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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File
December 31, 1998 Number 0-11685
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RADYNE COMSTREAM INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 11-2569467
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3138 East Elwood Street, Phoenix, Arizona 85034
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (602) 437-9620
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $.002 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
(deemed by the registrant to be persons, along with members of their families,
known to the registrant to beneficially own, exclusive of shares subject to
options, less than 5% of the outstanding shares of the registrant's common
stock) of the registrant as of March 22, 1999 was approximately $1,877,000
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a Court. Yes _X_ No____
As of March 22, 1999, there were 5,932,346 shares of the registrant's
common stock outstanding.
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PART I
DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
constitute "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors, which may
cause the actual results, performance or achievements of Radyne ComStream Inc.,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following:
o loss of, and failure to replace, any significant customers;
o timing and success of new product introductions;
o product developments, introductions and pricing of competitors;
o timing of substantial customer orders;
o availability of qualified personnel;
o the impact of local political and economic conditions and foreign
exchange fluctuations on international sales;
o performance of suppliers and subcontractors;
o market demand and industry and general economic or business
conditions;
o availability, cost and terms of capital;
o Radyne ComStream's level of success in effectuating its strategic
plan, including realization of all of the anticipated benefits of the
integration of Radyne and the recently acquired ComStream Holdings,
Inc.; and
o other factors to which this report refers.
ITEM 1. BUSINESS
Overview
Radyne ComStream Inc. designs, manufactures and sells equipment used to
receive data from, and transmit data to, satellites. We have engaged in the
advanced design and production of digital data communications equipment for
satellite telecommunications systems for over seventeen years. Our products
include:
o satellite modulators and demodulators and earth stations used to
receive data from and send data to orbiting satellites;
o satellite broadcast receivers, used to receive communications from
satellites;
o frequency converters, used to channel higher frequency transmissions
into lower frequency transmissions and vice versa;
o ancillary products;
o equipment racks containing integrated modems and supporting equipment
for data, audio, and television communications; and
o an integrated modem and router product for the Internet service
provider market.
Radyne Corp., our predecessor which was incorporated in 1980, was forced to
file for Chapter 11 bankruptcy protection in April 1994. It successfully emerged
from bankruptcy in December 1994 upon the acquisition of approximately 91% of
its common stock by Engineering and Technical Services, Inc., then a major
customer. On August 12, 1996, ETS was acquired by Singapore Technologies Pte Ltd
through its indirect wholly owned subsidiaries, Stetsys US, Inc. and Stetsys Pte
Ltd. (collectively, "ST"). As a result, approximately 91% of Radyne ComStream's
common stock is now held by ST.
In 1995, we installed a new management team, which moved our operations
from New York to Phoenix, Arizona. As part of this management change, we hired
an almost all new staff of engineering, sales and support personnel.
Recent trends and developments
Consistent with our new growth strategy, we recently acquired ComStream
Holdings, Inc. from Spar Aerospace Limited, a Canadian advanced technology
company. ComStream is an international provider of digital transmission
solutions for voice, data, audio and video applications with offices in the
United States, Singapore, Indonesia, China and the United Kingdom. Revenues of
ComStream for 1998 were approximately $37 million. We acquired ComStream in an
effort to expand our core business, and supplement our product lines with a
number of viable developed products and superior quality products in the design
phase, some of which have since been released for production. In addition, we
based our decision to acquire ComStream on the strategic belief that the
combined companies could compete more effectively and realize certain synergies.
We believe that Radyne's acquisition of ComStream will have a number of positive
effects, including the following:
1. The combined annual revenues of Radyne ComStream should approximate $50
million versus Radyne Corp.'s stand-alone revenues of about $13 million.
This dramatic difference in size should provide us with better control over
prices and margins and enable us to compete in larger markets. It should
also increase the likelihood that our common stock can be qualified for
trading on the Nasdaq Stock Market, our exchange of choice.
2. We also anticipate the combination to produce synergistic effects by
combining Radyne's newer product lines with ComStream's worldwide sales
channels. We expect the introduction of newer and more numerous products
into the ComStream distribution channels to have positive effects on our
revenues commencing in the first calendar quarter of 1999 and continuing in
the second calendar quarter as more products in development are completed
and released to production. We also expect positive results from the
ComStream sales force as compared to our historic reliance on independent
sales representatives.
3. While we viewed ComStream's gross margins as excellent, its profitability
had suffered from extremely high expenses. Since closing the acquisition in
October, 1998 we have reduced ComStream's recurring expenses by
approximately $1,000,000 per month. We expect continued efficiencies and
restructuring of our product lines to result in additional cost savings.
As a combined entity, Radyne ComStream has an expanded product line and a
worldwide sales and service organization with international offices in Beijing,
Singapore, London, Moscow, Jakarta, Rio de Janeiro and Amsterdam.
Radyne ComStream is currently addressing four markets/businesses as
follows:
o satellite modems and earth stations, including Intelsat equipment;
o digital video and high-speed modems;
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o military and government data modems; and
o data, audio, and video broadcast equipment.
Operating strategy
Radyne ComStream's operating strategy is to:
o continue to build on the experience, skills and customer access of its
management team;
o maintain a strong international position in the earth station business
and capitalize on its dominant position of supplying satellite
broadcast receivers while beginning to supply Internet access
providers with a personal computer receiver card;
o continue to find new military and government market niches;
o complete the integration and restructuring of ComStream and Radyne so
as to maximize cost savings and the benefits of ComStream's product
lines and sales channels; and
o continue to expand our special offerings in market segments, such as
Internet communications, rural telephone, private network services,
government network services and compressed television transmission.
Radyne ComStream's engineering staff and support facilities are dedicated
to:
o maintaining the state-of-the-art status of Radyne ComStream's core
products for the satellite ground equipment segment of the market;
o designing and enhancing products for high-growth markets, such as
Internet communications, rural telephony for developing areas,
high-speed satellite communications, government data equipment and the
growing private network market; and
o providing special configurations to satisfy customers' individual
needs.
Radyne ComStream has shipped commercial volumes of its products for rural
telephony and private network applications and has shipped units to several
government data equipment customers. Radyne ComStream has fulfilled a contract
with AT&T, one of the world's largest telephone and data service providers, to
develop a new line of satellite modems with a higher frequency L-Band interface
which will be used to replace aging equipment in existing earth stations. The
use of L-Band as an interface mechanism has the advantage of requiring fewer
conversions, thereby improving reliability of communication. This equipment is
designed to substantially reduce the space and power requirements in these earth
stations, and to improve reliability and permit lower maintenance costs.
Management believes this equipment will be the future standard for major earth
stations.
We are a major supplier of satellite broadcast receivers for data and
audio, with an installed base of more than 100,000 receivers. Broadcast
receivers are used to receive financial data, audio and video. We have also
supplied more than 1,000,000 set-top television receivers on an original
equipment manufacturer basis. Additionally, we have a line of personal computer
receiver cards which function as satellite receivers used to receive Internet
information and private network data in personal computers. This receiver card
is capable of delivering multimedia communications to personal computers and
local area networks at speeds up to 1,000 times faster than conventional
telephone modems, opening a new realm of practical and efficient distribution of
data intensive applications.
Radyne ComStream's satellite modems can receive communications with a large
range of data rates, from 2.4 kilobytes per second to 155 megabytes per second.
Our modems can be used in applications ranging from data and audio to telephony
and high definition television. Radyne ComStream's line of frequency converter
products can be used in many types of earth stations to convert intermediate
frequencies into microwave frequencies for satellite transmission. These
converters are competitively priced, small in size and accommodate either single
or dual bands used in the satellite industry. We believe that most of our
current line of modems and converters are smaller and lower priced than the
previous generation of products, facilitating the installation of large systems
in significantly less space than the products of our competitors. We also market
redundancy switches which operate in conjunction with satellite modems and
converters and provide automatic fault monitoring. In the event of a failure,
such standby equipment takes over.
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Radyne ComStream also manufactures a line of small earth stations that are
used worldwide for private phone and data systems. The earth stations receive,
transmit and convert data in both C-Band and Ku-Band, which are analogous to AM
and FM radio frequencies, and are the most widely used frequencies for satellite
transmission. We have recently begun shipping the new lower cost earth station
using an L-Band interface. Unlike the C-Band and Ku-Band, which must be
converted prior to use in a final application, the use of L-Band signals
eliminates this step, thereby reducing costs and increasing reliability. These
earth stations include an indoor mounted modem, which is common to all frequency
bands, and an outdoor mounted power amplifier and antenna.
Radyne ComStream's newer products include a low cost modem with expanded
features and small size, making it attractive for use in both private networks
and rural telephone systems offered in China, Indonesia and India. Radyne
ComStream also manufactures a line of satellite frequency translators presently
used for testing satellite earth stations.
The development of digital compression technology has allowed the
transmission of television in a smaller bandwidth than would otherwise be
possible using existing technology, which has made television transmission by
satellite more economical than ever before. Video compression allows many times
more channels on a satellite than was previously the case, thus producing a new
market for our products of major interest. This compression technology is used
for transmission of television to network facilities and homes, distribution of
cable television to cable companies, high definition television distribution and
video teleconferencing. To meet the demands of this industry, Radyne ComStream
has developed a modulator and demodulator, also known as a modem, product to be
used in conjunction with compression equipment and has been shipping this
product for the past two and one-half years.
Radyne ComStream has developed a line of modems used in government and
defense systems. This equipment is interoperable with certain existing equipment
in use by the U.S. Army. Our customers are replacing older equipment with our
newer technology to enable the military to communicate with ships and ground
units.
Radyne ComStream has also developed a new product for use by Internet
access providers which integrates our core satellite modem technologies with a
router.
Notwithstanding the foregoing, investors should be aware that Radyne
ComStream's future plans are subject to a number of variables outside of its
control, and there can be no assurance that Radyne ComStream will be able to
implement any or all of such plans or that such plans, when and if implemented,
will be successful.
Industry overview
There are more than 190 major commercial communications satellites in orbit
today, almost 60 of which were launched in the past two years. Over 65 more of
these expensive geosynchronous earth-orbiting satellites (GEO's) will be
deployed in the near future. (Source: VIA Online 1998 Global Satellite Survey).
The ways in which satellites are used continue to shift over time. Satellites
are principally used today in television distribution, international telephone
service, data and audio broadcasting, Internet service and private networks. As
more fiber cables are laid under the oceans, the use of satellites for
international telephony is slowing. However, satellites represent a sizable
investment and a unique communications medium which will continue to be used in
other ways. For example, the use of this satellite resource is already shifting
towards domestic telephony in countries, such as China and India, which are
seriously lacking in infrastructure. In addition, technological advances, such
as voice compression, have made it economical for third world countries to have
more telephone service. Moreover, television distribution is going through a
technological revolution in which ten times as many programs can be transmitted
through satellites than was possible 5 years ago. A typical satellite can
deliver 250 or more channels today compared to 24 channels before. This
technological and economical breakthrough has created many new markets. For
example, it is now cost-effective for many relatively small market segments to
have their own television networks, such as the networks for regional college
sports. In addition, satellites are an ideal medium to distribute high
definition television. Finally, the lowering of international barriers and
privatization are allowing the expansion of more private networks.
Almost anyone who uses a satellite as a means of transmission has the need
for equipment of the sort produced by Radyne ComStream. Radyne ComStream expects
to continue operating within the satellite ground equipment segment of the
market for the next several years, while continuing to expand into various new
markets. For example, additional needs for Internet service, new data broadcast
requirements, and communications directly to computers are areas in which Radyne
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ComStream expects to realize the greatest growth potential. Although the
telecommunications industry is rapidly changing, becoming more complex and
requiring new technology, we do not expect the transformation and evolution of
the industry to cause satellite data equipment to become obsolete, at least
within the near future.
Industry trends
Several major trends in the telecommunications industry should provide
opportunities for Radyne ComStream.
o Telecommunications needs in the Pacific Rim, South America, and the
Eastern European countries and an increase in the number of satellites
orbiting over the Pacific and Indian Oceans will produce a substantial
need for satellite data communications equipment.
o The requirement for increased dissemination of financial data
increases the requirements for broadcast receivers.
o If the United States defense budget continues to shrink, more
commercial off-the-shelf products may be purchased from suppliers,
such as Radyne ComStream, who can offer these products for much less
than the government would pay to develop or produce the products.
Radyne ComStream anticipates being able to and has already begun to
supply commercial versions of military equipment.
o As digital television and high-definition television become available,
the need for satellite equipment for distribution to cable companies
and homes will increase.
Satellite modems and earth stations
Satellite communication has been established as a key element in the growth
of the telecommunications industry. Although the emergence of fiber cable, which
industry prefers for certain applications, created competition for satellite
communications, satellite communications enjoy advantages in many markets for
several reasons:
o It is not cost-effective to utilize fiber cable in all areas of the
world, especially emerging countries where telecommunications
capabilities are just beginning to develop.
o Although fiber cable has performance advantages, it has a tendency to
break, resulting in the need for satellite capabilities as a back-up.
o Fiber cable is utilized mainly for point-to-point communications.
