (unshipped orders from the prior period (Backlog) plus New Orders Booked less orders shipped during the period) was $4,814,000 as of December 31, 1997, an increase of 95% over the $2,473,000 in Backlog as of December 31, 1996. The Company's Backlog consists of firm orders as evidenced by written contracts and/or purchase orders from customers. Approximately $945,000 of this amount is due to the effect of the late letters of credit from two orders. One of these orders was from South America and has subsequently shipped. The other order is from Indonesia and has not shipped to date. This order is in jeopardy due to the current economic crisis in Asia and particularly Indonesia. If this order is cancelled, the Company will sell the inventory to other customers from which there are sufficient orders in house to deplete this inventory. The Company believes that while projected sales to certain Asian countries, including Indonesia, may be affected by the current economic crisis, sales to other regions, including domestic sales, should increase substantially during the 1998 fiscal year and more than offset any decline in sales to the Asian region. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS SIX MONTH PERIOD ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996. The Company's net sales increased 28% to $4,905,000 during the six month period ended December 31, 1996 from $3,830,000 during the twelve months ended June 30, 1996. This increase was primarily attributable to the introduction of the Company's new product lines which have experienced exceptional market acceptance. Volume in terms of units sold has increased with sales of products introduced since July 1, 1995 increasing from $434,000 for the period ended June 30, 1996 to $3,477,000 for the period ended December 31, 1996. The Company's cost of sales as a percentage of net sales increased to 83% during the six months ended December 31, 1996 from 67% for the fiscal year ended June 30, 1996. There were two primary reasons for this increase in percentage, both of which the Company considers largely extraordinary. First, there were adjustments to inventory of $491,000 (10% of sales) for obsolescence. Of this amount, $364,000 was related to the introduction of new products which essentially rendered one entire product line obsolete, $110,000 was related to ongoing product development and $17,000 was related to the valuation of excess materials on hand. Second, $340,000 (7% of sales) of start-up costs related to the introduction of new products were included in the cost of sales for the period ended December 31, 1996. These products included a new generation modem sub-system which makes use of the Company's proprietary technology from older products while adding features and reducing future manufacturing costs. Also, the Company introduced and shipped the new "Digital Video Broadcast" modem which has experienced exceptional market acceptance. Also contributing to the increase in cost of sales as a percentage of sales were freight charges related to international sales (2% of sales) and higher than anticipated warranty expense on some of the Company's older products (1% of sales). The Company is obligated to pay royalties to Merit Microwave, Inc. ("Merit") on sales of certain translator products developed by Merit. The royalty rate ranges from five to ten percent of the selling price. During the period ended December 31, 1996, the Company paid $2,200 for royalty expenses, which were included in direct cost of goods sold. Selling, general and administrative costs decreased to $1,438,000 or 29% of sales during the six months ended December 31, 1996 from $1,844,000 or 48% of sales for the fiscal year ended June 30, 1996. The decrease in expenses was primarily attributable to the decreased time frame of the latter period over the prior period and partially offset by increased costs related to the higher level of business that the Company experienced during the latter period. The Company recorded an "asset impairment charge" of $421,000 during the six month period ended December 31, 1996 to reflect a valuation adjustment to Designs and Drawings which were partially impaired due to the introduction of new product lines. Research and development expenditures decreased to $808,000 (16% of sales) during the six months ended December 31, 1996 from $1,795,000 (47% of sales) for the twelve months ended June 30, 1996. The decrease in expenses was primarily attributable to the decreased time frame of the latter period relative to the prior period. Additionally, the Company had embarked on a major development program during the fiscal year ended June 30, 1996, in order to regain a competitive posture after two fiscal periods during which the Company had made no development effort. Interest expense net of interest income decreased to $256,000 (5% of sales) during the six months ended December 31, 1996 from $257,000 (7% of sales) for the fiscal year ended June 30, 1996. The small decrease in expense was primarily attributable to the 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) decreased time frame of the latter period as compared to the prior period, offset by additional interest from the Company's increased debt level. For the six month period ended December 31, 1996, the Company did not provide for income taxes, due to the net loss. The Company also did not provide for income taxes for the twelve month period ended June 30, 1996, due to net operating losses. For the six month period ended December 31, 1996, the Company had a net loss of ($2,070,000) as compared with a net loss of ($2,625,000) in the twelve month period ended June 30, 1996. The decrease was primarily attributable to the decreased time frame of the latter period relative to the prior period as partially offset by the increase in cost of sales as a percentage of sales and the expenses of increased business activity, and the $421,000 asset impairment charge as discussed above. "New Orders Booked" (firm, fixed orders from customers) for the six months ended December 31, 1996 were $5,939,000 as compared to $4,184,000 for the year ended June 30, 1996. The Company's "Backlog" of orders to be shipped (orders from the prior period which had not yet been shipped plus New Orders Booked less orders shipped during the period) was $2,473,000 as of December 31, 1996, an increase of 72% over the $1,439,000 in Backlog as of June 30, 1996. The Company's Backlog consists of firm orders as evidenced by written contracts and/or purchase orders from customers. RESULTS OF OPERATIONS FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO SIX AND ONE-HALF MONTH PERIOD ENDED JUNE 30, 1995 The Company's net sales increased 206% to $3,830,000 during the period ended June 30, 1996 from $1,861,000 during the six and one-half months ended June 30, 1995 primarily due to the increased time frame of the later period being reported upon herein over the prior period. The Company's cost of sales as a percentage of net sales increased to 67% during the fiscal year ended June 30, 1996 from 66% for the six and one-half months ended June 30, 1995. Selling, general and administrative costs increased to $1,844,000 or 48% of sales during the fiscal year ended June 30, 1996 from $961,000 or 52% of sales for the six and one-half months ended June 30, 1995. The increase in expenses was primarily attributable to the increased time frame of the later period over the prior period. Research and development expenditures increased to $1,795,000 during the fiscal year ended June 30, 1996 from $-0- for the six and one-half months ended June 30, 1995. The Company embarked on a major development program during the fiscal year ended June 30, 1996, in order to regain a competitive posture after two fiscal periods during which the Company had made no development effort. Interest expense net of interest income increased to $257,000 (7% of sales) during the fiscal year ended June 30, 1996 from $36,000 (2% of sales) for the six and one-half months ended June 30, 1995, due primarily to increased borrowings. For the period ended June 30, 1996, the Company did not provide for income taxes, due to the net loss. The Company also did not provide for income taxes for the six and one-half month period ended June 30, 1995, due to net operating losses. For the twelve month period ended June 30, 1996, the Company had a net loss of ($2,625,000) as compared with a net loss of ($365,000) in the period ended June 30, 1995. The increase was primarily 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) attributable to the increased level of research and development expenditures and interest expense, along with the increased time frame of the later period over the prior period. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital was $1,654,857 at December 31, 1997, as compared to a deficit of ($5,852,000) at December 31, 1996, ($4,083,000) at June 30, 1996 and ($1,837,000) at December 31, 1995. The elimination of the deficit from December 31, 1996 was due primarily to $5,050,000 of net proceeds from the sale of Common Stock, pursuant to a Rights Offering to the Company's shareholders ("Rights Offering"), new bank borrowings of $9,500,000 ($4,500,000 of which is classified as long-term) and a decrease in accounts receivable and other current assets of approximately $400,000. This amount was partially offset by payments on notes payable under lines of credit agreements of $1,994,000 and payments on notes payable to affiliates of $6,600,000 and an approximately $611,000 decrease in accounts payable and accrued liabilities, and an increase of $3,399,000 in inventories. Net cash used in operating activities was $4,945,000 for the twelve month period ended December 31, 1997, as compared to $3,546,000 for the six months ended December 31, 1996, as compared to $2,581,000 used in the year ended June 30, 1996 and $938,000 used in the six and half months ended June 30, 1995. The principal causes for the difference in 1997 were the net loss for the period of $1,757,000 and increases in inventories, approximately $600,000 of which was in the form of finished goods which had been built in anticipation of two orders placed with the Company which were to be purchased with funds underlying international letters of credit. Due to unexpected difficulties, the letters of credit were not received by the end of the period reported on herein and so the products were not shipped. Subsequent to the year end, only one of those letters of credit has been received, for approximately one-half of the inventory (and about $450,000 in sales) while the other letter of credit is still pending. The pending letter of credit is to be issued by an Indonesian bank and it is possible that this letter of credit will not materialize, in which case the Company will be forced to sell these goods to other customers. The impact of these delayed letters of credit was to delay shipment, and revenue recognition, of approximately $945,000 in sales as discussed above. Cash used in investing activities, consisting of additions to equipment, amounted to $593,000 for the period ended December 31, 1997, $255,000 for the period ended December 31, 1996, $389,0000 for year ended June 30, 1996 and $119,000 for the six and one-half month period ended June 30, 1995. The current year's increase of $338,000 is consistent with management's plans to continue investment in research & development and Company growth. The Company has no material commitments to make capital expenditures in 1998 or thereafter. Certain leasehold improvements relative to the new facility (ITEM 2 and Note 9), if any, will be added to the landlord's cost basis of the property and amortized in the form of increased rent. The Company derived net cash from financing activities of $5,922,000 during the year ended December 31, 1997, $3,986,000 during the six month period ended December 31, 1996 and $2,969,000 during the year ended June 30, 1996, with the difference resulting from greater net borrowings and the proceeds from the sale of stock during the current period. As a result of the foregoing, the Company increased its cash balance by $383,000 for the twelve month period ended December 31, 1997, increased its cash balance by $186,000 for the six months ended December 31, 1996 and decreased its cash balance by $1,000 for the year ended June 30, 1996. A bank line of credit, in the amount of $5,000,000, was established for the Company with Bank of America NT&SA, Asian Banking Unit, by Stetsys US, Inc., the beneficial owner of 57.3% of the 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Company's outstanding stock. As of December 31, 1997, the Company had drawn down $4,500,000 of the available funds in the form of demand loans. An affiliate of Stetsys US, Inc. issued a non-binding letter of awareness to the bank which replaced a previous guarantee. The interest rates on these loans ranged from 7.15625% to 8.5% per annum. The Company also has an uncommitted $5,500,000 credit facility with Citibank NA with respect to which the same affiliate of ST has also issued a non-binding letter of awareness. As of December 31, 1997, the Company had drawn down $5,000,000 of the available funds in the form of demand loans. Subsequent to the end of the period reported on herein, the bank line with Bank of America was terminated and paid in full by the proceeds of a loan from Stetsys US, Inc. in the amount of $4,618,272. The loan from Stetsys US, Inc. bears interest at the rate of 6.84375% per annum and matures on February 15, 1999. Another $500,000 loan was made by ST at the same interest rate and matures on January 4, 1999. The purpose of all of the above described loans has been to finance or refinance the capital needs associated with the Company's recent rapid sales and Backlog growth and the cost of research and development. To date, the Company's capital resources (as supplemented by loans from ST and its affiliates) have been sufficient to fund its operations and increased level of business. The Company believes that its bank credit lines and cash from operations are unlikely to be sufficient to fund its planned future operations and capital requirements for continued aggressive growth through the end of 1998. Therefore, in order to sustain a high rate of sales increases and new product development, management intends to formulate a plan for the Company to sell a substantial amount of additional Common Stock during the second or third quarter of this year. Of course there can be no assurance that the Company will be successful in offering such securities. If the Company were to be unable to raise sufficient capital, it might be necessary to delay or cut back on its plans for future growth. SUPPLEMENTARY INFORMATION YEAR 2000 COMPLIANCE The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a 2 digit year is commonly referred to as the Year 2000 Compliance (Year 2000) issue. As the year 2000 approaches, such systems may be unable to accurately process certain date-based information. The Company is in the process of communicating with others with whom it does significant business to determine their Year 2000 readiness and the extent to which the Company may be vulnerable to any third party Year 2000 issues. While there do not appear to be any issues for which the Company is not prepared, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company would not have a material adverse effect on the Company. In the opinion of the Company's management, the cost of addressing Year 2000 compliance will not be material. Management has studied the known problems of Year 2000 compliance and has found that in all material respects, the Company's existing software and hardware are compatible with Year 2000. Any future costs to comply with Year 2000 issues will be expensed in the period that the costs are incurred. IMPACT OF INFLATION The Company does not believe that inflation has had a material impact on revenues or expenses during the last four fiscal periods reported on herein. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's financial statements as of December 31, 1997, December 31, 1996, June 30, 1996 and June 30, 1995 are included in this report as listed in the Index to Financial Statements in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None reportable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The directors and executive officers of the Company, their positions held with the Company, and their ages are as follows:
NAME AGE POSITION - ------------------------------------------- --- ------------------------------------------- Lim Ming Seong............................. 50 Director, Chairman of the Board Chan Wee Piak.............................. 42 Director Lee Yip Loi................................ 54 Director Robert A. Grimes........................... 45 Director Robert C. Fitting.......................... 62 Director and President Steven W. Eymann........................... 45 Executive Vice President Garry D Kline.............................. 48 Vice President of Finance