Satellite transmission, on the other hand, is superior for
distribution communications, for example, distribution of financial
market information or video broadcasting on major television networks.
Thus, although fiber cable can be viewed as a competitor of satellite
communications, it has not historically reduced, nor is it anticipated to
reduce, the need for satellite modem equipment. Moreover, in the opinion of
management, there should be "niche" requirements that can be satisfied only with
satellite communications for a long time to come.
An example of the continued need for satellite communications is evident in
the difficulty of providing telecommunications services in certain areas. For
instance, it is not cost effective to lay fiber cable in mountainous terrain or
in nations composed of many islands, a geographical feature which is relatively
common in the Pacific region. Sparsely populated areas are generally not
conducive to fiber cable on a cost-effective basis. Moreover, fiber cable is not
suitable for portable communications, such as personal communications systems,
commonly referred to as PCS, news gathering, emergency services and other mobile
communication requirements.
Rural telephony and private network Demand Assigned Multiple Access
("DAMA") products require special communications equipment which is efficient
for low traffic volume in many different locations. DAMA products allow many
users to access the same channel on demand. Rural telephony can be described as
an intra-country telecommunications network linking many small villages or
islands in a country like the Philippines, for example, ultimately allowing the
villages to communicate with each other and with the world. In a typical rural
telephony service, a small village might designate a post office as the location
of telephone service. Residents could use this location to communicate
throughout the country. Communications outside of the country are frequently
enabled by the use of a central hub in such countries. All international traffic
from within such a country would be routed through such a hub.
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A private network, on the other hand, can be described as a network in the
commercial world. For example, banks and other financial institutions, airlines,
and large and multi-unit corporations all have the need for satellite
communications and may be linked by a private satellite-based network. Radyne
ComStream serves the DAMA products and rural telephony market segments with its
DMD-2401 modem and related products.
Radyne ComStream sells these products to system integrators who make a
business of supplying turnkey earth station operations, as components of systems
that they have designed, as well as directly to end users.
The RCS-10 represents the newest generation system used in major earth
stations which combines modems and redundancy switching in a single unit. Up to
30 modems can be combined in a single rack and each redundancy switch can
control up to 10 modems. The compact design which eliminates more than 1500
parts and cables from prior systems, offers improved transmission and reception
reliability and rapid installation. In addition to an expanded data rate range,
the RCS-10 offers an improved display and more options. The newest version,
under development through a contract from a major international communications
supplier, is the RCS-10L. The RCS-10L is a version with an L-Band interface,
allowing substantially lower power consumption. In addition, the L-Band
interface has a 500MHz bandwidth instead of the usual 36 MHZ bandwidth, reducing
the number of frequency converters required by 60%.
The CM-701 modem has been the workhorse of the industry for 8 years. The
CM-701 is used in Intelsat applications, digital video and small earth station
applications.
Radyne ComStream offers 3 different earth stations. The DT-7000 is
primarily used for C-Band applications. The DMD-2401 LB/ST is a low cost version
that can be used in either the C-Band or Ku-Band applications. The newest
version, the DT-8000, is used in Ku-Band applications.
Radyne ComStream also has a complete line of converters which synthesize
frequencies either up or down. Radyne ComStream also offers a full line of loop
test translators, including C-Band, Ku-Band, X-Band and Tri-Band models. Loop
back testing involves the sending of data which is subsequently received by the
same equipment. Our products consist of self contained frequency converters
which perform transmit-to-receive loopback testing of earth station equipment.
Augmenting these product offerings is the Star Network Management System.
The Star Network Management System consists of a Windows NT point and click
system used to monitor and maintain the functioning of a system remotely. The
Star system allows for the monitoring and control of an entire network of
modems, earth stations, and ancillary equipment from a single location, thereby
eliminating the need to travel to each remote location. It provides local and
remote modem management, control of the equipment connected to the modems and
earth stations, collection of network status and alarm information, remote
channel monitoring and dial-up control.
Digital video and high-speed modems
Compressed digital video is the latest frontier in satellite communications
technology. Several aspects of this market are of particular interest to Radyne
ComStream:
o Television broadcasters have requirements for efficient and economic
distribution.
o Compressed video encoding and decoding are available for the less
demanding business video teleconferencing and distance learning
markets.
o Expanding Internet usage should produce demand for high-speed
satellite transmission for connecting to the Internet. International
connections are relayed to the United States by satellite. The
economics of the new compressed video allows the use of satellite
transmission for long-distance teaching applications.
o Digital cinema distribution is emerging as a viable means of film
distribution. As movie theaters get smaller and thereby proliferate,
the costs of making and distributing copies of films becomes
proportionally greater. Using satellite distribution, movies can be
distributed directly to thousands of theaters simultaneously. We
expect the digital cinema market to become substantial over the next
five years.
Radyne ComStream has entered the high-speed satellite, cable and microwave
communications market with various products that have been designed to
incorporate the most advanced technologies available to condense a large amount
of data into small bandwidths. Communications equipment in this segment
possesses higher data rate capabilities,
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allowing much more data to be transmitted than in traditional equipment, and
supports distribution of digital video, high definition television and Internet
traffic.
The DD-45 demodulator and DM-45 modulator are multi-purpose solutions for
digital video broadcast and high-speed data transmission. Radyne ComStream's
newest high-speed entrants are the DM-160 and MM-160 microwave modem that offer
excellent solutions for applications requiring high data rates, such as high
definition television. These products also allow an increase in the number of
television channels that can be transmitted by satellite. In addition, our new
MM-155 microwave modem in conjunction with commercial off-the-shelf microwave
radios is ideal for high throughput service requirements, such as transmission
of video, data and voice.
The DVB-3030 digital video broadcast modulators are flexible and
programmable, and fully compatible with digital video standards. They are
principally used in digital video hub uplinks, mobile satellite news gathering,
video distribution and one-way data distribution. They are also high speed and
frequency agile and, thus, ideal for use in digital video hub uplinks, flyaway
and mobile satellite news gathering applications.
In addition, Radyne ComStream manufactures the QAM-256 which is used for
distribution of digital video and high definition television over cable and
microwave links.
Government and military modems
The United States Government has provided a significant market opportunity
for Radyne ComStream as the defense budget shrinks and it becomes cost
prohibitive for the government to develop its own products. Radyne ComStream has
an agreement with a major government supplier and has recently been awarded a
contract to provide a modem for use in the Special Forces Terminal for the US
Army. We have also been awarded a contract from Datapath to provide modems that
can be used in conjunction with other Army modems.
Radyne ComStream is currently supplying two different modems of this type
and is working on a third. The DMD-15G/FM is a universal modem used in the US
Army Special Forces Terminal in support of military operations. This modem
interoperates with military equipment that can no longer be procured by the
military because of price and age. A second modem is the DMD-15G which can
operate with thousands of military modems that are deployed throughout the world
and operate within the defense communication system, perhaps the largest phone
system in the world.
Integrated modem and router for Internet access
We have recently developed a product which combines our standard L-Band
modem and a wide area network router. This product will enable Internet access
providers, particularly those in remote areas or in locations with undeveloped
telecommunications systems, to receive a high speed Internet feed from a
satellite. For many smaller Internet access providers, the integrated modem and
router product offers the convenience of an all-in-one solution. This product
will help Radyne ComStream move into the fast-growing Internet connectivity
solution market.
Data, audio and video broadcast products
Radyne ComStream is a major supplier of satellite broadcast receivers and
associated equipment for data and audio, having manufactured more than 100,000
units. Satellites are an ideal transmission medium for broadcast services as a
single satellite has the ability to communicate with ground locations spread
across up to one-third of the surface of the earth. Satellite broadcast
receivers are used to provide music and other audio services as well as to
distribute financial data and other digital services. The new DBR-202 receiver
is a low cost platform handling audio, data, Internet Protocol data, and MPEG
video and audio.
There is an emerging market to provide data and video directly to the
personal computer. Towards that end, Radyne ComStream has developed a very low
cost receiver card for use in personal computers. The card has successfully
passed trials in a private network, resulting in an order for 2,000 cards, and
we expect to receive additional orders.
Our data broadcast networks consist of a single data uplink, multiple
receivers and the Star Network Management System for security, monitoring and
control. The receivers can be configured for C-band and Ku-band transmissions
and
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can be located anywhere within the range of a satellite. The DBR401VR variable
rate commercial data receiver provides a low-cost alternative for transmitting
data across a wide range of data rates. Our DBR801 high speed receiver is an
ideal solution for high speed transmission of digital audio, video or data.
Manufacturing
Radyne ComStream's products are to a certain extent assembled and tested at
its Phoenix, Arizona and San Diego, California facilities using subsystems and
circuit boards supplied by subcontractors. Some products are completely
assembled and tested at subcontractors, including subcontractors in Thailand and
in Wales, UK. Although Radyne ComStream believes that it maintains adequate
stock to reduce the procurement lead time for certain components, Radyne
ComStream's products use a number of specialized chips and customized components
or subassemblies produced by a limited number of suppliers. In the event that
such suppliers were to be unable or unwilling to fulfill Radyne ComStream's
requirements, Radyne ComStream could experience an interruption in production
until an alternative supply source was developed. Radyne ComStream maintains an
inventory of certain chips and components and subassemblies to limit the
potential for such an interruption. Radyne ComStream believes that there are a
number of companies capable of providing replacements for the types of unique
chips and customized components and subassemblies used in its products.
Sales and marketing
Radyne ComStream sells its products through an international sales force
with sales and/or service offices in San Diego, Phoenix, Boca Raton, Beijing,
Singapore, London and Jakarta. Additionally, international representatives,
distributors and systems integrators sell our products, supported by Radyne
ComStream's sales and marketing personnel.
Radyne ComStream's direct sales force is comprised of 14 individuals
supported by systems and applications engineers. We focus direct sales
activities on expanding Radyne ComStream's international sales by identifying
emerging markets and establishing new customer accounts. Additionally, Radyne
ComStream directly targets certain major accounts which may provide entry into
new markets or lead to subsequent distribution arrangements. Such major accounts
tend to be telecommunications agencies and major corporations in new
international markets. Radyne ComStream has a customer service and support
group, which primarily supports customers and distributors and is responsible
for after-sale support and installation supervision. In certain instances,
Radyne ComStream uses third party companies for installation and maintenance.
During 1998, no customers represented greater than 10 percent of net sales.
During 1997, one customer represented 14.5 percent of net sales. For the
six-month period ended December 31, 1996, two customers represented 15.6 percent
and 18.3 percent of net sales. During the year ended June 30, 1996, one customer
represented 12.7 percent of net sales.
Radyne ComStream's sales in its principal foreign markets for the periods
indicated consisted of the following percentages of total sales.
Year ended Year ended Six months ended Year ended
Region 12-31-98 12-31-97 12-31-96 6-30-96
- ------ -------- -------- -------- -------
Asia 7% 32% 30% 23%
Latin America 9% 12% 24% --
Europe 31% 7% -- 19%
Others* 3% 5% 12% 8%
-------- -------- ------- ------
Total Exports 50% 55% 66% 50%
* For the six months ended December 31. 1996, "Other" includes Europe. For
the year ended June 30, 1996, "Other" includes Latin America.
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Radyne ComStream believes that the above total export figure may rise in
subsequent periods. We consider our ability to continue to deliver products in
developing markets to be important to our growth potential. However, we may not
succeed in our efforts to cultivate such markets.
Research and development
Radyne ComStream's research and development efforts to date have been
devoted to the design and development of new products for the satellite
communications and telecommunications industries. Radyne ComStream's future
growth depends on increasing the market shares of its new products, adaptation
of its existing satellite communications products to new applications, and the
introduction of new communications products that will find market acceptance and
benefit from Radyne ComStream's established international distribution channels.
Accordingly, Radyne ComStream is actively applying its communications expertise
to design and develop new hardware and software products and enhance existing
products. However, there is no assurance that Radyne ComStream will continue to
have access to sufficient capital to fund the necessary research and development
or that such efforts, even if adequately funded, will prove successful.
Research and development expenses amounted to $4,296,000 in the year ended
December 31, 1998, $2,262,000 in the year ended December 31, 1997, $808,000 in
the six months ended December 31, 1996 and $1,795,000 in the year ended June 30,
1996. A number of new products were either launched or reached an advanced stage
of development during these periods.
In connection with the acquisition of ComStream, we recorded a one-time
charge of approximately $3.9 million, which represents the value assigned to
purchased in-process research and development.
Competition
The Satellite Industry Association estimates the global market for
satellite ground communications equipment to be in excess of $11 billion per
annum. Radyne ComStream estimates that its addressable markets are in excess of
$350 million.