Each director is elected for a period of one year at the Company's annual meeting of stockholders and serves until the next meeting and until his successor is duly elected and qualified. Officers are elected by, and serve at the discretion of, the Board of Directors. The following is a brief summary of the background of each director, executive officer and certain key employees of the Company: DIRECTORS AND EXECUTIVE OFFICERS: LIM MING SEONG has a been a Director and Chairman of the Board of the Company since August 13, 1996 and is chairman of its Compensation Committee. He is the Chairman of ST and of Vertex Management, Inc., a member of the Singapore Technologies group, and he has been Group Director of Singapore Technologies Pte Ltd, an indirect parent of ST since February of 1995. From March 1992 until February 1995, he was Executive Director of Singapore Technologies Ventures Pte Ltd and from February 1990 to March 1992, he was Group President of Singapore Technologies Holdings Pte Ltd. Prior to that time he held various corporate and government positions, including Deputy Secretary in the Singapore Ministry of Defense from 1979 to 1986. LEE YIP LOI has been a Director of the Company since August 13, 1996 and is chairman of the Audit Committee and a member of the Compensation Committee of the Board. Mr. Lee is also a director of ST. He has been Regional Director (America) of Singapore Technologies Pte Ltd since March 1994 and, from May 1990 to January 1997, he was President of it's affiliate, Metheus Corporation. Prior to that time he held a number of managerial positions with such corporations as Morgan Guaranty Trust and Singapore Technologies Pte Ltd and government positions with the Singapore Ministries of Education, Defense, Culture and Home Affairs. CHAN WEE PIAK has been a Director since August 13, 1996 and is a member of the Compensation Committee of the Board. He is a director of ST and has been General Manager of Agilis Communication Technologies Pte Ltd, also a member of the Singapore Technologies group, since January 1992. From 17 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES (CONTINUED) November 1989 to February 1992, he was General Manager of Chartered Microwave Pte Ltd. Prior to that time, he held various managerial positions in the Singapore Ministry of Defense and with Singapore Electronic and Engineering. ROBERT A. GRIMES, who is a member of the Audit and Compensation Committees of the Board, has served as a member of the Board of Directors since December, 1994. For the past seven years Mr. Grimes has also served as a member of the Board of Engineering and Technical Services, Inc. of which he was President until December 31, 1997. He was also the President of ST from February 24, 1997 to January 23, 1998. ROBERT C. FITTING has been President of the Company since February, 1995, became a Director of the Company in March, 1995 and is a member of the Audit Committee of the Board. Mr. Fitting has a Master of Electrical Engineering degree from New York University and a Bachelors with distinction from Penn State University. His professional career began at Bell Laboratories in 1962 where he spent six years developing innovative communication technologies. Mr. Fitting then joined the Motorola Government Electronics Division where he was an engineering manager. He published more than a dozen technical papers and was awarded a number of patents. He left Motorola in 1978 to build a new company under an agreement with Comtech Telecommunications. The new company was named Comtech Data Corporation, currently known as Fairchild Data Corporation. Mr. Fitting was the General Manager and President of Comtech Data Corporation from 1978 to 1984. He left Comtech to start a new company called EFData Corporation. As co-founder, CEO and President of EFData Corporation, Mr. Fitting built the company into a worldwide market leader in satellite communications equipment. While at EFData, Mr. Fitting won the "Arizona Entrepreneur of the Year" award in 1993 in the manufacturing/high technology category. STEVEN EYMANN has been Executive Vice President of the Company since February, 1995. Mr. Eymann graduated with honors and a Bachelor of Science in Electrical Engineering from the University of Nebraska. His professional career began at the Motorola Government Electronics Division where he was a design engineer, task leader and finally a project leader for the DSU-23/29B fuse development program. As project leader, he was responsible for project management, budgets, schedules, and design and testing of the fuse. He designed the computer-controlled automatic test set for factory testing based on an HP 9825 computer. The DSU-23/29B is an L-Band PN radar for accurate, low-cost altitude direction. In June of 1981, Mr. Eymann joined Comtech Data Corporation where he was Director of Product Development. He was responsible for budget, schedule and technical aspects of all new product development within Comtech. Prior to becoming the Director of Product Development, he served as a senior engineer with program and technical design responsibility. He left Comtech in 1984 to begin a new company called EFData Corporation. As co-founder and Vice President of EFData, Mr. Eymann was responsible for new product development and engineering management in the design and manufacture of high technology, military and commercial communications equipment. GARRY KLINE, Vice President of Finance, Chief Financial Officer and Secretary, joined the Company in September of 1995. From that time until July 1997 he was Secretary and Controller of the Company. From 1987 through 1995, Mr. Kline served as CFO and Controller of EFData Corporation. Prior to 1987, Mr. Kline served in various positions, including Vice President of Finance for Megatronics Inc., a publicly held printed circuit board manufacturer, Vice President of Operations for Vernal Lodging Associates, a hospitality management company, and General Partner of Tax and Accounting Computer Service, an accounting firm. CERTAIN KEY EMPLOYEES: PETER WEISSKOPF has been the President of the Microwave Products Division at Radyne since June, 1995. At Radyne, he is responsible for the operation of the microwave products division. His duties include 18 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES (CONTINUED) marketing, design and manufacture of existing and new microwave products as well as the administration of the division. Mr. Weisskopf has a Bachelor of Science in Computer and Electrical Engineering from George Mason University. He has worked as an engineer for several companies during his professional career, including Magnavox Data Systems, M/A-COM Linkabit and M/A-COM Active Assemblies Division. From 1990 to 1992, Mr. Weisskopf was an engineer at EFData Corporation, where he designed synthesized frequency converters for use in satellite communications. In 1992, Mr. Weisskopf founded Merit Microwave, Inc. As founder and President of this start-up firm, Mr. Weisskopf designed and marketed various microwave components and systems, including a complete line of satellite loopback test translators. ALAN POTTER has been the Vice President of Marketing for the Company since December 1995. His duties at Radyne include market research, neoteric product concepts, new corporate alliances and distribution systems in Europe and the Middle East. He joined Radyne after ten years with EFData as Sales Manager. Mr. Potter graduated from the University of Houston with honors, holding a Bachelor of Arts in Communications. After post graduate studies at the University of Massachusetts, Amherst, he began his professional career as an Associate Professor of Communications at the University of Texas at Houston. While there, in 1973, he developed and operated the first practical bi-directional coaxial cable network to simultaneously carry voice, data and video communications. He then designed, developed and managed a series of broadband cable television and data networks for Columbia Cable Television, Michelson Media and Cox Cable Communications. Mr. Potter joined Comtech Data in 1984 and, two years later, he followed Messrs. Fitting and Eymann to initiate the Sales and Marketing Department at EFData. He is currently an MBA candidate at the University of Phoenix. DAVE KOBLINSKI has been the Vice President of Operations for the Company since March, 1995. Mr. Koblinski has a Bachelor of Science in Business Administration from Arizona State University. He also holds a degree in Electronics Technology from Mesa Community College. His professional career began in 1982 at Comtech Data Corporation where he held the position of Customer Service Representative. He was responsible for repairs, field and telephone support of satellite data modems. From 1985 to 1995, Mr. Koblinski was the Senior Product Manager for EFData Corporation. His general responsibilities at EFData included relating customer requests and concerns to the factory. His direct responsibilities included the customer service, technical publication and order entry departments. Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to the registrant during the period from January 1,1997 to December 31, 1997, none of the officers or directors of the registrant or the beneficial owners of its equity securities failed to file reports on Forms 3, 4 or 5 required to be filed during such period or prior thereto, except that Form 4 Reports were filed late on one occasion by each of Stetsys Pte Ltd, Temasek Holdings (Private) Limited, Chan Wee Piak and Radyne Corp. ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION The Company's policy is to pay no compensation to directors for acting as such. The following table sets forth the compensation for services in all capacities to the Company for the period from the commencement of employment on March 1, 1995 through December 31, 1997 of the Company's President and Executive Vice President. No other executive officer or employee received total annual salary and bonus of more than $100,000. 19 ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION (CONTINUED) SUMMARY COMPENSATION TABLE
YEAR ALL OTHER NAME AND PRINCIPAL POSITION ENDED(1) SALARY OPTIONS (#) COMPENSATION(2) - ----------------------------------------------------------- --------- ---------- ----------- ----------------- Robert C. Fitting. President............................... 12/31/97 $ 116,529 $ 1,165 12/31/96 $ 40,000 279,085 $ 435 06/30/96 $ 80,000 0 $ 738 06/30/95 $ 29,231 0 0 Steven Eymann Exec. Vice Pres.............................. 12/31/97 $ 111,162 $ 1,112 12/31/96 $ 40,000 279,085 $ 435 06/30/96 $ 80,000 0 $ 738 06/30/95 $ 29,231 0 0
- ------------------------ (1) Mr. Fitting's and Mr. Eymann's employment with the Company commenced on March 1, 1995, so the figures shown for the fiscal year ended June 30, 1995 reflect a four-month period. The Company's fiscal year has been changed to the calendar year, so the figures shown for the period ended December 31, 1996 reflect a period of six months. (2) Matching 401(k) plan contributions. STOCK OPTIONS No stock options were granted to the above executive officers during the fiscal period ended December 31, 1997. AGGREGATE OPTION EXERCISES IN 1997 AND HOLDINGS AT YEAR END The following table sets forth information concerning option exercises and option holdings for the fiscal period ended December 31, 1997 with respect to Robert C. Fitting, the President of the Company and Steven Eymann, the Executive Vice President. AGGREGATE OPTIONS EXERCISED IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE
VALUE OF UNEXERCISED, NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS HELD AT OPTIONS AT NUMBER OF DECEMBER 31, 1997 DECEMBER 31, 1997(2) SHARES ACQUIRED VALUE ---------------------------- ------------------------------ NAME ON EXERCISE REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------------- --------------- --------------- ------------- ------------- ------------- --------------- Robert C. Fitting.................. 0.00 $ 0.00 0.00 215,085 $ 0.00 $ 0.00 Steven Eymann...................... 4,000.00 $ 0.00 0.00 215,085 $ 0.00 $ 0.00
- ------------------------ (1) Based on the fair market value of the Common Stock on the exercise date, less the per share exercise price. (2) Based on the fair market value of the Common Stock of $2.50 per share, as determined by the Company's Board of Directors, less the per share exercise price. 20 ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION (CONTINUED) EMPLOYMENT AGREEMENTS Under the employment agreement between the Company and Mr. Fitting and Mr. Eymann, they will serve as President and Vice President of the Company until the earlier of June 30, 2000 or such time as the stock options described in the above table become fully exercisable. Pursuant to the agreement, the Company presently pays Mr. Fitting and Mr. Eymann annual salaries of $130,000 and $125,000, respectively, and has granted them the stock options described in the above table. Each of Mr. Fitting and Mr. Eymann has also agreed that if he exercises any of the stock options, he will not engage in any business which competes with the Company until after the second anniversary of his termination of employment with the Company, except in the case of involuntary termination without cause. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee consists of Messrs. Lim, Chan, Lee and Grimes. There were no interlocking relationships between the Company and other entities that might affect the determination of the compensation of the executive officers of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of the date hereof, the ownership of the Common Stock by (i) each person who is known by the Company to own of record or beneficially more than 5% of the outstanding Common Stock, (ii) each of the Company's directors and its President and Executive Vice President, and (iii) all directors and executive officers of the Company as a group. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated.
NUMBER PERCENTAGE NAME AND ADDRESS OF SHARES OF CLASS - --------------------------------------------------------------------------------------- ---------- ------------- Stetsys US, Inc. c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie Singapore Science Park Singapore 118258........................................ 3,400,000 57.3% Stetsys Pte Ltd. c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie Singapore Science Park Singapore 118258........................................ 5,376,000(1) 90.6% Steven Eymann 5225 S. 37th Street Phoenix, Arizona 85040............................... 4,000 * Robert C. Fitting 5225 S. 37th Street Phoenix, Arizona 85040........................... -- -- Robert A. Grimes 5225 S. 37th Street Phoenix, Arizona 85040............................ 5,500 * Lee Yip Loi c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie Singapore Science Park Singapore 118258........................................ -- -- Chan Wee Piak c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie Singapore Science Park Singapore 118258........................................ 10,000 * Lim Ming Seong c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie Singapore Science Park Singapore 118258........................................ -- -- All directors and executive officers of the Company as a group (4 persons)............. 21,000 *
- ------------------------ * Less than one percent. (1) The shares reported as owned by Stetsys Pte Ltd include the shares reported as beneficially owned by Stetsys US, Inc., of which Stetsys Pte Ltd is sole shareholder. 100% of the stock of Stetsys US, Inc. and Stetsys Pte Ltd is ultimately owned by the Minister for Finance (Incorporated) of Singapore. 21 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Sales to ETS for the twelve month period ended December 31, 1997, the six month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half period ended June 30, 1995 were $152,500, $307,300, $311,600 and $159,700, respectively. ETS is a wholly owned subsidiary of ST. During the fiscal year ended December 31, 1997, the six month period ended December 31, 1996 and the year ended June 30, 1996, respectively, the Company made sales to Agilis Communication Technologies Pte Ltd, another member of the Singapore Technologies group, of $540,500, $375,000 and $118,900. The General Manager of Agilis, Chan Wee Piak, is a Director of the Company. On August 12, 1996, Stetsys US, Inc. ("ST"), a member of the Singapore Technologies Pte Ltd ("STPL") group, acquired 100% of the outstanding common stock of ETS. (ST is a wholly owned Delaware subsidiary of Stetsys Pte Ltd, which is a wholly owned subsidiary of STPL. STPL is an indirect wholly owned subsidiary of Temasek Holdings (Private) Limited, which is in turn wholly owned by the Minister for Finance (Incorporated) of Singapore). Messrs. Lim Ming Seong, Lee Yip Loi and Chan Wee Piak are all both Directors of the Company and officers of other corporations in the STPL group. From February 24, 1997 to January 23, 1998, Robert A. Grimes, a Director of the Company, was also President of ST. On August 12, 1996, Singapore Technologies Electronics Pte Ltd ("STE"), another member of the STPL group, made an unsecured loan of $4,500,000 to the Company, the proceeds from which were used to pay down the loan payable to ETS. This loan, which bore interest at 8%, was repaid on February 10, 1997 from the proceeds of loans provided by Citibank NA and ST. Between November 8 and December 18, 1996, ST made loans to the Company in the aggregate principal amount of $2,100,000, with interest at 8% per annum and maturing in March, 1997. At or about maturity, the accrued interest on these loans was paid by the Company and the principal amounts were repaid with the proceeds of new loans maturing on April 30, 1997. These loans by ST to the Company, totaling $4,100,000 were repaid with proceeds of the Rights Offering. Interest expense on notes payable to affiliates was $148,000, $205,900 and $248,400 for the year ended December 31, 1997, the six-month period ended December 31, 1996 and the year ended June 30, 1996, respectively, of which $-0-and $152,400 were included in accrued expenses in the accompanying balance sheet as of December 31, 1997 and 1996, respectively. Subsequent to December 31, 1997, ST made loans of $500,000 and $4,618,272 to the Company. The loans bear interest at 6.844% per annum with the principal and accrued interest due on January 4 and February 15, 1999, respectively. The proceeds of the $4,618,272 loan were used by the Company to repay a note payable under the above mentioned $5,000,000 line of credit agreement with Bank of America which was outstanding as of December 31, 1997 (Note 7). This line of credit, as to which an ST affiliate had issued a non-binding letter of awareness, was terminated at that time. The Company also has an uncommitted $5,500,000 line of credit from Citibank N.A. as to which the same ST affiliate has issued a non-binding letter of awareness. As of December 31, 1997, $5,000,000 had been drawn down in the form of demand loans under this line of credit. The Company has notes receivable from stockholders totaling $40,086. These notes bear interest at 4% and are due June 20, 1998. 22 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a) The following is an index of financial statements of Radyne Corp., financial statement schedules and exhibits included in Part IV, Item 14: FINANCIAL STATEMENTS Independent Auditors' Report.......................................................... F-1 Balance Sheets as at December 31, 1997 and 1996....................................... F-2 Statements of Operations for the Year Ended December 31, 1997, the Six-Month Period Ended December 31, 1996, the Year Ended June 30, 1996 and the Six and One-Half Month Period Ended June 30, 1995............................................................ F-3 Statements of Stockholders' Capital Deficiency for the Year Ended December 31, 1997, the Six Month Period Ended December 31, 1996, the Year Ended June 30, 1996 and the Six and One-Half Month Period Ended June 30, 1995......................................... F-4 Statements of Cash Flows for the Year Ended December 31, 1997, the Six-Month Period Ended December 31, 1996, the Year Ended June 30, 1996 and the Six and One-Half Month Period Ended June 30, 1995............................................................ F-5 Notes to Financial Statements......................................................... F-6
FINANCIAL SCHEDULES None
EXHIBITS - --------- 3.1* Restated Certificate of Incorporation 3.2* Bylaws, as amended and restated 10.1** 1996 Incentive Stock Option Plan 10.2*** Employment Agreement with Robert C. Fitting (Radyne Termsheet) 10.3 Lease dated November 11, 1997 27 Financial Data Schedule
- ------------------------ * Incorporated by reference from Registrant's report on Form 10-Q, filed March 11, 1997. ** Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on March 12, 1997. *** Incorporated by reference from Registrant's amended Registration Statement on Form S-1, dated May 9, 1997 and declared effective on May 12, 1997. b) Registrant filed no reports on Form 8-K during the period of October 1 through December 31, 1997. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Radyne Corp. (Registrant) By: /s/ ROBERT C. FITTING ----------------------------------------- Robert C. Fitting, PRESIDENT Dated: 21 March, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf by the Registrant and in the capacities and on the dates indicated. NAME TITLE DATE - ------------------------------ --------------------------- /s/ LIM MING SEONG Chairman of the Board of March 20, 1998 - ------------------------------ Directors Lim Ming Seong /s/ ROBERT C. FITTING President, Director March 20, 1998 - ------------------------------ Robert C. Fitting Vice President, Finance, March 20, 1998 /s/ GARRY D. KLINE Chief Financial - ------------------------------ (Principal Financial Garry D. Kline Officer) /s/ ROBERT A. GRIMES Director March 20, 1998 - ------------------------------ Robert A. Grimes /s/ LEE YIP LOI Director March 20, 1998 - ------------------------------ Lee Yip Loi /s/ CHAN WEE PIAK Director March 20, 1998 - ------------------------------ Chan Wee Piak 24 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Radyne Corp. Phoenix, Arizona We have audited the accompanying balance sheets of Radyne Corp. (the "Company") as of December 31, 1997 and 1996, and the related statements of operations, stockholders' capital deficiency and cash flows for the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one- half-month period ended June 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half-month period ended June 30, 1995 in conformity with generally accepted accounting principles. Deloitte & Touche LLP February 4, 1998 Phoenix, Arizona F-1 RADYNE CORP. BALANCE SHEETS DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996 - ----------------------------------------------------------------------------------- ------------- ------------- CURRENT ASSETS: Cash and cash equivalents........................................................ $ 569,692 $ 186,488 Accounts receivable--trade, net of allowance for doubtful accounts of $15,000 (1997) and $13,000 (1996)...................................................... 2,359,443 2,733,902 Inventories (Note 3)............................................................. 5,389,920 1,991,360 Prepaid expenses................................................................. 68,076 19,280 Deferred offering costs.......................................................... 75,018 ------------- ------------- Total current assets........................................................... 8,387,131 5,006,048 ------------- ------------- PROPERTY AND EQUIPMENT--NET (NOTES 4 AND 8)........................................ 1,322,551 849,564 ------------- ------------- OTHER ASSETS: Designs and drawings--net of accumulated amortization of $705,404 (1997) and $475,696 (1996)................................................................ 471,935 701,643 Deposits......................................................................... 50,000 15,662 ------------- ------------- Total other assets............................................................. 521,935 717,305 ------------- ------------- TOTAL.............................................................................. $ 10,231,617 $ 6,572,917 LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY CURRENT LIABILITIES Note payable under line of credit agreement (Note 7)............................. $ 5,000,000 $ 1,993,820 Notes payable to affiliates (Note 6)............................................. 6,600,000 Obligations under capital leases (Note 8)........................................ 109,258 53,042 Accounts payable--trade.......................................................... 667,202 805,279 Accounts payable--affiliate...................................................... 16,062 436,362 Accrued expenses (Notes 5 and 6)................................................. 901,032 926,956 Taxes payable (Note 2)........................................................... 38,720 42,116 ------------- ------------- Total current liabilities...................................................... 6,732,274 10,857,575 NOTE PAYABLE UNDER LINE OF CREDIT AGREEMENT (NOTES 6 AND 7)........................ 4,500,000 OBLIGATIONS UNDER CAPITAL LEASES (NOTE 8).......................................... 93,543 81,016 TAXES PAYABLE (NOTE 2)............................................................. 55,861 80,952 ------------- ------------- Total liabilities.............................................................. 11,381,678 11,019,543 ------------- ------------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 7, 9 AND 12) STOCKHOLDERS' CAPITAL DEFICIENCY (NOTES 2 AND 13): Common stock, $.002 par value--authorized, 20,000,000 shares; issued and outstanding, 5,931,346 shares (1997) and 3,759,721 shares (1996)............... 11,862 7,519 ADDITIONAL PAID-IN CAPITAL....................................................... 5,694,806 605,782 ACCUMULATED DEFICIT.............................................................. (6,816,643) (5,059,927) NOTES RECEIVABLE FROM STOCKHOLDERS (NOTE 6)...................................... (40,086) ------------- ------------- Total stockholders' capital deficiency......................................... (1,150,061) (4,446,626) ------------- ------------- TOTAL.............................................................................. $ 10,231,617 $ 6,572,917 ------------- ------------- ------------- -------------
See notes to financial statements. F-2 RADYNE CORP. STATEMENTS OF OPERATIONS
SIX AND ONE- SIX-MONTH HALF-MONTH YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, 1997 1996 1996 1995 ------------- ------------- ------------- ------------ Net Sales (Notes 6 and 11).................................. $ 13,446,852 $ 4,905,059 $ 3,829,523 $1,861,262 Cost of Sales (Note 6)...................................... 8,022,262 4,052,433 2,559,350 1,228,747 ------------- ------------- ------------- ------------ Gross Profit............................................ 5,424,590 852,626 1,270,173 632,515 Operating Expenses: Selling, general and administrative (Note 6).............. 4,242,138 1,437,971 1,843,576 961,162 Asset impairment charge (Note 1).......................... 421,000 Research and development.................................. 2,262,066 808,025 1,794,823 ------------- ------------- ------------- ------------ Total Operating Expenses.................................... 6,504,204 2,666,996 3,638,399 961,162 ------------- ------------- ------------- ------------ Loss from operations before interest expense................ (1,079,614) (1,814,370) (2,368,226) (328,647) Interest Expense--Net (Note 6).............................. 677,102 255,604 256,871 36,209 ------------- ------------- ------------- ------------ Net loss.................................................... $ (1,756,716) $ (2,069,974) $ (2,625,097) $ (364,856) ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------ Basic and diluted net loss per common share (Note 1)........ $ (.35) $ (.55) $ (.70) $ (.10) ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------ Weighted average number of common shares outstanding........ 5,012,664 3,750,699 3,742,227 3,729,721 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------
See notes to financial statements F-3 RAYDYNE CORP. STATEMENTS OF STOCKHOLDERS' CAPITAL DEFICIENCY YEAR ENDED DECEMBER 31, 1997, SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF MONTH PERIOD ENDED JUNE 30, 1995
NOTES COMMON STOCK ADDITIONAL RECEIVABLE --------------------- PAID-IN FROM SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS TOTAL ---------- --------- ------------ ------------ ------------ ------------ BALANCE, DECEMBER 16, 1994 (Note 1)................................ 3,729,721 $ 7,459 $ 545,842 $ 553,301 Net loss.......................... $ (364,856) (364,856) ---------- --------- ------------ ------------ ------------ BALANCE, JUNE 30, 1995.............. 3,729,721 7,459 545,842 (364,856) 188,445 Shares issued to Merit Microwave (Note 6)........................ 20,000 40 39,960 40,000 Net loss.......................... (2,625,097) (2,625,097) ---------- --------- ------------ ------------ ------------ BALANCE, JUNE 30, 1996.............. 3,749,721 7,499 585,802 (2,989,953) (2,396,652) Additional shares issued to Merit Microwave (Note 6).............. 10,000 20 19,980 20,000 Net loss.......................... (2,069,974) (2,069,974) ---------- --------- ------------ ------------ ------------ BALANCE, DECEMBER 31, 1996.......... 3,759,721 7,519 605,782 (5,059,927) (4,446,626) Issuance of common stock-net of issuance costs of $335,696...... 2,171,625 4,343 5,089,024 5,093,367 Promissory notes received in connection with issuance of stock (Note 6).................. $ (40,086) (40,086) Net loss.......................... (1,756,716) (1,756,716) ---------- --------- ------------ ------------ ------------ BALANCE, DECEMBER 31, 1997.......... 5,931,346 $ 11,862 $ 5,694,806 $ (6,816,643) $ (40,086) $ (1,150,061) ---------- --------- ------------ ------------ ------------ ---------- --------- ------------ ------------ ------------
See notes to financial statements. F-4 RADYNE CORP. STATEMENTS OF CASH FLOWS
SIX AND ONE YEAR SIX-MONTH YEAR HALF-MONTH ENDED PERIOD ENDED ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, 1997 1996 1996 1995 ------------ ------------ ----------- ------------ Cash flows from operating activities: Net loss.................................................... $(1,756,716) $(2,069,974) ($2,625,097) $ (364,856) Adjustments to reconcile net loss to net cash used in operating activities: Loss on disposal of assets.............................. 2,122 Depreciation and amortization........................... 454,183 177,535 276,913 147,523 Asset impairment charge................................. 421,000 Changes in operating assets and liabilities: Accounts receivable....................................... 374,459 (2,450,031) 251,806 (202,687) Bankruptcy claims escrow.................................. 106,613 Prepaids and other current assets......................... 26,222 (73,872) 73,581 99,534 Employee relocation incentives and advances............... 112,353 (109,353) Inventories............................................... (3,398,560) (840,691) (247,843) (353,686) Deposits.................................................. (34,338) (7,650) (191,796) Accounts payable--trade................................... (138,077) 339,848 (113,243) 284,495 Accounts payable--affiliate............................... (420,300) 436,362 Accrued expenses.......................................... (25,924) 545,990 (253,337) (348,004) Taxes payable............................................. (28,487) (24,053) (56,063) (6,093) ------------ ------------ ----------- ------------ Net cash used in operating activities................... (4,945,416) (3,545,536) (2,580,930) (938,310) ------------ ------------ ----------- ------------ Cash flows from investing activities--Capital expenditures.... (593,072) (255,118) (388,770) (119,042) ------------ ------------ ----------- ------------ Cash flows from financing activities: Net borrowings from notes payable under line of credit agreements................................................ 7,506,180 1,993,820 Proceeds from notes payable to affiliates................... 4,600,000 6,600,000 3,052,912 853,206 Payments on note payable to affiliate....................... (11,200,000) (4,594,696) Net proceeds from sale of common stock...................... 5,053,281 Principal payments on capital lease obligations............. (37,769) (12,953) (84,350) (50,143) ------------ ------------ ----------- ------------ Net cash provided by financing activities............... 5,921,692 3,986,171 2,968,562 803,063 ------------ ------------ ----------- ------------ Net increase (decrease) in cash............................... 383,204 185,517 (1,138) (254,289) Cash and cash equivalents, beginning of period................ 186,488 917 2,109 256,398 ------------ ------------ ----------- ------------ Cash and cash equivalents, end of period...................... $ 569,692 $ 186,488 $ 971 $ 2,109 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Supplemental disclosures of cash flow information--Cash paid for interest................................................ $ 687,626 $ 72,258 $ 3,996 $ 7,059 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Supplemental disclosures of noncash investing and financing activities: The Company incurred capital lease obligations of $106,512 and $85,887 for new machinery and equipment for the year ended December 31, 1997 and the six-month period ended December 31, 1996, respectively........................... In December 1996, the Company issued an additional 10,000 shares of common stock in conjunction with the asset purchase from Merit Microwave, Inc. (Note 6)..............
See notes to financial statements. F-5 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business--Radyne Corp. (the "Company" or "Radyne") is located in Phoenix, Arizona and designs, manufactures, and sells products, systems, and crsoftware used for the transmission and reception of data over satellite and cable communication networks. Upon emergence from bankruptcy proceedings on December 16, 1994 (Note 2), the Company became a majority-owned subsidiary of Radyne, Inc., which was a wholly-owned subsidiary of Engineering and Technical Services, Inc. ("ETS"). On August 12, 1996, Singapore Technologies Pte Ltd. ("STPL") acquired 100 percent of the outstanding common stock of ETS through its indirect wholly owned subsidiary, Stetsys US, Inc. ("ST"). The purchase price for the ETS stock was $5,756,425. Subsequent to the acquisition of ETS by ST, Radyne, Inc. was merged into ETS, which in turn distributed all of its Radyne shares to ST. ETS did not push down any related purchase accounting adjustments since its ownership in the Company was less than 95 percent. As a result, the accompanying financial statements continue to reflect the historical accounts of the Company. The Company changed its fiscal year-end to December 31 to conform to the year-end of ST. UNAUDITED SUMMARIZED FINANCIAL INFORMATION Change in Fiscal Year--Effective August 12, 1996, the Company changed its fiscal year-end from June 30 to December 31, to conform to the year-end of ST. Summarized unaudited financial information for the six-months ended December 31, 1995 is as follows:
UNAUDITED ------------ Net sales....................................................................... $ 2,397,235 Gross profit.................................................................... 921,951 Net loss before income taxes.................................................... (583,887) Income taxes.................................................................... -- Net loss........................................................................ (583,887) Net loss per common share....................................................... (0.16)
Rights Offering--In November 1996, the Board of Directors approved the distribution to stockholders, other than the Company's principal stockholder, ST, of subscription rights for the purchase of up to 215,833 shares of the Company's common stock at a price of $2.50 per share. The Board of Directors further approved the distribution of subscription rights to an affiliate of ST to purchase up to 2,040,000 shares of the Company's common stock at a price of $2.50 per share. This Rights Offering became effective on May 12, 1997 and was concluded in June. ST's affiliate exercised 1,976,000 of its rights and individuals associated with such affiliate exercised another 34,000. An additional 51,525 rights issued to stockholders other than ST were exercised. In a related offering under the Company's Incentive Stock Option Plan, 110,100 shares of the Company's common stock were purchased by employees at $2.50 per share. Total proceeds received from the Rights Offering were partially offset by approximately $336,000 of associated costs. The proceeds from the exercise of these rights were used, in part, to satisfy notes payable to affiliates shown on the accompanying balance sheet at December 31, 1996. F-6 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash Equivalents--The Company considers all money market accounts with a maturity of 90 days or less to be cash equivalents. Revenue Recognition--The Company recognizes revenue upon shipment of product. Inventories, consisting of satellite modems and related products, are valued at the lower of cost (first-in, first-out) or market, including material, direct labor, and overhead costs. Property and equipment are stated at cost. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements which extend the useful lives of the assets are capitalized. Depreciation and amortization of machinery and equipment are computed using the straight-line method over an estimated useful life of three to seven years. Designs and Drawings--The valuation of designs and drawings is the result of adjustments made by the Company to adopt Fresh Start reporting in accordance with AICPA Statement of Position ("SOP") 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and represents the excess reorganization value that has been applied to the acquired technology supporting the Company's products (Note 2). Amortization of designs and drawings is computed using the straight-line method over an estimated useful life of four to seven years. At December 31, 1996, the Company recognized a design and drawing impairment charge of $421,000, with no associated tax benefit. With the introduction of new products in October 1996, management determined that a portion of the technology related to the original designs and drawings would be phased out or modified with technology used in new products. Impairment was determined by comparing the amount of undiscounted projected future cash flows attributable to each product using the related technology to the carrying value of the asset. Projected future cash flows were estimated for a period approximating the estimated remaining lives of the long lived assets, based on products' earnings history, market conditions and assumptions reflected in internal operating plans and strategies. Research and Development--The cost of research and development is charged to expense as incurred. Income Taxes--Radyne will file a consolidated federal income tax return with ETS and ST through June 1997 (conclusion of the Rights Offering). Subsequent to June 1997, Radyne will file separate federal income tax returns. Income taxes have been computed as if the Company filed separate income tax returns for each year. The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future consequences attributed to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Differences between income for financial and tax reporting purposes arise primarily from amortization of certain designs and drawings and accruals for warranty reserves and compensated absences. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-7 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentration of Credit Risk--The Company maintains ongoing credit evaluations of its customers and generally does not require collateral. The Company provides reserves for potential credit losses and such losses have not exceeded management's expectations. Net Loss Per Common Share--The Company presents earnings per share in accordance with Statement of Financial Standards No. 128, Earnings per Share ("SFAS No. 128"). SFAS No. 128 prescribes a presentation of basic earnings per share, which is calculated utilizing only weighted average common shares outstanding, and a diluted earnings per share which gives effect to all dilutive potential common shares outstanding during the reporting periods. Per share amounts have been adjusted to reflect a 1- for-5 reverse stock split that occurred on January 9, 1997. Fair Value of Financial Instruments--The fair value of accounts receivable, accounts payable, and accrued expenses approximates the carrying value due to the short-term nature of these instruments. Management has estimated that the fair values of the notes payable, capital lease obligations, and taxes payable approximate the current balances outstanding, based on currently available rates for debt with similar terms. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the financial statement date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Pronouncements--The Financial Accounting Standards Board has issued SFAS No. 131 on Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. This standard requires that public companies report certain information about operating segments in their financial statements. It also establishes related disclosures about products and services, geographic areas, and major customers. The Company is currently evaluating what impact this standard will have on its disclosures. 2. REORGANIZATION On December 16, 1994, the Bankruptcy Court confirmed the Predecessor Company's Plan of Reorganization effective at the close of business on December 16, 1994. Under the Plan of Reorganization, tax claims were rescheduled for quarterly payments totaling approximately $9,600, with interest at 7 percent through September 2000. Under the provision of SOP 90-7, Radyne Corp., the Successor Company, was required to adopt Fresh Start reporting as of the close of business on December 16, 1994, because the reorganization value of the Predecessor Company was less than the total of all post-petition liabilities and prepetition allowed claims, and the preconfirmation stockholders retained less than 50 percent of the Successor Company's common stock. F-8 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 3. INVENTORIES Inventories consist of the following at December 31:
1997 1996 ------------ ------------ Raw materials and components...................................... $ 2,605,397 $ 1,108,019 Work-in-process................................................... 1,124,929 792,119 Finished goods.................................................... 1,950,594 577,222 Valuation allowance............................................... (291,000) (486,000) ------------ ------------ Total............................................................. $ 5,389,920 $ 1,991,360 ------------ ------------ ------------ ------------
4. PROPERTY AND EQUIPMENT Property and equipment at December 31 consist of the following:
1997 1996 ------------ ---------- Machinery and equipment............................................. $ 1,298,715 $ 731,778 Furniture and fixtures.............................................. 373,548 243,559 ------------ ---------- Total............................................................... $ 1,672,263 975,337 Less accumulated depreciation....................................... 349,712 125,773 ------------ ---------- Property and equipment--net......................................... $ 1,332,551 $ 849,564 ------------ ---------- ------------ ----------
5. ACCRUED EXPENSES Accrued expenses at December 31 consist of the following:
1997 1996 ---------- ---------- Wages and related payroll taxes....................................... $ 486,840 $ 356,624 Interest.............................................................. 183,968 194,492 Professional fees..................................................... 85,500 171,000 Warranty reserve...................................................... 105,000 139,775 Other................................................................. 39,724 65,065 ---------- ---------- Total accrued expenses................................................ $ 901,032 $ 926,956 ---------- ---------- ---------- ----------
6. RELATED PARTY TRANSACTIONS In June 1995, the Company acquired certain assets of Merit Microwave, Inc. ("Merit"), as well as the manufacturing rights to the Merit line of microwave products, which include translators and frequency converters. The purchase price of approximately $120,000 was allocated to inventory and machinery and equipment, and was paid by the issuance of 30,000 shares of the Company's stock ($40,000), cash of $60,000, and the assumption of a payable of $20,000. Under the terms of the agreement, the Company is F-9 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 6. RELATED PARTY TRANSACTIONS (CONTINUED) required to pay royalties to Merit of 5-10 percent on certain sales of microwave products. From June 1995 to December 31, 1997, the Company paid royalties of $10,200. In July 1995, the Company's manufacturing operations were moved to ETS pending the Company's relocation to Phoenix. As a result, the Company transferred $726,345 of inventory and $115,155 of machinery and equipment to ETS in exchange for an equal reduction in a loan payable to ETS, to facilitate the commencement of subcontract manufacturing by ETS. During September 1996, in recognition of the completion of the move to Phoenix and increase in staffing, the Board of Directors determined that the Company should resume direct manufacturing. To this end, the Company repurchased $22,100 of machinery and equipment from ETS and was obligated to purchase $348,000 of inventory from ETS, which ETS had acquired and or processed in the ordinary course of fulfilling purchase orders from the Company. However, as the Company's products were undergoing constant improvement, in September 1996, the Company considered it necessary to treat $70,000 of such inventory as obsolete and another $20,000 thereof as slow-moving. Ongoing product development rendered another $90,000 of this inventory obsolete shortly thereafter. Additional inventory of $457,000 and $2,461,500 was purchased from ETS during the six-month period ended December 31, 1996 and the year ended June 30, 1996, respectively. Sales to ETS for the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half-month period ended June 30, 1995 were $152,500, $307,300, $311,600 and $159,700, respectively. Sales to Agilis Communication Technologies Pte Ltd. ("Agilis"), an affiliate of ST, amounted to $540,000, $375,000 and $118,900 for the year ended December 31, 1997, the six-month period ended December 31, 1996 and the year ended June 30, 1996, respectively. Prior to 1997, ETS provided management services to Radyne, for which ETS charged Radyne $60,000, $120,000 and $65,000 for the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half-month period ended June 30, 1995, respectively. Interest expense on notes payable to affiliates was $148,000, $205,900 and $248,400 for the year ended December 31, 1997, the six-month period ended December 31, 1996 and the year ended June 30, 1996, respectively, of which $-0-and $152,400 were included in accrued expenses in the accompanying balance sheet as of December 31, 1997 and 1996, respectively. Subsequent to December 31, 1997, an ST affiliate made loans of $5,118,272 to the Company. The loans bear interest at 6.844 percent per annum with the principal and accrued interest due in February 1999. The proceeds of the loan were used in part by the Company to repay a note payable under a line of credit agreement which was outstanding as of December 31, 1997 (Note 7). The Company has notes receivable from stockholders totaling $40,086. These notes bear interest at 4 percent and are due June 20, 1998. F-10 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 7. NOTES PAYABLE The Company had a note payable under a line of credit agreement with a bank that permitted outstanding borrowings of $4,500,000. At December 31, 1997, outstanding borrowings against the line were $4,500,000 plus accrued interest. Subsequent to December 31, 1997, the Company repaid the note and accrued interest with proceeds from affiliated debt (Note 6). The Company has a $5,500,000 credit agreement with a bank that includes $5,000,000 available under an uncommitted line of credit facility and facilities for bank guarantees and/or standby letters of credit up to $500,000. STPL has issued a nonbinding letter of awareness in connection with this credit agreement. Borrowings under the line of credit bear interest at a fluctuating rate equal to LIBOR or alternative Citibank's Quoted Rate plus 1 percent per annum (6.844 percent-6.938 percent as of December 31, 1997). At December 31, 1997, outstanding borrowings against the line were $5,000,000 plus accrued interest. The credit agreement requires that the Company maintain certain financial leverage ratios. This credit facility is an uncommitted line of credit which the bank may modify or cancel without prior notice. 8. OBLIGATIONS UNDER CAPITAL LEASES The Company leases machinery and equipment under capital leases. The net book value of the equipment, $258,536 at December 31, 1997 and $146,958 at December 31, 1996, is included in property and equipment in the accompanying balance sheets and is being depreciated over the estimated useful lives of the machinery and equipment. Payments on capital lease obligations at December 31 are due as follows: 1998.............................................................. $ 121,951 1999.............................................................. 81,453 2000.............................................................. 10,275 --------- Total minimum lease payments...................................... 213,679 Less amount representing interest................................. 10,878 --------- Present value of minimum lease payments........................... 202,801 Less current portion.............................................. 109,258 --------- Capital lease obligations due after one year...................... $ 93,543 --------- ---------
9. COMMITMENTS Rent expense was approximately $94,000, $44,000, $95,000 and $57,000 for the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half-month period ended June 30, 1995, respectively. During 1997, the Company entered into an agreement to lease a new building which is scheduled to be ready for occupancy in June 1998. Future minimum rentals under leases, including the new building lease, at December 31 are as follows: F-11 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 9. COMMITMENTS (CONTINUED) 1998............................................................ $ 351,000 1999............................................................ 548,200 2000............................................................ 564,600 2001............................................................ 581,500 2002............................................................ 599,000 Thereafter...................................................... 3,568,400 --------- Total........................................................... $6,212,700 --------- ---------
10. INCOME TAXES The following summary reconciles taxes (recovery) from operations at the federal statutory rate with the actual provision (recovery):
SIX AND SIX-MONTH ONE-HALF- YEAR PERIOD YEAR MONTH PERIOD ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, 1997 1996 1996 1995 ------------ ------------ ----------- ------------- Income taxes (recovery) at statutory rate.............................. $ (597,000) $ (704,000) $ (893,000) $ (124,000) Increase (decrease) in income taxes (recovery) resulting from: State income tax benefit............ (64,000) (75,000) (95,000) Change in valuation allowance....... 613,000 775,000 988,000 117,600 Other adjustments................... 48,000 4,000 -- 6,400 ------------ ------------ ----------- ------------- Total............................... $ -- $ -- $ -- $ -- ------------ ------------ ----------- ------------- ------------ ------------ ----------- -------------
Deferred tax assets consisted of the following at December 31:
1996 1997 ------------ ------------ Gross deferred tax assets: Cumulative tax effect of net operating loss carryforwards......... $ 4,620,000 $ 3,930,000 Tax credits....................................................... 210,000 210,000 Temporary differences............................................. (107,000) (30,000) Valuation allowance............................................... (4,723,000) (4,110,000) ------------ ------------ Total............................................................. $ -- $ -- ------------ ------------ ------------ ------------
At December 31, 1997, the Company has net operating loss carryforwards of approximately $12,278,000 expiring in various years through 2013 and general business credit carryforwards of $210,000 F-12 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 10. INCOME TAXES (CONTINUED) expiring in various years through 2004 for utilization against taxable income/taxes payable of future periods, if any. Approximately $6,200,000 of the Company's net operating loss and tax credit carryforwards are subject to an annual limitation under Internal Revenue Code Section 382, in future years, as a result of changes in ownership of the Company's stock. Management believes that the inability to utilize net operating loss and tax credit carryforwards to offset future taxable income within the carryforward periods under existing tax laws and regulations is more likely than not. Accordingly, a 100 percent valuation allowance has been recorded against the net deferred tax asset as of December 31, 1997 and 1996. 11. SIGNIFICANT CUSTOMERS AND EXPORT SALES Sales to significant customers as a percentage of net sales are as follows:
SIX-MONTH SIX AND YEAR PERIOD ONE-HALF- YEAR MONTH PERIOD ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, 1997 1996 1996 1995 --------------- --------------- ------------- --------------- Customer A............................ 2.5% 1.6% 6.4% 22.0% Customer B............................ 1.1% -- -- 15.3% Customer C............................ 1.1% 6.3% 8.1% 14.2% Customer D............................ 2.7% 15.6% 12.7% 11.7% Customer E............................ 2.2% 18.3% -- -- Customer F............................ 14.5% -- -- --
No other customers represented greater than 10 percent of net sales during the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half- month period ended June 30, 1995. Export sales were 55 percent, 66 percent, 50 percent and 46 percent of net sales for the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half-month period ended June 30, 1995, respectively. Net sales to Asia, Latin America and Europe were 58 percent, 22 percent and 13 percent, respectively, of total export sales for the year ended December 31, 1997. Net sales to Asia and Latin America were 46 percent and 37 percent, respectively, of total export sales for the six-month period ended December 31, 1996. Net sales to Asia and Europe were 46 percent and 38 percent, respectively, of total export sales for the year ended June 30, 1996. 12. EMPLOYEE BENEFIT PLAN The Company has a qualified contributory 401(k) plan that covers all employees who have attained the age of 18 and are employed at the enrollment date. Matching contributions were $30,230, $8,576, $11,606 and $1,159 for the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half-month period ended June 30, 1995, respectively. Each participant may elect to contribute up to 15 percent of his or her gross compensation up to the F-13 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 12. EMPLOYEE BENEFIT PLAN (CONTINUED) maximum amount allowed by the Internal Revenue Service. The Company matches up to 1 percent of the employee's salary. 13. STOCK OPTIONS In November 1996, the Board of Directors adopted the 1996 Incentive Stock Option Plan (the "Plan"), which was approved by the stockholders on January 8, 1997. The Plan provides for the grant of options to employees of the Company to purchase up to 1,282,042 shares of common stock. The option price per share under the Plan may not be less than the fair market value of the stock (110 percent of the fair market value for an optionee who is a 10 percent stockholder) on the day the option is granted. At December 31, 1997, the Company had 690,665 options outstanding at an exercise price of $2.50 per share. 30,500 options are exercisable at the rate of 25 percent on each of the first four anniversaries of the grant date and expire on the tenth anniversary of the grant date. The remaining 660,165 options have been allocated among a group of 30 key employees. These options carry the right to a cash bonus of $1.72 per purchased share, payable upon exercise. One-third of these options will become exercisable, if and when the Company's earnings before interest and taxes (calculated without regard to any charge for compensation paid or payable under the Plan) for a period of four calendar quarters ("EBIT") exceeds $1,000,000. Another one-third of these options will become exercisable if and when EBIT exceeds $2,500,000 with the remaining one-third becoming exercisable if and when EBIT exceeds $6,000,000. The options become exercisable if EBIT exceeds the aforementioned prior to June 30, 2001. All options which become exercisable expire in November 2006. The Company applies Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting for its Plan. The 660,165 options are considered variable options, as defined by the provisions of APB No. 25 and related interpretations. The Company will start recognizing compensation cost on variable arrangements when the future events become probable of occurring. The accrual of compensation cost under the variable arrangement has not commenced as it is unlikely that the award will be earned in the near future due to significant historical losses incurred by the Company. Accordingly, no compensation cost has been recognized for the fixed or variable portions of the Plan. Had compensation cost for the Plan been determined consistent with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company's pro forma net loss and loss per common share for the year ended December 31, 1997 would have been $2,028,121 and $.40, respectively. The Company's pro forma net loss and loss per common share for the six-month period ended December 31, 1996 would have been $2,115,074 and $.56, respectively. The fair value of options granted under the Plan was estimated on the date of grant with vesting periods ranging from two to four years using the Black-Scholes option-pricing model with the following weighted average assumptions used: no dividend yield, expected volatility of 118 percent-132 percent, risk free interest rate of 5.87 percent-6.83 percent, and expected lives of five years. Subsequent to December 31, 1997, the Company granted additional options to employees to purchase 204,000 shares of common stock at an exercise price of $2.50. F-14 EX-13.2 9 EXHIBIT 13.2 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the three month period ended March 31, 1998. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-11685-NY RADYNE CORP. ------------ (Exact name of registrant as specified in its charter) NEW YORK -------- (State or other jurisdiction of incorporation or organization) 11-2569467 ---------- (IRS EMPLOYER IDENTIFICATION NO.) 5225 SOUTH 37TH STREET, PHOENIX, AZ 85040 ----------------------------------------- (Address of principal executive offices) 602-437-9620 ------------ (Registrant's Telephone number) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements, for the past 90 days. YES X NO --- --- Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES X NO --- --- The registrant had 5,931,346 shares of its common stock, par value $.002, outstanding as of March 31, 1998. 1 PART I - FINANCIAL INFORMATION RADYNE CORP. BALANCE SHEET