Radyne ComStream has a number of major competitors in the satellite
communications field. These include large companies, such as Hughes Network
Systems, NEC and the EFData division of California Microwave, which have
significantly larger and more diversified operations and greater financial,
marketing, human and other resources than Radyne ComStream. Radyne ComStream
estimates that the major competitors in the main markets in which it operates
have the following market shares as compared to Radyne ComStream's share:
Satellite Modems Digital Video & Gov't & Military Data & Audio
& Earth Stations High Speed Modems Modems Broadcast
---------------- ----------------- ------ ---------
Competitor
California Microwave/EF Data 33% 20% 15% 5%
Hughes Network Systems 10% -- -- --
SSE Telecom 5% -- 10% --
NEC 20% -- -- --
Wegener -- -- -- 15%
IDC -- -- -- 15%
Radyne ComStream 15% 25% 15% 30%
We do not believe that any other single competitor has a greater than 10%
market share for any of these product classes. However, the foregoing market
share figures represent estimates based on the limited information available to
us, and there can be no assurance of precision.
We believe that we have been able to compete by concentrating our sales
efforts in the international market, utilizing the resources of local
distributors, and by emphasizing product features. However, most of Radyne
ComStream's
9
competitors offer products which have one or more features or functions similar
to those offered by Radyne ComStream. Radyne ComStream believes that the
quality, performance and capabilities of its products, its ability to customize
certain network functions and the relatively lower overall cost of its products,
as compared to the costs generally offered by Radyne ComStream's major
competitors, have contributed to Radyne ComStream's ability to compete
successfully. However, Radyne ComStream's major competitors have the resources
available to develop products with features and functions competitive with those
offered by Radyne ComStream. There can be no assurance that such competitors
will not successfully develop such products or that Radyne ComStream will be
able to maintain a lower cost advantage for its products. Moreover, there can be
no assurance that Radyne ComStream will not experience increased competition in
the future from these or other competitors currently unknown.
Employees
As of March 1, 1999, Radyne ComStream had 197 full time employees,
including 7 executive officers, 173 in engineering, manufacturing and marketing
operations, and 17 in administration. None of Radyne ComStream's employees are
represented by a union or governed by a collective bargaining agreement, and
Radyne ComStream believes that its relationships with its employees are
satisfactory.
Technology
While Radyne ComStream has a number of patents, copyrights and other
intellectual property rights in the form of software and integrated circuit
designs, it has been cautious in obtaining patents on existing products. In
general, we believe that improvement of existing products, reliance upon trade
secrets, copyrights and unpatented proprietary know-how and the development of
new products are generally as important as patent protection in establishing and
maintaining a competitive advantage. Furthermore, patents often provide only
narrow protection which may not provide a competitive advantage in areas of
rapid technological change and patent applications require public disclosure of
information which may otherwise be subject to trade secret protection. However,
Radyne ComStream's technology could be found to infringe upon the intellectual
property of others. If Radyne ComStream's technology should be found to
impermissibly utilize the intellectual property of others, our ability to
utilize the technology could be materially restricted or prohibited. In such
event, Radyne ComStream might be required to obtain licenses from third parties
to utilize the patents or proprietary rights of others. Any licenses required
may not be obtainable on terms acceptable to Radyne ComStream or at all. In
addition, in such event, Radyne ComStream could incur substantial costs in
defending itself against infringement claims made by third parties or in
enforcing its own intellectual property rights.
ITEM 2. PROPERTIES
Radyne ComStream's primary facilities consist of a leased 76,000 square
foot lab, office and manufacturing facility in Phoenix, Arizona and a leased
66,400 square foot lab, office and manufacturing facility in San Diego,
California. These leases expire in September 2008 and February 2005,
respectively, and both leases provide options for renewal. The Company's plans
include subleasing a certain amount of space in both of these facilities until
such time as the space is required for internal use. We believe that these
facilities will provide for expected growth for the foreseeable future.
Radyne ComStream also has regional sales offices in the U.K., Singapore,
Boca Raton, Florida, China and Indonesia and customer service centers in China,
the U.K., and Indonesia. All such facilities are leased.
ITEM 3. LEGAL PROCEEDINGS
Radyne ComStream is involved in litigation and claims arising in the normal
course of operations. In the opinion of management based on consultation with
legal counsel, losses, if any, from this litigation are expected to be covered
by insurance or to be immaterial.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three months ended December 31, 1998, the Company submitted two
items to a vote of security holders. Pursuant to written consents, dated as of
November 5 and November 25, 1998, respectively, the majority holders of the
Company's common stock agreed to:
1. Amend the Company's 1996 Incentive Stock Option Plan to make another
900,000 shares of Common Stock available for grants of options under the Plan
and to accelerate the vesting of options previously granted; and
2. Change the name of the Company to "Radyne ComStream Inc." and amend the
Company's By-Laws to (a) clarify that either the directors or the stockholders
may resolve to vary the number of directors between three and ten, (b) eliminate
limitations on the forms of compensation which the Company may provide to
non-employee directors, and (c) permit record date and notice periods for
stockholder meetings and other proceedings to be as long as sixty (60) days, in
conformity with a recent amendment of New York law.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Radyne ComStream's Common Stock is traded in the over-the-counter market
under the OTC Bulletin Board symbol "RADN". However, there is no established
trading market as actual transactions are infrequent. The following table sets
forth the range of high and low trading prices as reported by the National
Quotation Bureau, Inc. for the periods indicated. At December 31, 1998, Radyne
ComStream had approximately 448 stockholders of record. Radyne ComStream
believes that the number of beneficial owners is actually in excess of 1,600,
due to the fact that a large number of shares are held in street name.
High Low
---- ---
1997:
First Quarter.................................... 6 3-1/8
Second Quarter................................... 3-1/4 3
Third Quarter.................................... 10-3/4 5
Fourth Quarter................................... 10-1/2 4
1998:
First Quarter.................................... 5-1/4 2-7/64
Second Quarter................................... 5 2-3/4
Third Quarter.................................... 5 3-3/16
Fourth Quarter................................... 5 2-1/2
On March 22, 1999 the last sale price of the Common Stock as reported by
the OTC Bulletin Board was $3-3/8 per share.
The Company has not paid dividends on the Common Stock since inception and
does not intend to pay any dividends to its stockholders in the foreseeable
future. The Company currently intends to reinvest earnings, if any, in the
development and expansion of its business. The declaration of dividends in the
future will be at the election of the Board of Directors and will depend upon
the earnings, capital requirements and financial position of the Company,
general economic conditions and other pertinent factors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations data for the years ended
December 31, 1998 and December 31, 1997, the six month period ended December 31,
1996, the year ended June 30, 1996, the six and one-half month period ended June
30, 1995 and the ten and one-half month period ended December 16, 1994, and the
selected balance sheet data at those dates, are derived from the financial
statements of the Company and notes thereto audited by KPMG LLP (in the case of
the year ended December 31, 1998) and Deloitte & Touche LLP (in the case of the
year ended December 31, 1997, the six months ended December 31, 1996, the year
ended June 30, 1996, the six and one-half months ended June 30, 1995 and the ten
and one-half months ended December 16, 1994), independent auditors for the
Company. Per share data and shares outstanding reflect an adjustment for the
effects of the 1-for-5 reverse split of the Company's common stock, which became
effective on January 9, 1997. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of the Company and notes thereto
included elsewhere in this 10-K Annual Report.
12
STATEMENT OF OPERATIONS DATA
TEN-AND-
SIX-AND- ONE-HALF
SIX MONTHS ONE-HALF MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED MONTHS ENDED
DECEMBER DECEMBER DECEMBER JUNE ENDED DECEMBER
31, 31, 31, 30, JUNE 30, 16,
1998 1997 1996 1996 1995 1994(1)
------------ ------------ ------------ ------------ ------------ ---------
Net Sales ......................... $ 21,111,704 $ 13,446,852 $ 4,905,059 $ 3,829,523 $ 1,861,262 2,569,396
Cost of Sales ..................... 15,808,459 8,022,262 4,052,433 2,559,350 1,228,747 2,229,329
Gross Profit ...................... 5,303,245 5,424,590 852,626 1,270,173 632,515 340,067
Selling, general and
Administrative expense ......... 5,531,213 4,242,138 1,437,971 1,843,576 961,162 1,658,388
Asset impairment charge(2) ........ 262,935 -- 421,000 -- -- --
Professional fees related to
Reorganization ................. -- -- -- -- -- 600,198
Research and development .......... 4,296,268 2,262,066 808,025 1,794,823 -- --
Stock option compensation expense . 1,155,477 -- -- -- -- --
In process research and
development .................... 3,909,000 -- -- -- -- --
Restructuring costs ............... 3,100,000 -- -- -- -- --
Total operating expenses ....... 18,254,893 6,504,204 2,666,996 3,638,399 961,162 2,258,586
Operating loss .................... (12,951,648) (1,079,614) (1,814,370) (2,368,226) (328,647) (1,918,519)
Interest expense .................. 1,198,777 677,102 255,604 256,871 36,209 118,235
Other ............................. (23,480) -- -- -- -- --
Loss before fresh start
adjustments and
extraordinary items ............ (14,126,945) (1,756,716) (2,069,974) (2,625,097) (364,856) (2,036,754)
Fresh start adjustments ........... -- -- -- -- -- 1,598,841
Loss before extraordinary
items and taxes on income ...... (14,126,945) (1,756,716) (2,069,974) (2,625,097) (364,856) (437,913)
Extraordinary items(3) ............ -- -- -- -- -- 2,699,156
Income (loss) before taxes ........ (14,126,945) (1,756,716) (2,069,974) (2,625,097) (364,856) 2,261,243
Net loss per share before
Extraordinary items ............ (2.38) (0.35) (0.55) (0.70) (0.10) (1.33)
Net income (loss) per share
after extraordinary
items .......................... (2.38) (0.35) (0.55) (0.70) (0.10) 6.87
Weighted average number
of outstanding shares .......... 5,931,346 5,012,664 3,750,699 3,742,227 3,729,721 329,020
13
BALANCE SHEET DATA
12/31/98 12/31/97 12/31/96 6/30/96 6/30/95 12/16/94(1)
------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents ... $ 254,956 $ 569,692 $ 186,488 $ 971 $ 2,109 $ 256,398
Working capital (deficit) ... (8,803,970) 1,654,857 (5,851,527) (4,082,987) (1,343,018) (977,678)
Total assets ................ 29,190,714 10,231,617 6,572,917 3,272,686 3,452,999 3,084,394
Long-term liabilities ....... 16,862,337 4,649,404 161,968 130,414 168,304 192,603
Total liabilities ........... 44,427,634 11,381,678 11,019,543 5,669,338 3,264,554 2,531,093
Stockholder equity (deficit) (15,236,920) (1,150,061) (4,446,626) (2,396,652) 188,445 553,301
- ----------
(1) The Company's predecessor petitioned for bankruptcy protection in April
1994 and operated as a debtor-in-possession until December 16, 1994.
(2) Consists of the writedown of designs and drawings in light of the
introduction of replacement products. (3) Consists of $1,062,667 gain on
exchange of debt for common stock and $1,636,489 gain on debt forgiveness.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In reviewing the following material, the reader should take note of the
fact that the respective periods being compared are of various duration. This is
due to several changes in the Company's fiscal year. Upon emergence from
bankruptcy on December 16, 1994, the predecessor company's fiscal year ended on
that date. The adoption of the fiscal year of the Company's new parent (ETS) at
that time created a fiscal period from December 17, 1994 through June 30, 1995,
followed by a full year ended June 30, 1996. Upon becoming a subsidiary of ST in
August of 1996, the Company adopted ST's fiscal year (the calendar year),
creating a stub fiscal period from July 1 through December 31, 1996.
Acquisition. On October 15, 1998, the Company completed the purchase of
ComStream Holdings, Inc. from Spar Aerospace Limited, a Canadian advanced
technology company. ComStream is an international provider of digital
transmission solutions for voice, data, audio and video applications with
offices in the United States, Singapore, Indonesia, China and the United
Kingdom. Revenues of ComStream for 1998 were approximately $37 million. We
acquired ComStream in an effort to expand our core business, and supplement our
product lines with a number of viable developed products and superior quality
products in the design stage, some of which have since been released for
production.
The acquisition was recorded in accordance with the "purchase method" of
accounting and, accordingly, the purchase price has been allocated to the assets
purchased and the liabilities assumed based upon the estimated fair values at
the date of acquisition. The excess of the purchase price over the fair values
of the net assets acquired was approximately $8.7 million of which $3.9 million
was allocated to in-process research and development, $2.5 million was valued as
purchased technology, which is being amortized over 6.25 years, and $2.3 million
has been recorded as goodwill, which is being amortized over ten years. The
results of operations of ComStream have been included in the Company's combined
statement of operations from the acquisition date.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
The Company's net sales increased 57% to $21,112,000 during the year ended
December 31, 1998 from $13,447,000 during the year ended December 31, 1997. This
increase is primarily attributable to the increased product sales resulting from
our purchase of ComStream.