March 31, 1998 December 31, 1997 ITEM 1 Unaudited Audited Current Assets: Cash & Cash Equvalents $ 34,795 $ 569,692 Account Receivable, less allowance for doubtful accounts of $17,000 and $15,000 respectively 3,238,476 2,359,443 Inventories 5,307,518 5,389,920 Prepaids and Other Current Assets 86,092 68,076 ----------- ----------- Total Current Assets 8,666,881 8,387,131 ----------- ----------- Property and Equipment - Net 1,277,182 1,322,551 ----------- ----------- Other Assets: Designs and Drawings - Net of accumulated amortization of $765,065 and $705,404 respectively 414,935 471,935 Deposits 50,000 50,000 ----------- ----------- Total Other Assets 464,935 521,935 ----------- ----------- Total Assets $10,408,998 $10,231,617 =========== =========== Liabilities and Stockholders' Capital Deficiency Current liabilities: Notes payable under lines of credit $ 5,000,000 $ 5,000,000 Notes payable to affiliates 5,118,272 0 Obligations under capital leases-ST 97,764 109,258 Accounts Payable - trade 824,452 667,202 Accounts Payable - affiliates 0 16,062 Accrued Liabilities 845,615 901,032 Taxes payable 29,862 38,720 ----------- ----------- Total Current Liabilities 11,915,965 6,732,274 ----------- ----------- Note Payable under Line of Credit Agreement 0 4,500,000 Obligation under Capital Leases 72,551 93,543 Taxes Payable 36,763 55,861 ----------- ----------- Total Liabilities 12,025,279 11,381,678 ----------- ----------- Stockholders' Capital Deficiency: Common Stock, $.002 par value, 20,000,000 shares authorized, shares issued and outstanding, 5,931,346 at March 31, 1998 and December 31, 1997. 11,862 11,862 Additional Paid-In Capital 5,694,806 5,694,806 Accumulated Deficit (7,306,683) (6,816,643) Notes Receivable - employees (16,266) (40,086) ----------- ----------- Total Stockholders' Capital Deficiency (1,616,281) (1,150,061) ----------- ----------- Total $10,408,998 $10,231,617 =========== ===========
The accompanying notes are an integral part of these financial statements. 2 RADYNE CORP. STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, 1998 March 31, 1997 Net Sales $3,948,501 $2,740,668 Cost of Sales 2,754,829 1,679,812 ---------------------------------- Gross Profit 1,193,672 1,060,856 ---------------------------------- Operating Expenses: Selling, general and administrative 847,166 811,281 Research and development 658,944 551,643 ---------------------------------- Total Operating Expenses 1,506,110 1,362,924 ---------------------------------- (Loss) from operations before interest expense (312,438) (302,068) Interest Expense - Net 177,602 172,087 ---------------------------------- Net (Loss) $ (490,040) $ (474,155) ================================== Basic and Diluted Net (loss) per common shares $ (0.08) $ (0.13) ================================== Weighted average number of common shares outstanding. 5,931,346 3,759,721 ==================================
The accompanying notes are an integral part of these financial statements. 3 RADYNE CORP. STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTH ENDED THREE MONTH ENDED MARCH 31, 1998 MARCH 31, 1997 OPERATING ACTIVITIES: Net Loss $ (490,040) $ (474,155) Adjustments to reconcile net loss to cash flows used in operating activities: Depreciation and Amortization 128,975 118,565 Changes in operating assets and liabilities: Accounts Receivable (879,033) 293,181 Inventories 82,402 (915,741) Prepaid and Other Current Assets (18,016) (126,951) Accounts Payable - Trade 157,250 239,240 Accounts Payable - Affiliates (16,062) (416,192) Accrued Liabilities (55,417) (332,922) Taxes Payable (27,956) (11,268) --------------------------------- Net Cash used in Operating Activities (1,117,897) (1,626,243) --------------------------------- Cash flows from investing activities: Capital Expenditures (26,606) (82,188) --------------------------------- Cash flows from financing activities: Net Borrowing from or (Payment on) Notes Payable under Line of Credit Agreements (4,500,000) 4,400,000 Proceeds from Notes Payable to Affiliates 5,118,272 0 Payments on Notes Payable to Affiliates 0 (2,500,000) Notes Receivable - employees 23,819 0 Payments on Long Term Debt 0 (4,670) Principle payments on capital lease obligations (32,486) 0 ================================= Net Cash provided by financing activites 609,606 1,895,330 --------------------------------- Net increase (decease) in Cash (534,897) 186,899 Cash, Beginning of year 569,692 186,488 ================================= Cash, End of Period $ 34,795 $ 373,387 ================================= Supplemental Disclosure of cash flow information: Interest paid $ 243,250 $ 289,959 =================================
The accompanying notes are an integral part of these financial statements. 4 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS (INFORMATION FOR MARCH 31, 1998 AND MARCH 31, 1997 IS UNAUDITED) 1. BUSINESS Radyne Corp. (the "Company") was incorporated on November 25, 1980 and commenced operations on May 22, 1981. On August 12, 1996 the Company became a majority owned subsidiary of Stetsys US, Inc ("ST"). The Company designs, manufactures and sells products, systems and software used for the transmission and reception of data over satellite and cable communications networks. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BASIS OF PRESENTATION The interim financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair statement of financial position as of March 31, 1998 and the results of operations and cash flows for the three months ended March 31, 1998 and March 31, 1997. Such adjustments are of a normal recurring nature. This information should be read in conjunction with the financial statements included in the Company's Form 10-K for the twelve-month period ended December 31, 1997. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. (b) REVENUE RECOGNITION The Company recognizes revenue upon shipment of products. (c) INVENTORIES Inventories, consisting of satellite modems, converters and related products, are valued at the lower of cost (first-in, first-out) or market value including material, direct labor and overhead costs. (d) PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements that extend the useful lives of assets are capitalized. Depreciation and amortization of machinery and equipment are computed using the straight-line method over the extimated useful lives of three to seven years. (e) DESIGNS AND DRAWINGS The valuation of designs and drawings is the result of adjustments made by the Company to adopt Fresh Start reporting in accordance with AICPA Statement of Position 90-7, 'Financial Reporting By Entities in Reorganization Under the Bankruptcy Code,' and represents the excess reorganization value that has been applied to the acquired technology supporting the Company's products. Amortization of designs and drawings is computed using the straight-line method over an estimated useful life of four to seven years. (f) RESEARCH AND DEVELOPMENT The cost of research and development is charged to expense as incurred. (g) TAXES ON INCOME Radyne will file a consolidated federal income tax return with ETS and ST through June 1997 (conclusion of the Rights Offering). Subsequent to June 1997, Radyne will file separate federal income tax returns. Income taxes have been computed as if the Company filed separate income tax returns for each year. The company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future consequences attributed to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Differences between income for financial and tax reporting purposes arise primarily from amortization of certain designs and drawings and accruals for warranty reserves and compensated absences. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized as income in the period that includes the enactment date. 5 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS (INFORMATION FOR MARCH 31, 1998 AND MARCH 31, 1997 IS UNAUDITED) (h) PER SHARE DATA The Company presents earnings per share in accordance with Statement of Financial Standards No. 128, Earnings per Share ("SFAS No. 128"). SFAS No. 128 prescribes a presentation of basic earnings per share, which is calculated utilizing only weighted average common shares outstanding, and a diluted earnings per share which gives effect to all dilutive potential common shares outstanding during the reporting periods. (i) RIGHTS OFFERING In November 1996 the Board of Directors approved the distribution to stockholders, other than the Company's principal stockholder, ST, of subscription rights for the purchase of up to 215,833 shares of the Company's common stock at a price of $2.50 per share. The Board of Directors further approved the distribution of subscription rights to an affiliate of ST to purchase up to 2,040,000 shares of the Company's common stock at a price of $2.50 per share. This Rights Offering became effective on May 12, 1997 and was concluded in June. ST's affiliate exercised 1,976,000 of its rights and individuals associated with such affiliate exercised another 34,000. 51,525 rights issued to stockholders other than ST were also exercised. In a related offering under the Company's Incentive Stock Option Plan, 110,100 shares of the Company's common stock were purchased by employees at $2.50 per share. Total proceeds received from the Rights Offering were partially offset by $336,000 of associated costs. The proceeds from the exercise of these rights were used, in part, to satisfy notes payable to affiliates. (j) NEW ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standard No. 130 REPORTING COMPREHENSIVE INCOME, in the quarter ended March 31, 1998. Comprehensive income is the same as net income for the quarter. 6
NOTES TO FINANCIAL STATEMENTS 3 INVENTORIES MARCH 31, 1998 DECEMBER 31, 1997 Inventories consist of the following: Raw materials and components $3,181,822 $2,605,397 Work in Process 1,214,522 1,124,929 Finished Goods 1,232,174 1,950,594 ---------------------------------------- Subtotal 5,628,518 5,680,920 ---------------------------------------- Less Valuation Allowance (321,000) (291,000) ---------------------------------------- Total $5,307,518 $5,389,920 ======================================== 4 PROPERTY AND EQUIPMENT MARCH 31, 1998 DECEMBER 31, 1997 Property and Equipment consist of the following: Machinery and Equipment $1,307,567 $1,298,715 Furniture and Fixtures 391,930 373,548 ---------------------------------------- Subtotal 1,699,497 1,672,263 ---------------------------------------- Less: Accumulated depreciation & Amortization (422,315) (349,712) ---------------------------------------- Total $1,277,182 $1,322,551 ======================================== 5 ACCRUED LIABILITIES MARCH 31, 1998 DECEMBER 31, 1997 Accrued liabilities consist of the following: Wages and related payroll taxes $ 271,874 $ 486,840 Interest Expense 118,320 183,968 Professional fees 94,500 85,500 Warranty Reserve 105,000 105,000 Other 255,921 39,724 ---------------------------------------- Total $ 845,615 $ 901,032 ========================================
7 6. RELATED PARTY TRANSACTIONS Sales to Engineering and Technical Services, Inc. and Agilis Communication Technologies Pte Ltd, companies under common control with Radyne, for the periods ended March 31, 1998 and March 31, 1997 were $38,181 and $347,660 respectively. Cost of such sales for the same periods were $11,459 and $250,664 respectively. Accounts Receivable from affiliates at March 31, 1998 and March 31, 1997 was $44,834 and $441,315 respectively. Notes payable to ST and affiliates outstanding at March 31, 1998 and March 31, 1997 were $5,118,272 and $4,100,000 respectively. An additional $250,000 was borrowed from ST on April 14, 1998. These notes bear interest at rates from 6.625% to 6.844% and mature at various dates between January 4. 1999 and January 15, 1999. Interest expense on notes payable to affiliates was $73,926 for the current period ended March 31, 1998 compared to $111,950 for the period ended March 31, 1997. Accrued interest on notes payable to affiliates was $73,926 at March 31, 1998 compared to $20,170 at March 31, 1997. 7. NOTES PAYABLE The Company had a note payable under a line of credit agreement with a bank that permitted outstanding borrowings of $4,500,000. At December 31, 1997, outstanding borrowings against the line were $4,500,000 plus accrued interest. On January 15, 1998, the Company repaid the note and accrued interest with proceeds from affiliated debt. The Company has a $5,500,000 credit agreement with a bank that includes $5,000,000 available under an uncommitted line of credit facility and facilities for bank guarantees and/or standby letters of credit up to $500,000. An ST affiliate has issued a nonbinding letter of awareness in connection with this credit agreement. Borrowings under the line of credit bear interest at a fluctuating rate equal to LIBOR or alternative Citibank's Quoted Rate plus 1 percent per annum (6.844 percent-6.938 percent as of December 31, 1997). At March 31, 1998, outstanding borrowings against the line were $5,000,000 plus accrued interest. The credit agreement requires that the Company maintain certain financial leverage ratios. This credit facility is an uncommitted line of credit which the bank may modify or cancel without prior notice. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS The Company's assets have increased from $10,231,617 at December 31, 1997 to $10,408,998 at March 31, 1998, while the Company's liabilities have increased from $11,381,678 at December 31, 1997 to $12,025,279 at March 31, 1998. The decrease in net assets (assets minus liabilities) of $466,221 is primarily due to the company's financial performance within the first quarter. Results of operations for the three month period ended March 31, 1998 compared to the three month period ended March 31, 1997, were as follows: The Company's net sales increased 44% to $3,948,501 during the period ended March 31, 1998 from $2,740,668 during the period ended March 31, 1997 primarily as a result of the Company's introduction of new products and aggressive marketing efforts. A portion of the sales increase came from the newer DMD-2401 modem line that has enjoyed tremendous market acceptance. Other products that contributed to the increase were the RCS-10 and RCS-20 subsystems with associated modems and the new digital video product line. The Company's cost of sales as a percentage of net sales increased to 70% during the period ended March 31, 1998 from 61% during the fiscal period ended March 31, 1997. Start-up costs associated with the delivery of new products to the market place accounted for the high period costs. 8 Selling, general and administrative costs increased to $847,166 (21% of sales) during the current period from $811,281 (30% of sales) during the fiscal period ended March 31, 1997. The decreased level of expenses as a percentage of sales for the period was a result of the increase in the Company's base business level during the period. Marketing expenses have remained high, based on the Company's attempts to position itself to compete head-to-head with larger competitors without giving up margin advantages. Research and development expenditures increased to $658,944 (17% of sales) during the current period from $551,643 (20% of sales) during the period ended March 31, 1997. The increased level of expenses for the period (and the related reduction in costs in terms of percentage of sales) was a result of the increase in the Company's base business level during the period and the redirection of efforts to marketing our newer lines of products. Net interest expense increased from $172,087 in the period ended March 31, 1997 to $177,602 in the current period due mainly to an increase in the Company's debt level. Based on the decreases in margins and higher research and development costs, the Company experienced net loss of ($490,040), during the period ended March 31, 1998 as compared with a net loss of ($474,155) during the period ended March 31, 1997. The Company's new-orders-booked (Bookings) increased by 131% to $4,935,747 for the current period from $2,132,948 for the period ended March 31, 1997. This increase was primarily due to the introduction of certain new product lines. The Company's level of unfilled-orders-to-ship (Backlog) increased 211% to $5,801,309 for the current period from $1,865,545 at March 31, 1997 primarily due to the record breaking level of Bookings received during the prior quarters. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital deficit was ($3,249,084) at March 31, 1998, a decrease in working capital of ($4,903,941) from $1,654,857 at December 31, 1997. This change is primarily a result of the reclassification of debt from long-term to short-term, based on due dates. Net cash used in operating activities was $1,117,896 for the current period, as compared to $1,626,243 used in the three month period ended March 31, 1997. Cash used in investing activities, consisting of additions to equipment, was $26,606 for the current period as compared to the prior period amount of $82,188. The Company derived net cash from financing activities of $609,606 and $1,895,330 during the periods ended March 31, 1998 and March 31, 1997, respectively. As a result of the foregoing, the Company decreased its cash balances by ($534,897) during the current period, compared to an increase in cash balance by $186,899 for the three month period ended March 31, 1997. PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBIT DESCRIPTION 3.1* Restated Certificate of Incorporation 3.2* Bylaws, as amended and restated 27 Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter covered by this report. * Incorporated by reference from Registrant's report on Form 10-Q, filed March 11, 1997. 9 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: April 30, 1998 RADYNE CORP. ---------------- By: /s/ Robert C. Fitting --------------------------- Robert C. Fitting President By: /s/ Garry D. Kline --------------------------- Garry D. Kline Chief Financial Officer 10 EX-13.3 10 EXHIBIT 13.3 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q |X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the six month period ended June 30, 1998. |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-11685-NY RADYNE CORP. ------------ (Exact name of registrant as specified in its charter) NEW YORK -------- (State or other jurisdiction of incorporation or organization) 11-2569467 ---------- (IRS EMPLOYER IDENTIFICATION NO.) 5225 South 37th Street, Phoenix, AZ 85040 ----------------------------------------- (Address of principal executive offices) 602-437-9620 ------------ (Registrant's Telephone number) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements, for the past 90 days. YES |X| NO |_| Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES |X| NO |_| The registrant had 5,931,346 shares of its common stock, par value $.002, outstanding as of June 30, 1998. PART I - FINANCIAL INFORMATION RADYNE CORP. CONDENSED BALANCE SHEET
June 30, 1998 December 31, 1997 ITEM 1 Unaudited Audited Current Assets: Cash & Cash Equivalents $ 813,648 $ 569,692 Account Receivable, less allowance for doubtful accounts of $17,000 and $15,000 1,621,315 2,359,443 Inventories 4,693,509 5,389,920 Prepaids and Other Current Assets 51,239 68,076 ------------ ------------ Total Current Assets 7,179,711 8,387,131 ------------ ------------ Property and Equipment - Net 1,390,416 1,322,551 ------------ ------------ Other Assets: Designs and Drawings - Net of accumulated amortization of $822,065 and $705,404 respectively 357,935 471,935 Deposits 50,000 50,000 ------------ ------------ Total Other Assets 407,935 521,935 ------------ ------------ Total Assets $ 8,978,062 $ 10,231,617 ============ ============ Liabilities and Stockholders' Capital Deficiency Current liabilities: Notes payable under lines of credit $ 5,000,000 $ 5,000,000 Notes payable to affiliates 5,368,272 -- Obligations under capital leases-Current Portion 90,068 109,258 Accounts Payable - trade 690,913 667,202 Accounts Payable - affiliates -- 16,062 Accrued Liabilities 1,063,646 901,032 Taxes payable 29,862 38,720 ------------ ------------ Total Current Liabilities 12,242,761 6,732,274 ------------ ------------ Note Payable under Line of Credit Agreement -- 4,500,000 Obligation under Capital Leases 53,768 93,543 Taxes Payable 30,496 55,861 ------------ ------------ Total Liabilities 12,327,025 11,381,678 ------------ ------------ Stockholders' Capital Deficiency: Common Stock, $.002 par value, 20,000,000 shares authorized, shares issued and outstanding, 5,931,346 at June 30, 1998 and December 31, 1997 11,862 11,862 Additional Paid-In Capital 5,694,806 5,694,806 Accumulated Deficit (9,055,631) (6,816,643) Notes Receivable - employees -- (40,086) ------------ ------------ Total Stockholders' Capital Deficiency (3,348,963) (1,150,061) ------------ ------------ Total $ 8,978,062 $ 10,231,617 ============ ============
The accompanying notes are an integral part of these condensed financial statements. 2 RADYNE CORP. CONDENSED STATEMENT OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 Net Sales $ 2,717,965 $ 2,811,596 $ 6,666,465 $ 5,552,264 Cost of Sales 2,669,607 1,654,095 5,424,435 3,333,906 -------------------------------------------------------- Gross Profit 48,358 1,157,501 1,242,030 2,218,358 -------------------------------------------------------- Operating Expenses: Selling, general and administrative 868,070 926,780 1,737,556 1,738,061 Research and development 708,700 572,079 1,367,644 1,123,721 -------------------------------------------------------- Total Operating Expenses 1,576,770 1,498,859 3,105,200 2,861,782 -------------------------------------------------------- Loss from operations (1,528,412) (341,358) (1,863,170) (643,424) Interest Expense - Net 198,217 162,961 375,818 335,048 -------------------------------------------------------- Net (Loss) $(1,726,629) $ (504,319) $(2,238,988) $ (978,472) ======================================================== Basic and Diluted Net (loss) per common shares $ (0.29) $ (0.11) $ (0.38) $ (0.24) ======================================================== Weighted average number of common shares outstanding 5,931,346 4,443,110 5,931,346 4,122,303 ========================================================
The accompanying notes are an integral part of these condensed financial statements. 3 RADYNE CORP. CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
Six Month Ended Six Month Ended June 30, 1998 June 30, 1997 OPERATING ACTIVITIES: Net Loss $(2,238,988) $ (978,473) Adjustments to reconcile net loss to cash flows used in operating activities: Depreciation and Amortization 261,603 222,065 Changes in operating assets and liabilities: Accounts Receivable 738,128 394,620 Inventories 696,411 (1,630,695) Prepaid and Other Current Assets 16,837 (23,506) Accounts Payable - Trade 23,711 12,210 Accounts Payable - Affiliates (16,062) (436,362) Accrued Liabilities 162,614 (157,487) Taxes Payable (34,223) (20,105) ----------------------------- Net Cash used in Operating Activities (389,969) (2,617,733) ----------------------------- Cash flows from investing activities: Capital Expenditures (215,468) (356,282) ----------------------------- Cash flows from financing activities: Net Borrowing from or (Payment on) Notes Payable under Line of Credit Agreements (4,500,000) 5,506,180 Proceeds from Notes Payable to Affiliates 5,368,272 -- Payments on Notes Payable to Affiliates -- (6,600,000) Net Proceeds from sale of common stock -- 5,154,802 Notes Receivable - employees 40,086 (96,500) Principal payments on capital lease obligations (58,965) (10,158) ----------------------------- Net Cash provided by financing activites 849,393 3,954,324 ----------------------------- Net increase (decease) in Cash 243,956 980,309 Cash, Beginning of year 569,692 186,488 ----------------------------- Cash, End of Period $ 813,648 $ 1,166,797 ============================= Supplemental Disclosure of cash flow information: Interest paid $ 313,602 $ 367,509 =============================
The accompanying notes are an integral part of these financial statements. 4 RADYNE CORP. Notes to Condensed Financial Statements (Information for June 30, 1998 and June 30, 1997 is Unaudited) 1. Business Radyne Corp. (the "Company") was incorporated on November 25, 1980 and commenced operations on May 22, 1981. On August 12, 1996 the Company became a majority owned subsidiary of Stetsys US, Inc ("ST"). The Company designs, manufactures and sells products, systems and software used for the transmission and reception of data over satellite and cable communications networks. 2. Summary of Significant Accounting Policies (a) Basis of presentation The interim unaudited condensed financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair statement of financial position as of June 30, 1998 and the results of operations for the three and six months ended June 30, 1998 and 1997, and cash flows for the six months ended June 30, 1998 and 1997. Such adjustments are of a normal recurring nature. The financial statements and notes have been prepared in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosure normally required by generally accepted accounting principles. This information should be read in conjunction with the financial statements included in the Company's Form 10-K for the year ended December 31, 1997. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. (b) Revenue Recognition The Company recognizes revenue upon shipment of products. (c) Inventories Inventories, consisting of satellite modems, converters and related products, are valued at the lower of cost (first-in, first-out) or market value including material, direct labor and overhead costs. (d) Property and Equipment Property and equipment are stated at cost. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements that extend the useful lives of assets are capitalized. Depreciation and amortization of machinery and equipment are computed using the straight-line method over the estimated useful lives of three to seven years. (e) Designs and Drawings The valuation of designs and drawings is the result of adjustments made by the Company to adopt Fresh Start reporting in accordance with AICPA Statement of Position 90-7, `Financial Reporting By Entities in Reorganization Under the Bankruptcy Code,' and represents the excess reorganization value that has been applied to the acquired technology supporting the Company's products. Amortization of designs and drawings is computed using the straight-line method over an estimated useful life of four to seven years. (f) Research and Development The cost of research and development is charged to expense as incurred. (g) Taxes on Income Radyne will file a consolidated federal income tax return with ST through June 1997 (conclusion of the below described Rights Offering). Subsequent to June 1997, Radyne will file separate federal income tax returns. Income taxes have been computed as if the Company filed separate income tax returns for each year. The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future consequences attributed to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Differences between income for financial and tax reporting purposes arise primarily from amortization of certain designs and drawings 5 and accruals for warranty reserves and compensated absences. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized as income in the period that includes the enactment date. (h) Earnings (Loss) Per Share The Company presents earnings (loss) per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128"). SFAS No. 128 prescribes a presentation of basic earnings per share, which is calculated utilizing only weighted average common shares outstanding, and a diluted earnings per share which gives effect to all dilutive potential common shares outstanding during the reporting periods. (i) Rights Offering In November 1996 the Board of Directors approved the distribution to stockholders, other than the Company's principal stockholder, ST, of subscription rights for the purchase of up to 215,833 shares of the Company's common stock at a price of $2.50 per share. The Board of Directors further approved the distribution of subscription rights to an affiliate of ST to purchase up to 2,040,000 shares of the Company's common stock at a price of $2.50 per share. This Rights Offering became effective on May 12, 1997 and was concluded in June. ST's affiliate exercised 1,976,000 of its rights and individuals associated with such affiliate exercised another 34,000. 51,525 rights issued to stockholders other than ST were also exercised. In a related offering under the Company's Incentive Stock Option Plan, 110,100 shares of the Company's common stock were purchased by employees at $2.50 per share. Total proceeds received from the Rights Offering were partially offset by $336,000 of associated costs. The proceeds from the exercise of these rights were used, in part, to satisfy notes payable to affiliates. (j) Comprehensive Income The Company adopted Statement of Financial Accounting Standards No. 130 Reporting Comprehensive Income, in the quarter ended March 31, 1998. Comprehensive income is the same as net income for the quarter. 6 Notes to Financial Statements 3 Inventories June 30, 1998 December 31, 1997 Unaudited Audited Inventories consist of the following: Raw materials and components $ 3,013,000 $ 2,605,397 Work in Process 1,178,007 1,124,929 Finished Goods 682,502 1,950,594 ---------------------------- Subtotal 4,873,509 5,680,920 ---------------------------- Less Valuation Allowance (180,000) (291,000) ---------------------------- Total $ 4,693,509 $ 5,389,920 ============================ The Company expensed $911,000 to revalue inventory including revisions to standard costs and a provision for obsolescence. 4 Property and Equipment June 30, 1998 December 31, 1997 Unaudited Audited Property and Equipment consist of the following: Machinery and Equipment $ 1,480,340 $ 1,298,715 Furniture and Fixtures 407,391 373,548 ---------------------------- Subtotal 1,887,731 1,672,263 ---------------------------- Less: Accumulated depreciation (497,315) (349,712) ---------------------------- Total $ 1,390,416 $ 1,322,551 ============================ 5 Accrued Liabilities June 30, 1998 December 31, 1997 Unaudited Audited Accrued liabilities consist of the following: Wages and related payroll taxes $ 392,970 $ 486,840 Interest Expense 246,185 183,968 Professional fees 81,000 85,500 Warranty Reserve 105,000 105,000 Other 238,491 39,724 ---------------------------- Total $ 1,063,646 $ 901,032 ============================ 7 6. Related Party Transactions Sales to Engineering and Technical Services, Inc. and Agilis Communication Technologies Pte Ltd, companies under common control with Radyne, for the three months ended June 30, 1998 and 1997 were $111,575 and $121,160, respectively. Cost of such sales for the same periods were $70,244 and $90,567, respectively. For the six months ended June 30, 1998 and 1997 sales were $149,756 and $466,210, respectively. Cost of such sales for the same periods were $81,703 and $348,494, respectively. Accounts Receivable from affiliates at June 30, 1998 and December 31,1997 was $52,260 and $19,505, respectively. Notes payable to affiliate (ST) outstanding at June 30, 1998 and December 31, 1997 were $5,368,272 and $ 0, respectively. These notes bear interest at rates from 6.625% to 6.844% and mature at various dates between January 4, 1999 and January 15, 1999. Interest expense on notes payable to affiliates was $73,926 and $57,610 for the three months ended June 30, 1998 and 1997, respectively. For the six months ended June 30, 1998 and 1997, interest expense on notes payable to affiliates was $166,012 and $105,929, respectively. Accrued interest on notes payable to affiliates was $166,012 at June 30, 1998 compared to $0 at December 31, 1997. 7. Notes Payable The Company had a note payable under a line of credit agreement with a bank that permitted borrowings of up to $4,500,000. At December 31, 1997, outstanding borrowings against the line were $4,500,000 plus accrued interest. On January 15, 1998, the Company repaid the note and related accrued interest with the proceeds from affiliated debt. The bank line was subsequently terminated. The Company has a $5,500,000 credit agreement with a bank that includes $5,000,000 under an uncommitted line of credit facility and facilities for bank guarantees and/or standby letters of credit of up to $500,000. An ST affiliate has issued a nonbinding letter of awareness in connection with this credit agreement. Borrowings under the line of credit bear interest at a fluctuating rate equal to LIBOR or Citibank's Quoted Rate plus 1 percent per annum (6.688% to 6.844% as of June 30, 1998). At June 30, 1998 and December 31, 1997, outstanding borrowings against the line were $5,000,000. The credit agreement requires that the Company maintain certain financial leverage ratios. The Company is currently not in compliance with this requirement. This credit facility is an uncommitted line of credit, which the bank may modify or cancel without prior notice. 8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Results of operations for the three month period ended June 30, 1998 compared to the three month period ended June 30, 1997, were as follows: The Company's net sales decreased 3% to $2,717,965 during the period ended June 30, 1998 from $2,811,596 during the period ended June 30, 1997. Meager shipments to the Southeast Asian markets, due to the current economic crisis in the region, as partially offset by increased sales to other regions, was the primary reason for the sales decrease. The Company's cost of sales increased to $2,669,607 (98% of sales) during the period ended June 30, 1998 from $1,654,095 (59% of sales) during the period ended June 30, 1997. Start-up costs associated with the delivery of new products to the market place accounted for the high period costs. The Company expensed $911,000 to revalue inventory including revisions to standard costs and a provision for obsolescence. Selling, general and administrative costs decreased to $868,070 (32% of sales) during the current period from $926,780 (33% of sales) during the period ended June 30, 1997. The decreased level of expenses for the period was, in part, a result of lower commission expenses. Research and development expenditures increased to $708,700 (26% of sales) during the current period from $572,079 (20% of sales) during the period ended June 30, 1997. The increased level of expenses for the period was a result of the Company's redirection of efforts to marketing our newer lines of products, the result of which was to raise the urgency for finishing the development phase of the newer lines and to build improved features into current lines. Net interest expense increased from $162,961 in the period ended June 30, 1997 to $198,217 in the current period due mainly to an increase in the Company's debt level. Based on the decreases in margins and higher research and development costs, the Company experienced a net loss of ($1,726,629) during the period ended June 30, 1998 as compared with a net loss of ($504,319) during the period ended June 30, 1997. The Company's new-orders-booked (Bookings) decreased to $3,118,962 for the current period from $5,341,368 for the period ended June 30, 1997. The Company's level of unfilled-orders-to-ship (Backlog) increased 45% to $6,202,307 for the current period from $4,269,002 at June 30, 1997 primarily due to the record level of Bookings received during prior periods. Due to the continuing nature of the economic crisis in Asia, the Company has eliminated approximately $990,000 from its December 31, 1997 backlog associated with orders from the region. 