The Company's cost of sales as a percentage of net sales increased to 75%
during the year ended December 31, 1998 from 60% for the year ended December 31,
1997. During the year ended December 31, 1998, we recorded adjustments to
inventory of approximately $911,000 (4.3% of sales) to write off excess and
obsolete inventory as well
14
as "start-up" costs associated with the introduction of new products such as
set-up fees, expedited product deliveries and low-volume pricing for purchased
parts on initial production runs. The establishment of a reserve to allow for
costs associated with valuation of older versions of products that will become
"slow-moving" or obsolete as a result of the introduction of the newer version
products are referred to as "excess and obsolete" reserves.
Selling, general and administrative costs increased to $5,531,000 or 26% of
sales during the year ended December 31, 1998 from $4,242,000 or 32% of sales
for the year ended December 31, 1997. The decrease in expenses as a percentage
of sales was primarily attributable to the sales growth as explained above. The
increase in pure dollars is mainly attributable to the purchase of our San Diego
operation in October, 1998.
The Company recorded an "asset impairment charge" of $263,000 during the
year ended December 31, 1998, to reflect a valuation adjustment to Designs and
Drawings which were fully impaired by the introduction of competing product
lines due to the purchase of ComStream. Impairment was determined by comparing
the amount of undiscounted projected cash flows attributable to each product
using the related technology to the carrying value of the asset.
Research and development expenditures increased to $4,296,000 (20% of
sales) from $2,262,000 (17% of sales) during the year ended December 31, 1997.
The increase in expenses was primarily attributable to major development
programs instituted during 1997 and to the inclusion of the research and
development expenses from our San Diego facility due to the purchase of
ComStream in October, 1998. It is anticipated that the Company will continue to
experience high research and development expenses as it positions itself,
through the introduction of new products, to gain market share.
Stock option compensation expense of $1,155,000 was recorded to reflect the
bonus and related expenses to be incurred as a result of the vesting of 657,000
shares of Incentive Stock Options under the Incentive Stock Option Plan of 1996.
These options carry the right to a cash bonus of $1.72 per purchased share,
payable upon exercise. These options were fully vested by action of the Board of
Directors effective October 15, 1998.
Restructuring costs of $3,100,000 were recorded in connection with a
corporate restructuring cost-cutting initiative. $1,100,000 of the total costs
was reserved for additional costs expected in connection with the termination of
approximately 25% of the work force. $2,000,000 was reserved for costs related
to the termination of a lease for a 125,000 square foot facility in San Diego.
This included $700,000 in leasehold improvements, which were abandoned.
In connection with the acquisition of ComStream Holdings, Inc., Radyne
allocated $3,909,000 of the purchase price to in-process research and
development projects. This allocation represents the estimated fair value based
on risk-adjusted future cash flows related to the incomplete projects. At the
date of the acquisition, the development of these projects had not yet reached
technological feasibility and the research and development in process had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date.
There are three generally accepted valuation methodologies useful for
valuing intellectual property and intangible assets: market approach, cost
approach, and income approach. The market approach is the most direct and easily
understood appraisal technique, utilizing data on comparable assets. The cost
approach seeks to measure the future benefits of ownership by quantifying the
amount of money that would be required to replace the future service capability
of the subject property. The income approach steps away from the cost of
constructing or creating a new asset and focuses on a consideration of the
income-producing capability of the asset.
The assets appraised in the valuation analysis included in-process
technology, developed technology and assembled workforce. Based upon the nature
of the assets, the income approach was considered most appropriate for analyzing
both the developed and in-process technologies. This valuation approach
considers the commercial profits and growth prospects of the products as well as
the relative investment risk of the required complementary assets.
Products-in-development at ComStream at the time of the acquisition were
classified as in-process technology. These include the following products with
their respective estimated completion dates:
Description Estimated Completion Date
----------- -------------------------
o A 2MB card Jan-99
o "CM601" modem modifications Mar-99
o "DT 8000" - a Ku-band 2 Watt earth station Dec-98
o "DBR 2000" - a new data broadcast receiver Jun-99
o "ABR 202" - a new audio receiver Nov-98
o Set Top Box Jun-99
o MediaCast Card Receiver Mar-99
15
Revenue streams associated with these products-in-development were used to
estimate fair value using the discounted cash flow method within the income
approach. In the classification of these assets as in-process, the following
were considered:
The products in development at ComStream had not attained "technological
feasibility", as that term is defined in Financial Accounting Statement No. 86,
as of the acquisition date. In other words, either the research projects were
incomplete or major technical uncertainties remained. Technological feasibility
was expected to be achieved, for a few of the products in the fourth quarter of
1998 and the remaining products within 1999. The nature, amount, and timing of
the costs required to complete the in-process technology are presented in the
following chart:
------------ ---------- ----------
Estimated Estimated TotalCosts
Product Started Cost To Cost To at
Base Line (Month Completion Date Complete Completion
Description Technology Applicability -Year) Date $000's $000's $000's
- ----------------------------------------------------------------------------------------------------------------
2 MB Card QPSK,FEC Modems 01-98 01-99 $ 1,100 $ 700 $ 1,800
Coding
"CM 601" Low Cost Mod Coding Modems 05-97 03-99 600 900 1,500
Modulation
"DT8000" Ku-band Modulation Earth 03-97 12-98 1,950 800 2,750
2 Watt Earth Station Coding Stations
Transmission
"DBR 2000" Data L-Band Broadcast 06-98 06-99 100 300 400
Broadcast Receiver Receivers Data
Packet
Protocol
"ABR 202" Audio Receiver L-Band Broadcast 11-98 600 150 750
Receivers Audio
Multiplexing
Set Top Box Receiver DTH TV - Satellite TV - 03-97 06-99 1,400 200 1,600
Cable TV - Cable TV
Proprietary
IC's - MPEG
Decoders
MediaCast Card Receiver Proprietary Internet 03-97 03-99 1,600 300 1,900
IC's - Receiver -
Internet Video
Protocol - Receiver
DVB MPEG
Decoders
$ 7,350 $ 3,350 $ 10,700
======== ======= ========
It was determined that there was no alternative future use for the
in-process technology as of the acquisition date. Consideration was given to
possible other projects in which the hardware and software products could have
been put to use, but none of these projects had yet attained "technological
feasibility", and so they themselves were considered to be in-process
technology.
The discounted cash flow method began with estimates of future cash flow
using ComStream management's forecasts. In deriving these cash flows, revenues,
cost of goods sold, sales and marketing, general and administrative, and
research and development expenses were used to estimate a baseline measure of
earnings attributable to the products. These earnings represent the expected
income the products would produce once ComStream's technology was integrated
with the resources of Radyne. By adding back non-cash charges and deducting
projected capital expenditures, a measure of debt-free cash flow, useful for
valuing ComStream's in-process technology, was derived.
From the debt-free cash flow forecasts, which represent the cash flow
return on all of ComStream's assets, returns were deducted for the use of
certain other assets: developed technology, net fixed assets, working capital,
and assembled workforce and goodwill.
16
The fair value of ComStream's total assets reflects an investment of
capital, which requires a return to its investors; in addition the Company's
firm-wide cash flows need to satisfy requirements on all of ComStream's assets,
and not just its technology. Overall, a 28% rate of return was employed as
representing ComStream's weighted average cost of capital. The weighted average
cost of capital was allocated among all the assets of the Company, based upon
the relative risk associated with each asset. By allocating the return
requirements for the entire firm to its assets, values can be established based
upon an asset's relative risk and discrete return capability.
Accordingly, the procedure used to value ComStream's in-process technology
was "residual" in nature. The cash flow returns attributable to the products
(debt-free cash flow) were reduced by the return requirement for each of the
other assets employed, with the remaining cash flow used to value the in-process
technology. This is the cash flow that would be available to satisfy the return
requirement on the amount of money invested in the in-process technology.
The Company believes that the assumptions used in the forecasts were
reasonable at the time of the acquisition. No assurance can be given, however,
that the underlying assumptions used to estimate expected product sales,
development costs or profitability, or the events associated with such projects,
will transpire as estimated. For these reasons, actual results may vary from the
projected results. Within the satellite communications equipment industry, there
are several specific technologies incorporated within a single product. It is
therefore difficult to relate specific revenue streams to individual
technologies or projects. As a result, instead of attempting to model each
individual project or technology, the cash flow generated by ComStream's
products in the aggregate was examined. We allocated the aggregate revenues to
developed, in-process and future technology, in a manner which we believe is
reasonable.
Interest expense net of interest income increased to $1,199,000 (6% of
sales) during the year ended December 31, 1998 from $677,000 (5% of sales) for
the year ended December 31, 1997. The large increase in expense was primarily
attributable to the increased debt of the Company, which in turn, is primarily
attributable to the acquisition of ComStream Holdings, Inc.
For the year ended December 31, 1998, the Company did not provide for
income taxes, due to the current period net loss and its net operating loss
carryforwards. The Company also did not provide for income taxes for the prior
period due to net operating losses.
For the year ended December 31, 1998, the Company had a net loss of
$14,127,000 as compared with a net loss of $1,757,000 for the year ended
December 31, 1997. The increase in net loss was primarily attributable to the
restructuring costs, acquired in-process research and development, increased
research and development expense, the stock option compensation expense and the
asset impairment charge.
"New Orders Booked" (firm, fixed orders from customers) for the year ended
December 31, 1998 were $24,904,000 as compared to $15,788,000 for the year ended
December 31, 1997. The increase is primarily attributable to the "bookings"
included in the fourth quarter for the acquired ComStream products.
The Company's "Backlog" of orders to be shipped (unshipped orders from the
prior period plus new orders booked less orders shipped during the period) was
$8,606,000 as of December 31, 1998, an increase of 79% over the $4,814,000 in
Backlog as of December 31, 1997. The Company's Backlog consists of firm orders
as evidenced by written contracts and/or purchase orders from customers.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996
The Company's net sales increased 174% to $13,447,000 during the twelve
month period ended December 31, 1997 from $4,905,000 during the six months ended
December 31, 1996. This increase is primarily attributable to the increased time
frame of the later period relative to the prior period and to the introduction
of the Company's new product lines which experienced exceptional market
acceptance.
The Company's cost of sales as a percentage of net sales decreased to 60%
during the twelve months ended December 31, 1997 from 83% for the six months
ended December 31, 1996. During the six months ended December 31, 1996,
adjustments to inventory of approximately $491,000 (10% of sales) for
obsolescence, of which $364,000 was related to the introduction of new products
(which essentially rendered one entire older product line obsolete), and
$340,000 (7% of sales) for start-up costs related to the introduction of new
products were included in the cost of sales as old product lines were replaced
with new product lines. These products included a new generation modem
sub-system which makes use of the Company's proprietary technology from older
products while adding features and reducing
17
future manufacturing costs. Also, the Company introduced and shipped new
"digital video broadcast" modems which experienced exceptional acceptance in the
marketplace.
The Company was obligated to pay royalties to Merit Microwave, Inc. on
sales of certain translator products developed by Merit. The royalty rate ranges
from five to ten percent of the selling price. During the period ended December
31, 1997, the Company accrued $5,600 for royalty expenses, which were included
in direct cost of goods sold.
Selling, general and administrative costs increased to $4,242,000 or 32% of
sales during the twelve months ended December 31, 1997 from $1,438,000 or 29% of
sales for the six months ended December 31, 1996. The increase in expenses as a
percentage of sales was primarily attributable to growth and expenses incurred
for market penetration. The increase in pure dollars was also attributable to
the increased time frame of the later period over the prior period.
The Company recorded an "asset impairment charge" of $421,000 during the
six months ended December 31, 1996, to reflect a valuation adjustment to designs
and drawings which were partially impaired due to the introduction of new
product lines. The valuation of designs and drawings was the result of
adjustments made by the Company to adopt Fresh Start reporting in accordance
with AICPA Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code, and represents the excess
reorganization value that was applied to the acquired technology supporting the
Company's products. Amortization of designs and drawings was computed using the
straight-line method over an estimated useful life of four to seven years. The
remaining asset carried a net book value of $472,000, amortized using the
straight-line method over the remaining estimated useful life of one to four
years.
Research and development expenditures increased to $2,262,000 (17% of
sales) during the twelve months ended December 31, 1997 from $808,000 (16% of
sales) for the six months ended December 31, 1996. The increase in expenses was
primarily attributable to the increased time frame of the later period over the
prior period and to major development programs instituted during the fiscal year
ended December 31, 1997. It was anticipated that the Company will continue to
experience high R&D expenses as it positions itself, through the introduction of
new products, to gain market share.
As of the last day of the fiscal period, the Company held approximately
$600,000 worth of inventory, in the form of finished goods in a ready-to-ship
status, on the shipping dock for two orders placed with the Company which were
to be purchased with funds underlying international letters of credit. Due to
unexpected difficulties, the letters of credit were not received by the end of
the period and so the products were not shipped. The impact of these delayed
letters of credit was to delay shipment, and revenue recognition, of
approximately $945,000 in sales.
Interest expense net of interest income increased to $677,000 (5% of sales)
during the twelve months ended December 31, 1997 from $256,000 (5% of sales) for
the six months ended December 31, 1996. The large increase in expense was
primarily attributable to the increased time frame of the later period over the
prior period.
For the period ended December 31, 1997, the Company did not provide for
income taxes, due to the net loss. The Company also did not provide for income
taxes, for the six months ended December 31, 1996, due to net operating losses.
For the twelve month period ended December 31, 1997, the Company had a net
loss of ($1,757,000) as compared with a net loss of ($2,070,000) in the six
month period ended December 31, 1996. The decrease was primarily attributable to
increased sales with a lower percentage of cost of sales.
"New Orders Booked" (firm, fixed orders from customers) for the twelve
months ended December 31, 1997 were $15,788,000 as compared to $5,939,000 for
the six months ended December 31, 1996. This increase was as a result of the
increased time frame of the later period over the prior period coupled with the
increased effort, on the part of the Company, to rejuvenate its marketing
strategy.
The Company's "Backlog" of orders to be shipped (unshipped orders from the
prior period plus new orders booked less orders shipped during the period) was
$4,814,000 as of December 31, 1997, an increase of 95% over the
18
$2,473,000 in Backlog as of December 31, 1996. The Company's Backlog consists of
firm orders as evidenced by written contracts and/or purchase orders from
customers. Approximately $945,000 of this amount was due to the effect of the
late letters of credit from two orders. One of these orders was from South
America and subsequently shipped. The other order was from Indonesia and has not
shipped to date.
SIX MONTH PERIOD ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30,
1996.
The Company's net sales increased 28% to $4,905,000 during the six month
period ended December 31, 1996 from $3,830,000 during the twelve months ended
June 30, 1996. This increase was primarily attributable to the introduction of
the Company's new product lines which experienced exceptional market acceptance.
Sales of products introduced since July 1, 1995 increased from $434,000 for the
period ended June 30, 1996 to $3,477,000 for the period ended December 31, 1996.
The Company's cost of sales as a percentage of net sales increased to 83%
during the six months ended December 31, 1996 from 67% for the fiscal year ended
June 30, 1996. There were two primary reasons for this increase in percentage.
First, there were adjustments to inventory of $491,000 (10% of sales) for
obsolescence. Of this amount, $364,000 was related to the introduction of new
products which essentially rendered one entire product line obsolete, $110,000
was related to ongoing product development and $17,000 was related to the
valuation of excess materials on hand. Second, $340,000 (7% of sales) of
start-up costs related to the introduction of new products were included in the
cost of sales for the period ended December 31, 1996. These products included a
new generation modem sub-system which makes use of the Company's proprietary
technology from older products while adding features and reducing future
manufacturing costs. Also, the Company introduced and shipped the new "Digital
Video Broadcast" modem which experienced exceptional market acceptance. Also
contributing to the increase in cost of sales as a percentage of sales were
freight charges related to international sales (2% of sales) and higher than
anticipated warranty expense on some of the Company's older products (1% of
sales).
The Company was obligated to pay royalties to Merit on sales of certain
translator products developed by Merit. The royalty rate ranges from five to ten
percent of the selling price. During the period ended December 31, 1996, the
Company paid $2,200 for royalty expenses, which were included in direct cost of
goods sold.
Selling, general and administrative costs decreased to $1,438,000 or 29% of
sales during the six months ended December 31, 1996 from $1,844,000 or 48% of
sales for the fiscal year ended June 30, 1996. The decrease in expenses was
primarily attributable to the decreased time frame of the latter period over the
prior period 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 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 and net operating loss
carryforwards from prior periods. The Company also did not provide for income
taxes for the twelve month period ended June 30, 1996, for the same reasons.
19
For the six month period ended December 31, 1996, the Company had a net
loss of ($2,070,000) as compared with a net loss of ($2,625,000) in the twelve
month period ended June 30, 1996. The decrease was primarily attributable to the
decreased time frame of the latter period relative to the prior period as
partially offset by the increase in cost of sales as a percentage of sales and
the expenses of increased business activity, and the $421,000 asset impairment
charge as discussed above.
"New Orders Booked" (firm, fixed orders from customers) for the six months
ended December 31, 1996 were $5,939,000 as compared to $4,184,000 for the year
ended June 30, 1996. The Company's "Backlog" of orders to be shipped (orders
from the prior period which had not yet been shipped plus new orders booked less
orders shipped during the period) was $2,473,000 as of December 31, 1996, an
increase of 72% over the $1,439,000 in Backlog as of June 30, 1996. The
Company's Backlog consists of firm orders as evidenced by written contracts
and/or purchase orders from customers.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of ($8,804,000) at December 31,
1998, as compared to working capital of $1,655,000 at December 31, 1997 and a
deficit of ($5,852,000) at December 31, 1996 and ($4,083,000) at June 30, 1996.
The current working capital deficit is attributable principally to the increase
in short-term debt associated with ongoing operations ($3,000,000) and the
ComStream acquisition ($7,000,000), and increases in accounts payable
(approximately $2,625,000) and accrued expenses (approximately $8,239,000)
associated with the ComStream acquisition, as partially offset by increases in
receivables (approximately $6,176,000) and inventory (approximately $3,991,000)
associated with the ComStream acquisition.
Net cash used in operating activities was $3,850,000 for the twelve month
period ended December 31, 1998, as compared to $4,945,000 for the twelve month
period ended December 31, 1997, and $3,546,000 for the six months ended December
31, 1996 and $2,581,000 used in the year ended June 30, 1996.
Cash used in investing activities was $10,551,000 for the period ended
December 31, 1998, $593,000 for the period ended December 31, 1997, $255,000 for
the period ended December 31, 1996 and $389,000 for period ended June 30, 1996.
The current year's increase of almost $10,000,000 relates to the purchase of
ComStream. The Company has no material commitments to make capital expenditures
in 1999 or thereafter.
The Company derived net cash from financing activities of $14,086,000
during the year ended December 31, 1998, $5,922,000 during the year ended
December 31, 1997, $3,986,000 during the six month period ended December 31,
1996 and $2,969,000 during the year ended June 30, 1996. During the current
period net cash from financing activities was composed primarily of line of
credit borrowings ($3,000,000), loans from affiliates ($15,618,000) and line of
credit repayments ($4,500,000).
As a result of the foregoing, the Company decreased its cash balance by
$315,000 for the twelve month period ended December 31, 1998, increased its cash
balance by $383,000 for the twelve month period ended December 31, 1997,
increased its cash balance by $186,000 for the six months ended December 31,
1996 and decreased its cash balance by $1,000 for the year ended June 30, 1996.
The Company has a $20,500,000 credit agreement with Citibank, N.A. that
includes $20,000,000 available under an uncommitted line of credit facility and
facilities for bank guarantees and/or standby letters of credit up to $500,000.
An affiliate of ST has issued a nonbinding letter of awareness in connection
with this credit agreement. Borrowings under the line of credit bear interest at
a fluctuating rate equal to LIBOR plus 1% per annum or an alternative Citibank
Quoted Rate plus 1% per annum (rates of 6.125% and 6.938% on balances owed at
December 31, 1998 and 1997, respectively). The credit agreement requires the
Company to maintain certain financial leverage ratios. The availability of
additional borrowings under the credit agreement expires September 29, 1999 and
is renewable annually at the option of the Bank. The Company owed principal of
$8,000,000 under the line of credit as of December 31, 1998. Subsequent to the
end of the period reported on herein, the Company borrowed another $1,500,000
under the credit agreement at rates ranging from 5.97% to 6.06%.
Notes payable to parent (ST) outstanding at December 31, 1998 were
$15,618,272. These notes bear interest at rates from 6.375% to 6.844% and mature
on March 31, 2000. Of this amount, $10,000,000 was borrowed in
20
September 1998 for the acquisition of ComStream Holdings, Inc. ST has committed
to purchase approximately $16,000,000 of the Company's Common Stock in the below
described rights offering, the proceeds of which will be used to retire these
notes.
The Company also has a note payable to Spar Aerospace Limited in the amount
of $7,000,000. This note was issued on October 15, 1998 as partial consideration
for the acquisition of ComStream Holdings, Inc., matures on July 15, 1999 with
interest at 8% per annum and is convertible under certain circumstances into
Common Stock of the Company.
The Company intends to finance the repayment of debt incurred for the
ComStream acquisition, certain planned restructuring costs and its ongoing
working capital needs through (i) a rights offering pursuant to which it will
offer approximately $17,700,000 of Common Stock to its existing stockholders and
(ii) the existing bank line of credit. This offering will be made strictly by
means of a prospectus which will be distributed to stockholders of record as of
April 16, 1999.
The purpose of all of the above described loans has been to finance or
refinance the capital needs associated with the Company's acquisition of
ComStream Holdings, Inc., growth in backlog and the cost of research and
development. To date, the Company's capital resources (as supplemented by loans
from ST and its affiliates) have been sufficient to fund its operations and
increased level of business. ST has confirmed its ability and intent to provide
working capital necessary to ensure that Radyne ComStream remains a going
concern. With this support, the Company believes that its bank credit lines and
cash from operations are likely to be sufficient to fund its planned future
operations and capital requirements for continued growth through the end of
1999, as well as repayment of the above described $7,000,000 note.
SUPPLEMENTARY INFORMATION
YEAR 2000 COMPLIANCE
The Company recognizes the potential business impacts related to the Year
2000 computer system issue and has implemented a plan to assess and improve the
Company's state of readiness with respect to such issues. The year 2000 issue is
one where computer systems may recognize the designation "00" as the year 1900
when it is intended to mean the year 2000, resulting in system failure or
miscalculations.
The Company has undertaken a comprehensive review of its information
technology systems, which the Company is dependent upon to conduct day to day
business operations, in order to determine the adequacy of those systems in
light of future business requirements. Year 2000 readiness was one of the
factors considered in the review process. The Company is in the process of
formalizing its Year 2000 plan. This plan document should be completed by April
30, 1999. The plan provides for the completion of efforts to assess, test and
verify, remediate and develop contingency plans for all internal systems, both
IT and non-IT, for Year 2000 compliance by September 30, 1999. The Company's
review of internal systems is in process. The majority of the Company's
application software programs are purchased from and maintained by vendors. The
Company will work with these software vendors to verify these applications are,
or will become, year 2000 compliant.
The Company presently believes that all mission critical systems are or
will timely become Year 2000 compliant and therefore the Year 2000 issue will
not pose significant operational problems for the Company's internal systems.
All Year 2000 costs to date have been expensed and the Company does not expect
to incur any future costs in excess of $100,000 related to the Year 2000 issue.
We anticipate that future costs related to bringing the Company into compliance
will be written off in the period incurred. However, the Company may choose to
upgrade certain existing software that is already Year 2000 compliant and, if it
does, the costs related to those upgrades will be capitalized in the normal
course of business.
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
21
progress of its material vendors and customers and formulate a contingency plan
if and when the Company concludes that a material vendor or customer may not be
compliant.
During the year ended December 31, 1998, a Year 2000 readiness survey was
sent to all of the Company's material vendors and customers. The readiness
surveys are currently being collected for review and analysis. The Company has
undertaken to advise all of its customers as to the Company's Year 2000 state of
readiness with regard to its products.
There can be no assurance that the Company will be able to completely
resolve all Year 2000 issues or that the ultimate cost to identify and implement
solutions to all Year 2000 problems will not be material to the Company.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material impact on
revenues or expenses during the last four fiscal periods reported on herein.
ACCOUNTING MATTERS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130) which became effective for the Company January 1, 1998. SFAS No. 130
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. The adoption
of SFAS No. 130 did not have a material impact on the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131) which became effective for
the Company January 1, 1998. SFAS No. 131 establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim reports issued to stockholders.
The adoption of SFAS No. 131 did not have a material impact on the Company.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits" (SFAS No. 132) which became
effective for the Company on January 1, 1998. SFAS No. 132 establishes standards
for the information that public enterprises report in annual financial
statements. The adoption of SFAS No. 132 did not have a material impact on the
Company.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133) which becomes effective for the Company
on July 1, 1999. Management does not expect the adoption of SFAS No. 133 to have
a material impact on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk on our financial instruments from changes in
interest rates. We do not use financial instruments for trading purposes or to
manage interest rate risk. Increases in market interest rates would not have a
substantial adverse effect on profitability.