9 RADYNE CORP Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Results of operations for the six month period ended June 30, 1998 compared to the six-month period ended June 30, 1997, were as follows: The Company's net sales increased 20% to $6,666,465 during the period ended June 30, 1998 from $5,552,264 during the six month period ended June 30, 1997 as a result of the Company's introduction of new products during and after the prior period. A substantial portion of the sales increase (17% of sales) came from the new "High-Speed" product lines that have enjoyed tremendous market acceptance. Other products which contributed to the increase were the RCS-10 and RCS-20 subsystems with their associated modems, the new DMD-2401 modem and the RF product lines. The Company's cost of sales as a percentage of net sales increased to 81% during the period ended June 30, 1998 from 60% during the six month period ended June 30, 1997. Start-up costs associated with the delivery of new products to the market accounted for the major portion of the increase in costs. The Company expensed $911,000 to revalue inventory including revisions to standard costs and a provision for obsolescence. Selling, general and administrative costs decreased to $1,737,556 (26% of sales) during the current period from $1,738,061 (31% of sales) during the six month period ended June 30, 1997. The reduction as a percentage of sales was primarily due to the increased level of sales for the period. Research and development expenditures increased to $1,367,644 (21% of sales) during the period ended June 30, 1998 from $1,123,721 (20% of sales) during the six month period ended June 30, 1997. The increased level of expenses for the period is a result of the Company's continued commitment to invest in its' future through technological advances and its' efforts to improve our older product lines for manufacturability and lower costs. Net interest expense increased from $335,048 (6% of sales) in the six month period ended June 30, 1997 to $375,819 (6% of sales) in the current period due to an increase in the Company's debt level. Based on the increases in costs and expenses as outlined above, the Company experienced a net loss of ($2,238,989) during the period ended June 30, 1998 as compared with a net loss of ($978,472) during the six months ended June 30, 1997. The Company's new-orders-booked (Bookings) increased 10% to $8,054,709 for the six month period ended June 30, 1998 from $7,348,001 for the period ended June 30, 1997. This increase was primarily due to the successful introduction of certain new product lines to the market during and after the period ended June 30, 1997. The Company's level of unfilled-orders-to-ship (Backlog) increased 45% to $6,202,307 at June 30, 1998 from $4,269,002 at June 30, 1997 primarily due to the increased Bookings referred to above and like increases in the previous six months. Due to the continuing nature of the economic crisis in Asia, the Company has eliminated approximately $990,000 from its December 31, 1997 backlog associated with orders from the region. Year 2000 Issue The Company is in the process of performing a comprehensive review of its Year 2000 issues and has completed its review of internal systems. The majority of the Company's application software programs are purchased from and maintained by vendors. Therefore, the Company is working with these software vendors to verify these applications become Year 2000 compliant. The Company presently believes that with modifications and updates to existing software, the cost of which is not expected to be material, the Year 2000 problem will not pose significant operational problems for the Company's internal systems. As part of the Company's comprehensive review, it is continuing to verify the Year 2000 readiness of third parties (vendors and customers) with whom the Company has material relationships. The Company is not able to determine the effect on the Company's results of operations, liquidity and financial condition in the event the Company's material vendors and customers are not Year 2000 compliant. The Company will continue to monitor 10 the progress of its material vendors and customers and formulate a contingency plan at that point in time when the Company does not believe a material vendor or customer will be compliant. Liquidity and Capital Resources The Company's working capital deficit was ($5,063,050) at June 30, 1998, a decrease in working capital of ($6,717,907) from $1,654,857 at December 31, 1997. The proceeds of a $5,368,272 short term loan from affiliate ST, were used, in part, to satisfy the $4,500,000 long term debt to a bank. This action and the current period loss are the primary reasons for the reduction in working capital. Net cash used in operating activities was $389,969 for the current period, as compared to $2,617,733 used in the six-month period ended June 30, 1997. The primary reason for the reduction of cash used for operating activities during the current period was changes in inventory levels and accounts payable to affiliates. Cash used in investing activities, consisting of additions to equipment, was $215,468 for the current period as compared to the prior period amount of $356,282. The Company derived net cash from financing activities of $849,393 and $3,954,324 during the periods ended June 30, 1998 and 1997, respectively. The primary reason for the difference in cash generated from financing activities during the respective periods was the sale of common stock in 1997. As a result of the foregoing, the Company increased its cash balances by $243,956 during the current period, compared to an increase in cash balance of $980,309 for the six-month period ended June 30, 1997. The Company believes that its working capital, along with borrowings available from its bank and other commitments from its affiliates, and anticipated cash flow from operations will provide adequate sources to fund operations for at least the next twelve months. Item 4 - Submission of Matters to a Vote of Security Holders. The annual meeting of shareholders was held on May 5, 1998. Proxies were neither solicited nor given. 5,378,000 shares were represented at the meeting. The following matters were voted on at the meeting: (1) The board of directors was reelected in its entirety by all 5,378,000 shares represented at the meeting. (2) Amendment of the Company's Certificate of Incorporation (A) prescribing a majority vote of outstanding shares for the adoption or approval of a plan of merger or consolidation, the sale, lease, exchange or other disposition of all or substantially all of the assets of the Company, or a plan of binding share exchanges, and (B) permitting the shareholders to act without a meeting by written consent of the holders of less than all of the outstanding shares. All 5,378,000 shares represented at he meeting were voted in favor of both amendments. (3) Ratification of the selection of Deloitte & Touche LLP as the Company's independent accountants for the fiscal year ended December 31, 1997. All 5,378,000 shares represented at the meeting were voted in favor of ratification. 11 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K. (a) Exhibit Description ------- ----------- 3.1 Restated Certificate of Incorporation 3.2* Bylaws, as amended and restated 27 Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter covered by this report. * Incorporated by reference from Registrant's report on Form 10-Q, filed March 11, 1997. 12 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 13, 1998 RADYNE CORP. By: /s/ Robert C. Fitting --------------------------------- Robert C. Fitting President By: /s/ Garry D. Kline --------------------------------- Garry D. Kline Chief Financial Officer 13 EX-13.4 11 EXHIBIT 13.4 EXHIBIT 13.4 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q |X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998. |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-11685-NY RADYNE CORP. ------------ (Exact name of registrant as specified in its charter) NEW YORK -------- (State or other jurisdiction of incorporation or organization) 11-2569467 ---------- (IRS EMPLOYER IDENTIFICATION NO.) 3138 East Elwood Street, Phoenix, AZ 85034 ------------------------------------------ (Address of principal executive offices) 602-437-9620 ------------ (Registrant's Telephone number) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements, for the past 90 days. YES |X| NO |_| Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES |X| NO |_| The registrant had 5,931,346 shares of its common stock, par value $.002, outstanding as of September 30, 1998. 1 PART I - FINANCIAL INFORMATION RADYNE CORP. CONDENSED BALANCE SHEET (Unaudited)
September 30, December 31, 1998 1997 Item 1 Unaudited Audited Current Assets: Cash & Cash Equvalents $ 775,832 $ 569,692 Restricted Cash 10,000,000 0 Account Receivable, less allowance for doubtful accounts of $23,000 and $15,000 respectively 2,198,026 2,359,443 Inventories 4,269,540 5,389,920 Prepaids and Other Current Assets 452,889 68,076 ------------ ------------ Total Current Assets 17,696,287 8,387,131 ------------ ------------ Property and Equipment - Net 1,487,996 1,322,551 ------------ ------------ Other Assets: Designs and Drawings - Net of accumulated amortization of $876,404 and $705,404 respectively 300,935 471,935 Deposits 50,000 50,000 ------------ ------------ Total Assets $ 19,535,218 $ 10,231,617 ============ ============ Liabilities and Stockholders' Capital Deficiency Current Liabilities: Notes payable under lines of credit $ 5,500,000 $ 5,000,000 Notes payable to parent 15,618,272 0 Obligations under capital leases 78,145 109,258 Accounts Payable - trade 1,021,948 667,202 Accounts Payable - affiliates 0 16,062 Accrued Liabilities 1,124,102 901,032 Taxes payable 53,845 38,720 ------------ ------------ Total Current Liabilities 23,396,312 6,732,274 ------------ ------------ Long Term Liabilities: Notes payable under lines of credit 0 4,500,000 Obligation under Capital Leases 37,513 93,543 Taxes Payable 0 55,861 ------------ ------------ Total Long Term Liabilities: 37,513 4,649,404 ------------ ------------ Total Liabilities 23,433,825 11,381,678 Stockholders' Capital Deficiency Common Stock, $0.002 par value, 20,000,000 shares authorized, shares issued and outstanding, 5,931,346 at September 30, 1998 and December 31, 1997, respectively 11,862 11,862 Additional Paid-In Capital 5,694,806 5,694,806 Accumulated Deficit (9,605,275) (6,816,643) Notes Receivable - employees 0 (40,086) ------------ ------------ Total Stockholders' Capital Deficiency (3,898,607) (1,150,061) ------------ ------------ Total $ 19,535,218 $ 10,231,617 ============ ============
The accompanying notes are an integral part of these condensed financial statements. 2 PART I - FINANCIAL INFORMATION RADYNE CORP. CONDENSED STATEMENT OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 1998 1997 1998 1997 Net Sales $ 3,307,146 $ 4,434,112 $ 9,973,611 $ 9,986,377 Cost of Sales 2,280,421 2,397,597 7,704,856 5,529,267 -------------------------------------------------------- Gross Profit 1,026,725 2,036,515 2,268,755 4,457,110 -------------------------------------------------------- Operating Expenses: Selling, general and administrative 806,430 1,219,255 2,543,986 3,159,553 Research and development 577,166 569,177 1,944,809 1,692,899 -------------------------------------------------------- Total Operating 1,383,596 1,788,432 4,488,795 4,852,452 Expenses -------------------------------------------------------- Income (loss) from operations before interest expense (356,871) 248,083 (2,220,040) (395,342) Interest Expense - Net 192,773 162,270 568,592 497,318 -------------------------------------------------------- Net Income (loss) before provision for Income Taxes (549,644) 85,813 (2,788,632) (892,660) Provision for Income Taxes 0 0 0 0 -------------------------------------------------------- Net Income (loss) available to common stockholders $ (549,644) $ 85,813 $(2,788,632) $ (892,660) ======================================================== Earnings (loss) per common share - basic $ (0.09) $ 0.01 $ (0.47) $ (0.19) ======================================================== Earnings (loss) per common share - diluted $ (0.09) $ 0.01 $ (0.47) $ (0.19) ======================================================== Weighted average common and equivilent shares - basic 5,931,346 6,432,854 5,931,346 4,734,185 ======================================================== Weighted average common and equivilent shares - diluted 5,931,346 6,432,854 5,931,346 4,734,185 ========================================================
The accompanying notes are an integral part of these condensed financial statements. 3 PART I - FINANCIAL INFORMATION RADYNE CORP. CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
Nine Months Ended Nine Months Ended September 30, 1998 September 30, 1997 OPERATING ACTIVITIES: Net Loss $ (2,788,632) $ (892,660) Adjustments to reconcile net loss to cash flows used in operating activities: Depreciation and Amortization 395,653 347,202 Changes in operating assets and liabilities: Accounts Receivable 161,417 (850,970) Inventories 1,120,380 (3,258,394) Prepaid and Other Current Assets (384,813) 60,307 Accounts Payable - Trade 354,746 414,821 Accounts Payable - Affiliates (16,062) (436,362) Accrued Liabilities 223,070 (122,372) Taxes Payable (40,736) (21,232) ---------------------------------------- Net Cash used in Operating Activities (974,977) (4,759,660) ---------------------------------------- Cash flows from investing activities: Investment in Restricted Cash (10,000,000) 0 Capital Expenditures (390,098) (555,544) ---------------------------------------- Net Cash flows from investing activities: (10,390,098) (555,544) ---------------------------------------- Cash flows from financing activities: Net borrowing from or (payment on) Notes Payable under Line of Credit Agreements (4,000,000) 6,706,180 Proceeds from Notes Payable to Affiliates 15,618,272 0 Payments on Notes Payable to Affiliates 0 (6,600,000) Net Proceeds from sale of common stock 0 5,093,367 Notes Receivable - employees 40,086 (59,228) Principal payments on capital lease obligations (87,143) (11,520) ---------------------------------------- Net Cash provided by financing activites 11,571,215 5,128,799 ---------------------------------------- Net increase (decease) in Cash 206,140 (186,405) Cash, Beginning of Year 569,692 186,488 ---------------------------------------- Cash, End of Period $ 775,832 $ 83 ======================================== Supplemental Disclosure of cash flow information: Interest paid $ 698,201 $ 622,738 ========================================
The accompanying notes are an integral part of these condensed financial statements. 4 RADYNE CORP. Notes to Condensed Financial Statements (Information for SEPTEMBER 30, 1998 and SEPTEMBER 30, 1997 is Unaudited) 1. Business Radyne Corp. (the "Company") was incorporated on November 25, 1980 and commenced operations on May 22, 1981. On August 12, 1996 the Company became a majority owned subsidiary of Stetsys US, Inc ("ST"). The Company designs, manufactures and sells products, systems and software used for the transmission and reception of data over satellite and cable communications networks. 2. Summary of Significant Accounting Policies (a) Basis of presentation The interim unaudited condensed financial statements furnished reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of financial position as of September 30, 1998 and the results of operations for the three and nine months ended September 30, 1998 and 1997, and cash flows for the nine months ended September 30, 1998 and 1997. Such adjustments are of a normal recurring nature. The financial statements and notes have been prepared in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosure normally required by generally accepted accounting principles. This information should be read in conjunction with the financial statements included in the Company's Form 10-K for the year ended December 31, 1997. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. (b) Revenue Recognition The Company recognizes revenue upon shipment of products. (c) Restricted Cash Restricted cash consists of $10,000,000 derived from a loan from an affiliate. This loan is restricted for the purpose of funding the purchase of Comstream Holdings, Inc. (See Note 8, Subsequent Event.) (d) Inventories Inventories, consisting of satellite modems, converters and related products, are valued at the lower of cost (first-in, first-out) or market value including material, direct labor and overhead costs. (e) Property and Equipment Property and equipment is stated at cost. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements that extend the useful lives of assets are capitalized. Depreciation and amortization of machinery and equipment are computed using the straight-line method over the estimated useful life of four to seven years. 5 RADYNE CORP. Notes to Condensed Financial Statements (Information for SEPTEMBER 30, 1998 and SEPTEMBER 30, 1997 is Unaudited) (f) Designs and Drawings The valuation of designs and drawings is the result of adjustments made by the Company to adopt Fresh Start reporting in accordance with AICPA Statement of Position 90-7, `Financial Reporting By Entities in Reorganization Under the Bankruptcy Code,' and represents the excess reorganization value that has been applied to the acquired technology supporting the Company's products. Amortization of designs and drawings is computed using the straight-line method over an estimated useful life of four to seven years. (g) Research and Development The cost of research and development is charged to expense as incurred. (h) Taxes on Income The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Differences between income for financial and tax reporting purposes arise primarily from amortization of certain designs and drawings and accruals for warranty reserves and compensated absences. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized as income in the period that includes the enactment date. (i) Earnings (Loss) Per Share The Company presents earnings (loss) per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128"). SFAS No. 128 prescribes a presentation of basic earnings per share, which is calculated utilizing only weighted average common shares outstanding, and a diluted earnings per share which gives effect to all dilutive potential common shares outstanding during the reporting periods. (j) Rights Offering In November 1996 the Board of Directors approved the distribution to stockholders, other than the Company's principal stockholder, ST, of subscription rights for the purchase of up to 215,833 shares of the Company's common stock at a price of $2.50 per share. The Board of Directors further approved the distribution of subscription rights to an affiliate of ST to purchase up to 2,040,000 shares of the Company's common stock at a price of $2.50 per share. This Rights Offering became effective on May 12, 1997 and was concluded in June 1997. ST's affiliate exercised 1,976,000 of its rights and individuals associated with such affiliate exercised another 34,000. 51,525 rights issued to stockholders other than ST were also exercised. In a related offering under the Company's Incentive Stock Option Plan, 110,100 shares of the Company's common stock were purchased by employees at $2.50 per share. Total proceeds received from the Rights Offering were partially offset by $336,000 of associated costs. The proceeds from the exercise of these rights were used, in part, to satisfy notes payable to affiliates. (k) Comprehensive Income The Company adopted Statement of Financial Accounting Standards No. 130 Reporting Comprehensive Income, in the quarter ended March 31, 1998. Comprehensive income is the same as net income for the quarter and nine months ended September 30, 1998. 6 PART I - FINANCIAL INFORMATION RADYNE CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
3 Inventories September 30, December 31, 1998 1997 (Unaudited) (Audited) Inventories consist of the following: Raw materials and components $ 1,824,723 $2,605,397 Work in Process 2,261,352 1,124,929 Finished Goods 363,465 1,950,594 --------------------------------- Subtotal 4,449,540 5,680,920 --------------------------------- Less Valuation Allowance (180,000) (291,000) --------------------------------- Total $ 4,269,540 $5,389,920 =================================
4 Accrued Liabilities September 30, December 31, 1998 1997 (Unaudited) (Audited) Accrued liabilities consist of the following: Wages and related payroll taxes $356,068 $ 486,840 Interest expense 313,902 183,968 Warranty reserve 140,000 85,500 Professional fees 140,500 105,000 Other 173,632 39,724 --------------------------------- Total $ 1,124,102 $ 901,032 ==================================
5 Earnings (Loss) per Share A summary of the reconciliation from basic earnings (loss) per share to diluted earnings (loss) per share for the nine month periods ended September 30, 1998 and 1997.