Our financial instruments consist primarily of short-term variable rate
revolving credit lines, and fixed rate debt. Our debt at December 31, 1998
consisted of notes payable to affiliates, notes payable under a line of credit
agreement and a note payable.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements as of December 31, 1998,
December 31, 1997, December 31, 1996 and June 30, 1996 are included in this
report as listed in the Index to Financial Statements in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None reportable.
23
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors and executive officers of the Company, their positions held
with the Company, and their ages are as follows:
NAME AGE POSITION
- -------------------------------- ---- ------------------------------
Lim Ming Seong ................. 51 Director, Chairman of the Board
Chan Wee Piak .................. 43 Director
Lee Yip Loi .................... 55 Director
Robert A. Grimes ............... 46 Director
Dennis W. Elliott .............. 57 Director
Robert C. Fitting............... 64 Director, Chief Executive Officer and
President
Steven W. Eymann ............... 46 Executive Vice President, Chief
Technical Officer
Garry D. Kline ................. 49 Vice President of Finance
Each director is elected for a period of one year at the Company's annual
meeting of stockholders and serves until the next meeting and until his
successor is duly elected and qualified. Officers are elected by, and serve at
the discretion of, the Board of Directors.
The following is a brief summary of the background of each director,
executive officer and certain key employees of the Company:
DIRECTORS AND EXECUTIVE OFFICERS:
LIM MING SEONG has a been a Director and Chairman of the Board of the
Company since August 13, 1996 and is chairman of its Compensation Committee. He
is the Chairman of ST and of Vertex Management, Inc., a member of the Singapore
Technologies group, and he has been Group Director of Singapore Technologies Pte
Ltd, the parent of ST since February of 1995. From March 1992 until February
1995, he was Executive Director of Singapore Technologies Ventures Pte Ltd and
from February 1990 to March 1992, he was Group President of Singapore
Technologies Holdings Pte Ltd. Prior to that time he held various corporate and
government positions, including Deputy Secretary in the Singapore Ministry of
Defense from 1979 to 1986. Mr. Lim is a director of 41 subsidiary companies of
Singapore Technologies.
LEE YIP LOI has been a Director of the Company since August 13, 1996 and is
chairman of the Audit Committee and a member of the Compensation Committee of
the Board. Mr. Lee is also a director of ST. He was Regional Director (America)
of Singapore Technologies Pte Ltd from March 1994 until December 1998, and from
May 1990 to January 1997 he was President of its affiliate, Metheus Corporation.
Prior to that time he held a number of managerial positions with such
corporations as Morgan Guaranty Trust and Singapore Technologies Pte Ltd and
government positions with the Singapore Ministries of Education, Defense,
Culture and Home Affairs. Mr. Lee is currently a director of Stetsys Pte Ltd,
Stetsys US Inc., California Avitron Corporation, Tritech Microelectronics Pte
Ltd, Tritech Microelectronics Inc., Chartered Semiconductor Manufacturing Inc.,
ST Assembly and Test Services, Inc., Vertex Management, Inc. and Tritech Design
Inc.
CHAN WEE PIAK has been a Director since August 13, 1996 and is a member of
the Compensation Committee of the Board. He is a director of ST and has been
General Manager of Agilis Communication Technologies Pte Ltd, also a member of
the Singapore Technologies group, since January 1992. From November 1989 to
February 1992, he was General Manager of Chartered Microwave Pte Ltd. Prior to
that time, he held various managerial positions in the Singapore Ministry of
Defense and with Singapore Electronic and Engineering.
ROBERT A. GRIMES, who is a member of the Audit and Compensation Committees
of the Board, has served as a member of the Board of Directors since December,
1994. He has been President of Pinkerton Systems
24
Integration since 1998. From 1991 to 1998 Mr. Grimes served as a member of the
Board of Engineering and Technical Services, Inc. of which he was President
until December 31, 1997. He was also the President of Stetsys US, Inc. from
February 24, 1997 to January 23, 1998.
DENNIS W. ELLIOTT has been a Director and a member of the Audit and
Compensation Committees since October 1998. He is the President of Elliott
Communications Co., a technology/marketing consulting concern involved in
advising companies on strategy and developing operating ventures in
telecommunications, data networking, digital television/HDTV and multimedia.
Until September 1998, Mr. Elliott was a Director of STM Wireless, Inc. and a
member of its Compensation Committee from January to September 1998. Mr. Elliott
is currently a director of Firetalk, Inc. He has also held executive positions
at Pacific Telecom, Inc., RCA American Communications (now GE American
Communications) and RCA Global Communications.
ROBERT C. FITTING has been Chief Executive Officer of the Company since
October 1998 and has been President of the Company since February 1995. He
became a Director of the Company in March 1995. Mr. Fitting has a Master of
Electrical Engineering degree from New York University and a Bachelors with
distinction from Penn State University. His professional career began at Bell
Laboratories in 1962 where he spent six years developing innovative
communication technologies. Mr. Fitting then joined the Motorola Government
Electronics Division where he was an engineering manager. He published more than
a dozen technical papers and was awarded a number of patents. He left Motorola
in 1978 to build a new company under an agreement with Comtech
Telecommunications. The new company was named Comtech Data Corporation,
currently known as Fairchild Data Corporation. Mr. Fitting was the General
Manager and President of Comtech Data Corporation from 1978 to 1984. He left
Comtech to start a new company called EFData Corporation. As co-founder, CEO and
President of EFData Corporation, Mr. Fitting built the company into a worldwide
market leader in satellite communications equipment. While at EFData, Mr.
Fitting won the "Arizona Entrepreneur of the Year" award in 1993 in the
manufacturing/high technology category.
STEVEN EYMANN has been Chief Technical Officer of the Company since October
1998 and has been its Executive Vice President since February 1995. Mr. Eymann
graduated with honors and a Bachelor of Science in Electrical Engineering from
the University of Nebraska. His professional career began at the Motorola
Government Electronics Division where he was a design engineer, task leader and
finally a project leader for the DSU-23/29B fuse development program. As project
leader, he was responsible for project management, budgets, schedules, and
design and testing of the fuse. He designed the computer-controlled automatic
test set for factory testing based on an HP 9825 computer. The DSU-23/29B is an
L-Band PN radar for accurate, low-cost altitude direction. In June of 1981, Mr.
Eymann joined Comtech Data Corporation where he was Director of Product
Development. He was responsible for budget, schedule and technical aspects of
all new product development within Comtech. Prior to becoming the Director of
Product Development, he served as a senior engineer with program and technical
design responsibility. He left Comtech in 1984 to begin a new company called
EFData Corporation. As co-founder and Vice President of EFData, Mr. Eymann was
responsible for new product development and engineering management in the design
and manufacture of high technology, military and commercial communications
equipment.
GARRY D. KLINE, Vice President of Finance, Chief Financial Officer and
Secretary, joined the Company in September of 1995. From that time until July
1997 he was Secretary and Controller of the Company. From 1987 through 1995, Mr.
Kline served as CFO and Controller of EFData Corporation. Prior to 1987, Mr.
Kline served in various positions, including Vice President of Finance for
Megatronics Inc., a publicly held printed circuit board manufacturer, Vice
President of Operations for Vernal Lodging Associates, a hospitality management
company, and General Partner of Tax and Accounting Computer Service, an
accounting firm.
CERTAIN KEY EMPLOYEES:
ALAN POTTER has been the Vice President of Marketing for Radyne Corp. 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
25
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 Radyne Corp.
since March, 1995. His duties presently include general management of the
Phoenix facility. Mr. Koblinski has a Bachelor of Science in Business
Administration from Arizona State University. He also holds a degree in
Electronics Technology from Mesa Community College. His professional career
began in 1982 at Comtech Data Corporation where he held the position of Customer
Service Representative. He was responsible for repairs, field and telephone
support of satellite data modems. From 1985 to 1995, Mr. Koblinski was the
Senior Product Manager for EFData Corporation. His general responsibilities at
EFData included relating customer requests and concerns to the factory. His
direct responsibilities included the customer service, technical publication and
order entry departments.
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the registrant during the period from January 1, 1998 to December
31, 1998, none of the officers or directors of the registrant or the beneficial
owners of its equity securities failed to file reports on Forms 3, 4 or 5
required to be filed during such period or prior thereto, except that a Form 3
Report was filed late by Dennis Elliott and Form 4 Reports were filed late on
three occasions by Robert Grimes.
ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION
Radyne ComStream's policy has been to pay no compensation to directors who
are employees of the Company or ST affiliates for their service as directors. On
October 6, 1998 the Board of Directors resolved that outside directors will be
paid $4,000 per meeting attended and $500 if attendance is via telephone.
Moreover, commencing in March 1999, all directors will be eligible to receive
stock options, if granted. Expenses will continue to be reimbursed.
The following table sets forth the compensation for services in all
capacities to the Company for the period from the year ended June 30, 1996
through December 31, 1998 of the Company's Chief Executive Officer and Executive
Vice President. No other executive officer or employee received total annual
salary and bonus of more than $100,000.
SUMMARY COMPENSATION TABLE
YEAR ALL OTHER
NAME AND PRINCIPAL POSITION ENDED(1) SALARY OPTIONS(#) COMPENSATION(2)
- --------------------------- -------- ------ ---------- ---------------
Robert C. Fitting, CEO........... 12/31/98 $ 144,234 30,000 $ 1,186
12/31/97 116,529 0 1,165
12/31/96 40,000 279,085 435
06/30/96 80,000 0 738
Steven Eymann, Exec. Vice Pres... 12/31/98 $ 133,543 30,000 $ 1,174
12/31/97 11,162 0 1,112
12/31/96 40,000 279,085 435
06/30/96 80,000 0 738
(1) The Company's fiscal year was changed to the calendar year, so the figures
shown for the year ended December 31, 1996 reflect a period of six months.
(2) Matching 401(k) plan contributions.
26
OPTION GRANTS IN LAST FISCAL YEAR
PERCENT OF TOTAL OPTIONS
OPTIONS GRANTED TO EMPLOYEE IN EXERCISE EXPIRATION START DATE PRESENT
NAME GRANTED FISCAL YEAR PRICE DATE VALUE(1)
- --------------------- ------- ----------- ----- ---- --------
Robert C. Fitting ... 15,000 3% $2.50 2/5/08 $3.37
15,000 3% $3.125 10/15/08 $2.48
Steven Eymann........ 15,000 3% $2.50 2/5/08 $3.37
15,000 3% $3.125 10/15/08 $2.48
- ----------
(1) Based on the Black-Scholes option pricing model, assuming that one-fourth
of the options will be exercisable on the grant date and each of the first
three anniversaries thereof, no dividend yield, expected volatility of 105%
and a risk-free interest rate of 6.125%.
AGGREGATE OPTION EXERCISES IN 1998 AND HOLDINGS AT YEAR END
The following table sets forth information concerning option exercises and
option holdings for the year ended December 31, 1998 with respect to Robert C.
Fitting, the Chief Executive Officer and President of the Company and Steven
Eymann, the Executive Vice President.
AGGREGATE OPTIONS EXERCISED IN THE
LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED, IN-THE-MONEY
NUMBER HELD AT OPTIONS AT
SHARES OF DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED ON VALUE ----------------------------- -------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
Robert C. Fitting...... 0 $0.00 182,585 62,500 $157,418 $47,656
Steven Eymann.......... 0 0.00 182,585 62,500 157,418 47,656
- ----------
(1) Based on the December 31, 1998 closing price of the Common Stock of $3.375
per share on the OTC Bulletin Board, less the per share exercise price.
EMPLOYMENT AGREEMENTS
Under the employment agreement between the Company and Messrs. Fitting and
Eymann, they will serve as President and Vice President of the Company until the
earlier of June 30, 2000 or such time as the Company's adjusted earnings before
interest and taxes exceeds $6,000,000 for a period of four calendar quarters.
Pursuant to the agreement, the Company presently pays Mr. Fitting and Mr. Eymann
annual salaries of $160,000 and $140,000, respectively, and has granted them
certain of the stock options described in the above table. Each of Mr. Fitting
and Mr. Eymann has also agreed that if he exercises any of 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, Grimes and
Elliott. There were no interlocking relationships between the Company and other
entities that might affect the determination of the compensation of the
executive officers of the Company.
27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date hereof, the ownership of the
Common Stock by (i) each person who is known by the Company to own of record or
beneficially more than 5% of the outstanding Common Stock, (ii) each of the
Company's directors and its Chief Executive Officer and Executive Vice
President, and (iii) all directors and executive officers of the Company as a
group. Except as otherwise indicated, the stockholders listed in the table have
sole voting and investment powers with respect to the shares indicated.
NUMBER
OF PERCENTAGE
NAME AND ADDRESS SHARES OF CLASS
- ---------------- ------ --------
Stetsys US, Inc............................................ 1,180,000 19.69%
c/o Singapore Technologies Pte Ltd
83 Science Park Drive
#01-01/02 The Curie, Singapore Science Park
Singapore 118258
Stetsys Pte Ltd............................................ 5,376,000 (1) 90.6%
c/o Singapore Technologies Pte Ltd
83 Science Park Drive
#01-01/02 The Curie, Singapore Science Park
Singapore 118258
Dennis W. Elliott.......................................... -- --
c/o Radyne Corp.
3138 East Elwood Street
Phoenix, Arizona 85034
Steven Eymann.............................................. 4,000 *
c/o Radyne Corp.
3138 East Elwood Street
Phoenix, Arizona 85034
Robert C. Fitting.......................................... -- --
c/o Radyne Corp.
3138 East Elwood Street
Phoenix, Arizona 85034
Robert A. Grimes........................................... -- --
c/o Radyne Corp.
3138 East Elwood Street
Phoenix, Arizona 85034
Lee Yip Loi................................................ -- --
c/o Singapore Technologies Pte Ltd
83 Science Park Drive
#01-01/02 The Curie, Singapore Science Park
Singapore 118258
28
NUMBER
OF PERCENTAGE
NAME AND ADDRESS SHARES OF CLASS
- ---------------- ------ --------
Chan Wee Piak.............................................. 10,000 *
c/o Singapore Technologies Pte Ltd
83 Science Park Drive
#01-01/02 The Curie, Singapore Science Park
Singapore 118258
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 (3 persons)........................ 15,500 *
- ----------
* Less than one percent.
(1) The shares reported as owned by Stetsys Pte Ltd include the shares reported
as beneficially owned by Stetsys US, Inc., of which Stetsys Pte Ltd is sole
stockholder. 100% of the stock of Stetsys US, Inc. and Stetsys Pte Ltd is
ultimately owned by the Minister for Finance (Incorporated) of Singapore.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Sales to ETS for the twelve month period ended December 31, 1998, were
$50,000. Until October 1998, ETS was a wholly owned subsidiary of ST. During the
fiscal year ended December 31, 1998, the Company made sales to Agilis
Communication Technologies Pte Ltd, another member of the Singapore Technologies
group, of $65,000. The General Manager of Agilis, Chan Wee Piak, is a Director
of the Company.
ST loaned $10 million to the Company in connection with the ComStream
acquisition. Under the terms of this loan, the Company is required to repay ST
with interest at 6.375% per annum out of the proceeds of a rights offering of
its Common Stock. In turn, Stetsys Pte Ltd has agreed to purchase approximately
$16,040,000 of Common Stock at $3.73 in the rights offering. As of December 31,
1998, the Company owed ST another $5,618,272, plus interest at rates ranging
from 6.625% to 6.844% per annum.
Interest expense on notes payable to affiliates was $581,000 for the year
ended December 31, 1998.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) The following is an index of financial statements of Radyne ComStream
Inc., financial statement schedules and exhibits included in Part IV, Item 14:
FINANCIAL STATEMENTS
Independent Auditors' Reports................................................F-1
Consolidated Balance Sheets as at December 31, 1998 and 1997.................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997, the Six- Month Period Ended
December 31, 1996 and the Year Ended June 30, 1996...........................F-4
Consolidated Statements of Stockholders' Capital Deficiency for the
Years Ended December 31, 1998 and 1997, the Six-Month Period
Ended December 31, 1996 and the Year Ended June 30, 1996.....................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997, the Six- Month Period Ended
December 31, 1996 and the Year Ended June 30, 1996...........................F-6
Notes to Consolidated Financial Statements...................................F-7
FINANCIAL STATEMENT SCHEDULES
Schedules for the years ended December 31, 1998 and December 31, 1997, the
six months ended December 31, 1996, and the year ended June 30, 1996 - Schedule
II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, or are not
applicable, or the information is included in the consolidated financial
statements or notes to consolidated financial statements.
EXHIBITS
NO.
---
2.1* Stock Purchase Agreement dated August 28, 1998 between Spar
Aerospace limited and Radyne Corp.
3.1** Restated Certificate of Incorporation
3.2 By-Laws, as amended and restated
4.1*** Convertible Promissory Note between Spar Aerospace Inc. and
the Company dated October 15, 1998 with the form of
Registration Rights Agreement included as Appendix A
thereto.
10.1**** 1996 Incentive Stock Option Plan
10.2***** Employment Agreement with Robert C. Fitting (Radyne
Termsheet)
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
30
10.6+ Indemnity Agreement between Pacific Bell Corporation and
ComStream dated November 18, 1998
10.7+ Letter Agreement between Spar and Radyne Corp. dated
November 18, 1998
10.8****** Lease for facility in Phoenix, Arizona
10.9++ Amendment to 1996 Incentive Stock Option Plan
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (set forth on the signature page hereof)
27.0 Financial Data Schedule
- ----------
* Incorporated by reference from Registrant's Form 8-K filed on August
28, 1998.
** Incorporated by reference from Registrant's report on Form 10-Q filed
on March 11, 1997.
*** Incorporated by reference from Registrant's Registration Statement on
Form 8-K filed on October 30, 1998.
**** Incorporated by reference from Registrant's Registration Statement on
Form S-8, dated and declared effective on March 12, 1997 (File No.
333-23159).
***** Incorporated by reference from Registrant's amended Registrant
Statement on Form S-1, dated May 8, 1997 and declared effective on May
12, 1997 (File No. 333-18811).
****** Incorporated by reference from Registrant's Annual Report on Form 10-K
for the year Ended December 31, 1997.
+ Incorporated by reference from Registrant's Registration Statement on
Form S-2, filed January 11, 1999 (File No. 333-70403).
++ Incorporated by reference from Registrant's Registration Statement on
Form S-8, dated and declared effective on November 18, 1998 (File No.
333-67469).
(b) Registrant filed the following reports on Form 8-K during the period
of October 1 through December 31, 1998:
Current Report on Form 8-K dated October 30, 1998, Item 2, as amended on
December 23, 1998. Financial Statements included with respect to ComStream
Holdings, Inc.'s Consolidated Balance Sheets for the Years ended December 31,
1997 and 1996, Consolidated Statements of Operations for the Years ended
December 31, 1997, 1996 and 1995, and Consolidated Statements of Operations at
December 31, 1997; ComStream Holdings, Inc.'s Unaudited Condensed Interim
Balance Sheet for the Nine Months ended September 30, 1998, Unaudited Condensed
Consolidated Statements of Operations for the Nine Months ended September 30,
1998 and 1997 and Unaudited Condensed Consolidated Statement of Cash Flows for
the Nine Months ended September 30, 1998 and 1997; and Radyne Corp.'s Pro Forma
Condensed Combined Balance Sheet as of September 30, 1998, Pro Forma Condensed
Combined Statement of Operations for the Nine Month Period ended September 30,
1998 and Pro Forma Condensed Combined Statement of Operations for the Year ended
December 31, 1997.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RADYNE COMSTREAM INC.
----------------------
(Registrant)
By: /s/ Robert C. Fitting
--------------------------------------
Robert C. Fitting, Chief Executive
Officer and President
Dated: April 14, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Lim Ming Seong Chairman of the Board of Directors April 14, 1999
- ---------------------
Lim Ming Seong
/s/ Robert C. Fitting Chief Executive Officer, President April 14, 1999
- --------------------- and Director
Robert C. Fitting
/s/ Garry D. Kline Vice President, Finance April 14, 1999
- --------------------- (Principal Financial and
Garry D. Kline Accounting Officer)
/s/ Robert A. Grimes Director April 14, 1999
- ---------------------
Robert A. Grimes
/s/ Lee Yip Loi Director April 14, 1999
- ---------------------
Lee Yip Loi
/s/ Chan Wee Piak Director April 14, 1999
- ---------------------
Chan Wee Piak
/s/ Dennis W. Elliott Director April 14, 1999
- ---------------------
Dennis W. Elliott
32
Independent Auditors' Report
The Board of Directors and Stockholders
Radyne Comstream Inc.:
We have audited the accompanying consolidated balance sheet of Radyne Comstram
Inc. and subsidiaries (the Company) (a 90.6%-owned subsidiary of Singapore
Technologies Pte Ltd) as of December 31, 1998, and the related consolidated
statements of operations, stockholders' capital deficiency, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1998, and the results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/s/KPMG LLP
March 19, 1999
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Radyne Comstream Inc.
Phoenix, Arizona
We have audited the accompanying balance sheets of Radyne Comstream Inc.
(formerly Radyne Corp.) (the "Company") as of December 31, 1997, and the related
statements of operations, stockholders' capital deficiency, and cash flows for
the year ended December 31, 1997, the six-month period ended December 31, 1996
and the year ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997, and the
results of its operations and its cash flows for the year ended December 31,
1997, the six-month period ended December 31, 1996 and the year ended June 30,
1996 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 4, 1998
F-2
RADYNE COMSTREAM INC.
Consolidated Balance Sheets
December 31,
----------------------------
Assets 1998 1997
------------ ------------
Current assets:
Cash and cash equivalents $ 254,956 569,692
Accounts receivable - trade, net of allowance for doubtful accounts of $632,815
and $15,000, respectively 7,270,732 2,359,443
Other receivable 1,265,000 --
Inventories, net 9,380,478 5,389,920
Prepaid expenses 590,161 68,076
------------ ------------
Total current assets 18,761,327 8,387,131
------------ ------------
Property and equipment, net 5,533,645 1,322,551
Other assets:
Designs and drawings, net of accumulated amortization of $705,404
at December 31, 1997 -- 471,935
Purchased technology, net of accumulated amortization of $105,000
at December 31, 1998 2,395,000 --
Goodwill, net of accumulated amortization of $35,960 at December 31, 1998 2,278,300 --
Deposits and other 222,442 50,000
------------ ------------
Total other assets 4,895,742 521,935
------------ ------------
$ 29,190,714 10,231,617
============ ============
Liabilities and Stockholders' Capital Deficiency
Current liabilities:
Note payable under line of credit agreement $ 8,000,000 5,000,000
Note payable 7,000,000 --
Current installments of obligations under capital leases 124,891 109,258
Accounts payable, trade 3,291,915 667,202
Accounts payable, affiliate 8,150 16,062
Accrued expenses 9,140,341 901,032
Taxes payable -- 38,720
------------ ------------
Total current liabilities 27,565,297 6,732,274
Notes payable to affiliates 15,618,272 --
Note payable under line of credit agreement -- 4,500,000
Obligations under capital leases, excluding current installments 88,588 93,543
Accrued stock option compensation 1,155,477 --
Taxes payable -- 55,861
------------ ------------
Total liabilities 44,427,634 11,381,678
------------ ------------
Commitments, contingent liabilities and subsequent events (notes 2, 8, 9, 10,
13, 17, 18 and 19)
Stockholders' capital deficiency:
Common stock; $.002 par value - authorized, 20,000,000 shares; issued and
outstanding, 5,931,346 shares at December 31, 1998 and 1997 11,862 11,862
Additional paid-in capital 5,694,806 5,694,806
Accumulated deficit (20,943,588) (6,816,643)
Notes receivable from stockholders -- (40,086)
------------ ------------
Total stockholders' capital deficiency (15,236,920) (1,150,061)
------------ ------------
$ 29,190,714 10,231,617
============ ============
See accompanying notes to consolidated financial statements.
F-3
RADYNE COMSTREAM INC.
Consolidated Statements of Operations
Six-month
Year ended Year ended period ended Year ended
December 31, December 31, December 31, June 30,
1998 1997 1996 1996
------------ ------------ ------------ ------------
Net sales $ 21,111,704 13,446,852 4,905,059 3,829,523
Cost of sales 15,808,459 8,022,262 4,052,433 2,559,350
------------ ------------ ------------ ------------
Gross profit 5,303,245 5,424,590 852,626 1,270,173
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 5,531,213 4,242,138 1,437,971 1,843,576
Research and development 4,296,268 2,262,066 808,025 1,794,823
Stock option compensation expense 1,155,477 -- -- --
In-process research and development 3,909,000 -- -- --
Restructuring costs 3,100,000 -- -- --
Asset impairment charge 262,935 -- 421,000 --
------------ ------------ ------------ ------------
Total operating expenses 18,254,893 6,504,204 2,666,996 3,638,399
------------ ------------ ------------ ------------
Loss from operations (12,951,648) (1,079,614) (1,814,370) (2,368,226)
Other (income) expense:
Interest expense, net 1,198,777 677,102 255,604 256,871
Other (23,480) -- -- --
------------ ------------ ------------ ------------
Net loss $(14,126,945) (1,756,716) (2,069,974) (2,625,097)
============ ============ ============ ============
Basic net loss per common share $ (2.38) (0.35) (0.55) (0.70)
============ ============ ============ ============
Diluted net loss per common share $ (2.38) (0.35) (0.55) (0.70)
============ ============ ============ ============
Weighted average number of common
shares outstanding 5,931,346 5,012,664 3,750,699 3,742,227
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
RADYNE COMSTREAM INC.