September 30, September 30, 1998 1997 (Unaudited) (Unaudited) Net (loss) $(2,788,632) $ (892,660) ---------------------------------- Basic EPS - weighted average shares outstanding 5,931,346 4,734,185 ---------------------------------- Basic earnings (loss) per share $ (0.47) $ (0.19) ---------------------------------- Diluted EPS - weighted average shares outstanding 5,931,346 4,734,185 Diluted earnings (loss) per share $ (0.47) $ (0.19)
7 RADYNE CORP. Notes to Condensed Financial Statements (Information for SEPTEMBER 30, 1998 and SEPTEMBER 30, 1997 is Unaudited) 6. Related Party Transactions Sales to Engineering and Technical Services, Inc. and Agilis Communication Technologies Pte Ltd, companies under common control with Radyne, for the three months ended September 30, 1998 and 1997 were $13,589 and $199,800, respectively. Cost of such sales for the same periods were $5,336 and $151,492, respectively. For the nine months ended September 30, 1998 and 1997 sales to these companies were $163,345 and $666,010, respectively. Cost of such sales for the same periods were $87,039 and $499,986, respectively. Accounts Receivable from affiliates at September 30, 1998 and December 31, 1997 was $59,221 and $281,775, respectively. Notes payable to parent (ST) outstanding at September 30, 1998 and December 31, 1997 were $15,618,272 and $ 0, respectively. These notes bear interest at rates from 6.388% to 6.844% and mature during 1999. Of this amount, $10,000,000 was borrowed in September 1998 for the acquisition of Comstream Holdings, Inc ("Comstream") (See Note 8). Interest expense on notes payable to parent was $99,916 and $0 for the three month period ended September 30, 1998 and 1997, respectively. For the nine month periods, which ended September 30, 1998 and 1997, interest expense on notes payable to parent was $265,928 and $147,929 respectively. 7. Notes Payable The Company had a note payable under a line of credit agreement with a bank that permitted borrowings of up to $4,500,000. At December 31, 1997, outstanding borrowings against the line were $4,500,000 plus accrued interest. On January 15, 1998, the Company repaid the note and related accrued interest with the proceeds from affiliated debt. The bank line was subsequently terminated. The Company has a $20,500,000 credit agreement with Citibank, N.A. that includes $20,000,000 available under an uncommitted line of credit facility and facilities for bank guarantees and/or standby letters of credit up to $500,000. An affiliate of ST has issued a nonbinding letter of awareness in connection with this credit agreement. Borrowings under the line of credit bear interest at a fluctuating rate equal to LIBOR plus 1% per annum or alternative Citibank's Quoted Rate plus 1% per annum (rates varied from 6.4063% to 6.75% on balances owed at September 30, 1998). The credit agreement requires the Company to maintain certain financial leverage ratios. The availability of additional borrowings under the credit agreement expires September 29, 1999 and is renewable annually at the option of the Bank. The Company owed principal of $5,500,000 under the line of credit as of September 30, 1998. Subsequent to the end of the period reported on herein, the Company borrowed another $500,000 under the credit agreement at 6.1563%. 8. Subsequent event On August 28, 1998, Radyne Corporation signed a definitive agreement (the "Agreement") to acquire ComStream from Spar Aerospace Limited ("Spar"). On October 15, 1998 (the "Closing Date"), Radyne acquired Comstream (the "Acquisition"), with Comstream becoming a wholly owned subsidiary of Radyne. On the Closing Date, Radyne purchased all of the outstanding shares of common stock of ComStream for an aggregate purchase price of $17 million, of which $10 million was paid in cash at the closing and $7 million will be payable up to nine months thereafter pursuant to a note (the "Note") which is convertible into Radyne common stock, par value $.002 per share (the "Common Stock"), under certain circumstances. A Registration Rights Agreement would provide Spar with piggy-back 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 will result in a one-time charge, which represents the value assigned to purchased 8 "in-process-research-and-development" ("IPR&D"). The amounts of these charges are dependent upon the valuation analysis, which is underway, by an independent valuation consulting firm. In addition, Radyne expects to incur a charge for restructuring costs related to employee severance and a lease termination. Radyne intends to finance the repayment of debt incurred for the Acquisition, certain planned restructuring costs and its ongoing working capital needs through (i) a rights offering pursuant to which it will offer approximately $17,700,000 of Common Stock to its existing shareholders and (ii) the existing bank line of credit. 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 Radyne's filing a registration statement for such offering with the Securities and Exchange Commission. 9 RADYNE CORP Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 This form 10-Q may contain forward-looking statements that involve risks and uncertainties, including, but not limited to, the impact of competitive products and pricing, product demand and market acceptance risks, the presence of competitors with greater financial resources, product development and commercialization risks, costs associated with the integration and administration of acquired operations, capacity and supply constraints or difficulties, the results of financing efforts, Year 2000 issues and other risks detailed from time to time in the Company's Securities and Exchange Commission filings. The Company filed it 1997 Form 10-K in March, 1998. Please refer to this document for a more detailed discussion of the risks and uncertainties associated with the Company's future operations. Results of Operations The Company's assets have increased from $10,231,617 at December 31, 1997 to $19,535,218 at September 30, 1998, while the Company's liabilities have increased from $11,381,678 at December 31, 1997 to $23,433,825 at September 30, 1998. This increase was due primarily to an increase in restricted cash of $10,000,000 derived from a loan from an affiliate (See Note 6, Related Party Transactions). The purpose of this loan was to have sufficient cash on hand to fund the purchase of Comstream Holdings, Inc. from Spar Aerospace Limited, a Canadian company, which closed on October 15, 1998 (See Note 8, Subsequent Event). Results of operations for the three month period ended September 30, 1998 compared to the three month period ended September 30, 1997, were as follows: The Company's net sales decreased 25% to $3,307,146 during the period ended September 30, 1998 from $4,434,112 during the period ended September 30, 1997 primarily as a result of a decline in sales into the Asian Market, due to the continued unfavorable economic conditions in that market, during the current period compared to the prior period. The Company's cost of sales as a percentage of net sales increased to 69% during the period ended September 30, 1998 from 54% during the period ended September 30, 1997. Start-up costs associated with the delivery of new products to the market place during the current period accounted for the increased costs. Selling, general and administrative costs decreased to $806,430 (24% of sales) during the current period from $1,219,255 (27% of sales) during the three month period ended September 30, 1997. The decreased level of expenses was, in part, due to the reduced sales commissions as a result of the lower sales output during the current period as compared to the prior period. Research and development expenditures increased to $577,166 during the period ended September 30, 1998 from $569,177 during the period ended September 30, 1997. The increased level of expenses coincides with the Company's goals to bring newer product lines to market. Net interest expense increased from $162,270 in the period ended September 30, 1997 to $192,773 in the current period due to an increase in the Company's debt level. Based on the decrease in margins (higher costs in terms of percentage of sales) as outlined above, the Company experienced a net loss of $549,644 during the period ended September 30, 1998 as compared with net income of $85,813 during the period ended September 30, 1997. The Company's new-orders-booked (Bookings) increased by 88% to $3,930,265 for the quarter ended September 30, 1998 from $2,094,061 for the period ended September 30, 1997. This increase is primarily due to new product orders within the quarter. The Company's level of unfilled-orders-to-ship (Backlog) increased 35% to $6,253,075 at September 30, 1998 from $4,621,790 at September 30, 1997 primarily due to the level of Bookings received during the current quarter. About 70% of the backlog is scheduled to be shipped by the end of the current calendar year. 10 RADYNE CORP Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Results of operations for the nine month period ended September 30, 1998 compared to the nine month period ended September 30, 1997, were as follows: The Company's net sales decreased slightly to $9,973,611 during the period ended September 30, 1998 from $9,986,377 during the nine month period ended September 30, 1997 as a result of the decline in sales to the Asian Market due to its deteriorated economic situation. However, the market acceptance of the Company's newer products is demonstrated by sales remaining level over the nine month comparison in spite of the impact of the Asian economic situation. A substantial portion of current period sales came from the new DMD-2401 modem that has enjoyed positive market acceptance. Other products which contributed were the RCS-10 and RCS-20 subsystems with associated modems, the RF product lines, the new digital video products and the new lines of high-speed modems and peripherals. The Company's cost of sales as a percentage of net sales increased to 77% during the nine months ended September 30, 1998 from 55% during the nine month period ended September 30, 1997. An increase in start-up costs associated with the delivery of new products to the market place during the current period accounted for the major portion of the increase in costs. In June of 1998, the Company expensed $911,000 to revalue inventory including revisions to standard costs and a provision for obsolescence. Selling, general and administrative costs decreased to $2,543,986 (26% of sales) during the current period from $3,159,553 (32% of sales) during the nine month period ended September 30, 1997. The decreased level of expenses for the period (and the related reduction in costs in terms of percentage of sales) was, in part, a result of the Company's cost containment measures. However the Company's marketing expenses remain high as the Company has attempted to position itself in the marketplace to compete head-to-head with larger competitors without giving up margin advantages. Additionally, the Company has embarked on a full-scale marketing effort to seek out new product opportunities, which will enhance our current product lines and provide a full array of product options for our customers. Research and development expenditures increased to $1,944,809 (19% of sales) during the nine months ended September 30, 1998 from $1,692,899 (17% of sales) during the nine months ended September 30, 1997. The increased level of expenses for the period was, in part, a result of new product development and research to lower older product lines' manufacturing costs. Net interest expense increased from $497,318 in the period ended September 30, 1997 to $568,592 in the current period due to an increase in the Company's debt level. Based mainly on lower gross margins as outlined above, the Company experienced a net loss of ($2,788,632) during the period ended September 30, 1998 as compared with a net loss of ($892,660) during the nine month period ended September 30, 1997. The Company's new-orders-booked (Bookings) increased 22% to $11,489,973 for the nine months ended September 30, 1998 from $9,442,062 for the period ended September 30, 1997. This increase was primarily due to the successful introduction of certain new product lines to the market during the current period. The Company's level of unfilled-orders-to-ship (Backlog) increased 35% to $6,253,075 at September 30, 1998 from $4,621,790 at September 30, 1997 primarily due to the level of Bookings received during the current period. About 70% of the above backlog is scheduled to be shipped by the end of the current calendar year. Year 2000 Issue The Company recognizes the potential business impacts related to the Year 2000 computer system issue and is implementing a plan to assess and improve the Company's state of readiness with respect to such issues. The year 2000 issue is one where computer systems may recognize the designation "00" as the year 1900 when it is intended to mean the year 2000, resulting in system failure or miscalculations. Commencing in 1997, the Company began a comprehensive review of its information technology systems, which the Company is dependent upon for the conduct of day to day business operations, in order to determine the adequacy of those systems in light of future business requirements. Year 2000 readiness was one of the factors considered in the review process. 11 The Company has completed its review of internal systems. The majority of the Company's application software programs are purchased from and maintained by vendors. Therefore, the Company is working with these software vendors to verify these applications are, or will become, Year 2000 compliant. The Company presently believes that all mission critical systems are Year 2000 compliant and therefore the Year 2000 issue will not pose significant operational problems for the Company's internal systems. All Year 2000 costs to date have been expensed and the Company does not expect to incur any significant future costs related to the Year 2000 issue. However, the Company may choose to upgrade certain existing software that is already Year 2000 compliant and, if it does, the costs related to those upgrades will be capitalized in the normal coarse of business. As part of the Company's comprehensive review, it is continuing to verify the Year 2000 readiness of third parties (vendors and customers) with whom the Company has material relationships. The Company is not able to determine the effect on the Company's results of operations, liquidity and financial condition in the event the Company's material vendors and customers are not Year 2000 compliant. The Company will continue to monitor the progress of its material vendors and customers and formulate a contingency plan if and when the Company concludes that a material vendor or customer may not be compliant. During the current period a Year 2000 readiness survey was sent to all of the Company's material vendors and customers. The readiness surveys are currently being collected for review and analysis. The Company has also started to generate a formal Year 2000 plan. This plan document should be completed by March 31, 1999. Liquidity and Capital Resources The Company's working capital deficit was ($5,700,025) at September 30, 1998, compared to working capital of $1,654,857 at December 31, 1997. The decrease in working capital is primarily due to the maturation of $4,500,000 in debt which was classified as long-term as of December 31, 1997 and has been replaced with short term loans and losses incurred by the Company during the period. Net cash used in operating activities was $974,977 for the nine month period ended September 30, 1998, as compared to $4,759,660 used in the nine month period ended September 30, 1997, mainly due to decreased inventory and account receivable levels and increases in accounts payable and accrued liability levels. Cash used in investing activities, consisting of additions to equipment, amounting to $390,098 for the nine month period ended September 30, 1998 was comparable to the prior period amount of $555,544. The Company derived net cash from financing activities of $11,571,215 and $5,128,799 during the nine month periods ended September 30, 1998 and September 30, 1997, respectively. A $10,000,000 loan was taken for the acquisition of Comstream during the quarter ended September 30, 1998. As a result of the foregoing, the Company increased its cash balance by $10,206,140 for the nine month period ended September 30, 1998, as compared to a decrease in its cash balance by $186,405 for the nine month period ended September 30, 1997. The Company believes that it will be able to satisfy its working capital and capital expenditure requirements for the foreseeable future from existing cash balances, from anticipated cash flow from operating activities, from funds advanced under the line of credit agreement and from funds advanced from the Company's parent. In this connection, the parent company has committed to purchase approximately $16,000,000 worth of the Company's common stock in order to enable the Company to retire a like amount of short term debt to the parent. 12 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K. (a) Exhibit Description ------- ----------- 3.1* Restated Certificate of Incorporation 3.2** Bylaws, as amended and restated 27 Financial Data Schedule (b) 1. A report on Form 8-K was filed with regard to Item 4, Changes in Registrant's Certifying Accountant, on July 23, 1998. 2. An amended report on Form 8-K was filed with regard to Item 4, Changes in Registrant's Certifying Accountant, on July 31, 1998. 3. A report was filed on form 8-K with regard to Item 5, Other Events (relating to Registrant's agreement to acquire the shares of Comstream Holdings, Inc.) on August 28, 1998. * Incorporated by reference from Registrant's report on Form 10-Q, filed August 14, 1998. ** Incorporated by reference from Registrant's report on Form 10-Q, filed March 11, 1997 13 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 12, 1998 RADYNE CORP. ------------------- By: /s/ Robert C. Fitting ------------------------------ Robert C. Fitting President By: /s/ Garry D. Kline ------------------------------ Garry D. Kline Chief Financial Officer 14 -----END PRIVACY-ENHANCED MESSAGE-----