Consolidated Statements of Stockholders' Capital Deficiency
Years ended December 31, 1998 and 1997, the six-month period ended
December 31, 1996 and the year ended June 30, 1996
Notes
Common Stock Additional receivable
------------------------- paid-in Accumulated from
Shares Amount capital Deficit stockholders Total
----------- ----------- ----------- ----------- ------------ -----------
Balances, June 30, 1995 3,729,721 $ 7,459 545,842 (364,856) -- 188,445
Shares issued to Merit Microwave 20,000 40 39,960 -- -- 40,000
Net loss -- -- -- (2,625,097) -- (2,625,097)
----------- ----------- ----------- ----------- ----------- -----------
Balances, June 30, 1996 3,749,721 7,499 585,802 (2,989,953) -- (2,396,652)
Additional shares issued to Merit Mircrowave 10,000 20 19,980 -- -- 20,000
Net loss -- -- -- (2,069,974) -- (2,069,974)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1996 3,759,721 7,519 605,782 (5,059,927) -- (4,446,626)
Issuance of common stock, net of issuance 2,171,625 4,343 5,089,024 -- -- 5,093,367
Promissory notes received in connection
costs of $335,696 -- -- -- -- (40,086) (40,086)
Net loss -- -- -- (1,756,716) -- (1,756,716)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1997 5,931,346 11,862 5,694,806 (6,816,643) (40,086) (1,150,061)
Payments received on promissory notes -- -- -- -- 40,086 40,086
Net loss -- -- -- (14,126,945) -- (14,126,945)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1998 5,931,346 $ 11,862 5,694,806 (20,943,588) -- (15,236,920)
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
RADYNE COMSTREAM INC.
Consolidated Statements of Cash Flows
Six-month
Year ended Year ended period ended Year ended
December 31, December 31, December 31, June 30,
1998 1997 1996 1996
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss $(14,126,945) (1,756,716) (2,069,974) (2,625,097)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of assets 961,069 2,122 -- --
Depreciation and amortization 1,041,088 454,183 177,535 276,913
Asset impairment charge 262,935 -- 421,000 --
Write-off of in-process research and development 3,909,000 -- -- --
Increase (decrease) in cash resulting from changes in:
Accounts receivable (915,154) 374,459 (2,450,031) 251,806
Prepaid expenses and other current assets (179,931) 26,222 (73,872) 73,581
Employee relocation incentives and advances -- -- -- 112,353
Inventories 2,833,811 (3,398,560) (840,691) (247,843)
Deposits and other 242,787 (34,338) (7,650) --
Accounts payable, trade (985,095) (138,077) 339,848 (113,243)
Accounts payable, affiliate 113,682 (420,300) 436,362 --
Accrued expenses 1,932,071 (25,924) 545,990 (253,337)
Accrued stock option compensation 1,155,477 -- -- --
Taxes payable (94,581) (28,487) (24,053) (56,063)
------------ ------------ ------------ ------------
Net cash used in operating activities (3,849,786) (4,945,416) (3,545,536) (2,580,930)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (543,630) (593,072) (255,118) (388,770)
Purchase of Comstream, net of cash acquired (10,007,369) -- -- --
------------ ------------ ------------ ------------
Net cash used in investing activities (10,550,999) (593,072) (255,118) (388,770)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net borrowings from notes payable under line of credit
agreement 3,000,000 7,506,180 1,993,820 --
Payments on notes payable under line of credit agreement (4,500,000) -- -- --
Proceeds from notes payable to affiliates 15,618,272 4,600,000 6,600,000 3,052,912
Payments on note payable to affiliate -- (11,200,000) (4,594,696) --
Net proceeds from sale of common stock -- 5,053,281 -- --
Payments received on promissory notes issued in connection --
with common stock 40,086 -- -- --
Principal payments on capital lease obligations (72,309) (37,769) (12,953) (84,350)
------------ ------------ ------------ ------------
Net cash provided by financing activities 14,086,049 5,921,692 3,986,171 2,968,562
------------ ------------ ------------ ------------
Net increase (decrease) in cash (314,736) 383,204 185,517 (1,138)
Cash and cash equivalents, beginning of period 569,692 186,488 971 2,109
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 254,956 569,692 186,488 971
============ ============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 568,812 687,626 72,258 3,996
============ ============ ============ ============
Supplemental disclosures of noncash investing and financing activities:
In December 1996, the Company issued an additional 10,000 shares of common
stock in conjunction with the asset purchase from Merit Microwave, Inc.
During 1997, the Company incurred capital lease obligations of $106,512 for
new machinery and equipment. In October 1998, the Company made an
acquisition for $17,000,000 plus $300,000 of other costs incurred in
connection with
the acquisition. A summary of the acquisition was as follows:
Purchase price $ 17,000,000
Costs incurred 300,000
Less issuance of note payable (7,000,000)
Less cash acquired (292,631)
------------
Cash invested $ 10,007,369
============
See accompanying notes to consolidated financial statements.
F-6
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Organization and Acquisition
Radyne Corp., a New York corporation, ("Radyne") was incorporated on
November 25, 1980. On August 12, 1996, Radyne became a 90.6%-owned
subsidiary of Singapore Technologies Pte Ltd ("STPL"), through its
wholly-owned subsidiary, Stetsys US, Inc. ("ST"). In 1996, Radyne changed
its fiscal year-end to December 31.
On October 15, 1998, Radyne purchased all of the outstanding shares of
common stock of Comstream Holdings, Inc. ("Comstream") for an aggregate
purchase price of $17 million, of which $10 million was paid in cash at the
closing, using funds borrowed from its controlling stockholder, and the
balance of which was in the form of a $7 million note (the "Note"), payable
nine months from the purchase date. The Note is convertible into Radyne
common stock under certain circumstances. This acquisition was recorded in
accordance with the "purchase method" of accounting. The excess of the
purchase price over the net assets acquired was approximately $8.7 million
of which $3.9 million was allocated to in-process research and development,
$2.5 million was valued as purchased technology, which is being amortized
over 6.25 years, and $2.3 million has been recorded as goodwill, which is
being amortized over ten years. The results of operations of Comstream have
been included in the accompanying consolidated statement of operations from
October 15, 1998.
Comstream operates primarily in North America in the satellite
communications industry. Comstream designs, markets and manufacturers
satellite interactive modems and earth stations. Additionally, Comstream
manufactures and markets full-transponder satellite digital audio receivers
for music providers and has designed and developed a PC broadband satellite
receiver card which is an Internet and high-speed data networking product.
In March 1999, Radyne changed its name to Radyne Comstream Inc.
Radyne Comstream Inc. (the "Company") has locations in Phoenix, Arizona and
San Diego, California. The Company designs, manufactures, and sells
products, systems and software used for the transmission and reception of
data over satellite and cable communication networks.
F-7
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations (unaudited) as if the acquisition had
taken place on January 1, 1997. Such pro forma amounts are not necessarily
indicative of what the actual results of operations might have been if the
acquisition had been effective on January 1, 1997:
Years ended December 31,
----------------------
1998 1997
--------- --------
(In thousands, except per share data)
Net Sales $ 50,965 69,369
========= ========
Gross profit $ 13,788 28,723
========= ========
Net loss $ (19,497) (6,826)
========= ========
Net loss per common share $ (3.29) (1.36)
========= ========
(2) Liquidity
The Company has incurred significant losses from operations and has a
stockholders' accumulated deficit of $20.9 million and a working capital
deficiency of $8.8 million at December 31, 1998 and has been unable to
generate a positive cash flow from operations. These matters raise doubt
about the Company's ability to continue as a going concern. Stetsys Pte
Ltd, the Company's majority stockholder, has confirmed its ability and
intent to provide such working capital as may be necessary to ensure that
the Company will continue to operate for a reasonable period into the
future. Since August 1996, the Company has been dependent on STPL to
provide cash for day-to-day operations. Management believes that, as a
result of the acquisition of Comstream and the resultant increase in
revenues, the Company can begin to generate profits. Management also
believes that with the rights offering (see note 19) expected to be
finalized in the second quarter of 1999, and through additional funding
sources, the Company will be a viable going concern. Therefore, the
accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern.
(3) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the financial statement date and the reported amounts of revenue and
expenses during the reporting period. The industry in which the
Company operates is characterized by rapid technological change and
short product life cycles. As a result, estimates are required to
provide for product obsolescence and warranty returns as well as other
matters. Actual results could differ from those estimates.
(Continued)
F-8
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany accounts and
transactions have been eliminated in the consolidation.
(c) Cash Equivalents
The Company considers all money market accounts with a maturity of 90
days or less to be cash equivalents.
(d) Revenue Recognition
The Company recognizes revenue upon shipment of product.
(e) Inventories
Inventories, consisting of satellite modems and related products, are
valued at the lower of cost (first-in, first-out) or market.
(f) Property and Equipment
Property and equipment are stated at cost. Equipment held under
capital leases is stated at the present value of future minimum lease
payments. Expenditures for repairs and maintenance are charged to
operations as incurred, and improvements which extend the useful lives
of the assets are capitalized. Depreciation and amortization of
machinery and equipment are computed using the straight-line method
over an estimated useful life of three to ten years. Equipment held
under capital leases and leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or estimated
useful lives of the assets.
(g) Designs and Drawings
Amortization of designs and drawings was computed using the
straight-line method over an estimated useful life of four to seven
years. During 1996, the Company recognized a design and drawing
impairment charge of $421,000, with no associated tax benefit. During
1998, the Company recognized a design and drawing impairment charge of
$262,935, with no associated tax benefit as a result of technology
used in new products.
(h) Goodwill
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line basis
over ten years.
(i) Purchased Technology
In connection with the acquisition of Comstream, value was assigned to
purchased technology. Purchased technology is being amortized on a
straight-line basis over the expected period to be benefited of 6.25
years.
(Continued)
F-9
(j) Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
(k) Warranty Costs
The Company provides limited warranties on certain of its products and
systems for periods generally not exceeding two years. The Company
accrues estimated warranty costs for potential product liability and
warranty claims based on the Company's claim experience. Such costs
are accrued as cost of sales at the time revenue is recognized.
(l) Research and Development
The cost of research and development is charged to expense as
incurred.
(m) Income Taxes
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future consequences attributed to differences between the consolidated
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Differences between income
for financial and tax reporting purposes arise primarily from
amortization of certain designs and drawings and accruals for warranty
reserves and compensated absences. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(n) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are principally accounts receivable. The
Company maintains ongoing credit evaluations of its customers and
generally does not require collateral. The Company provides reserves
for potential credit losses and such losses have not exceeded
management's expectations.
(Continued)
F-10
(o) Net Loss Per Common Share
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares
outstanding for the period. Diluted loss per share reflects the
potential dilution that could occur if securities or contracts to
issue common stock were exercised or converted to common stock or
resulted in the issuance of common stock that then shared in the
earnings or loss of the Company. Assumed exercise of outstanding stock
options and warrants for all periods have been excluded from the
calculations of diluted net loss per common share as their effect is
antidilutive. Per share amounts have been adjusted to reflect a
1-for-5 reverse stock split that occurred on January 9, 1997.
(p) Fair Value of Financial Instruments
The fair value of accounts receivable, accounts payable, and accrued
expenses approximates the carrying value due to the short-term nature
of these instruments. Management has estimated that the fair values of
the notes payable approximate the current balances outstanding, based
on currently available rates for debt with similar terms.
(q) Employee Stock Options
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options and to
adopt the "disclosure only" alternative treatment under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123 requires the use of fair value
option valuation models that were not developed for use in valuing
employee stock options. Under SFAS No. 123, deferred compensation is
recorded for the excess of the fair value of the stock on the date of
the option grant, over the exercise price of the option. The deferred
compensation is amortized over the vesting period of the option.
(r) Segment Reporting
The Company has only one operating business segment, the sale of
equipment for satellite and cable communications networks.
(s) Reclassifications
Certain reclassifications have been made to the prior years' financial
statement amounts to conform to the current year presentation.
(Continued)
F-11
(4) Inventories
Inventories at December 31 consist of the following:
1998 1997
------------ ------------
Raw materials and components $ 6,065,751 2,605,397
Work-in-process 4,319,338 1,124,929
Finished goods 546,858 1,950,594
------------ ------------
10,931,947 5,680,920
Valuation allowance (1,551,469) (291,000)
------------ ------------
$ 9,380,478 5,389,920
============ ============
(5) Property and Equipment
Property and equipment at December 31 consist of the following:
1998 1997
----------- -----------
Machinery and equipment $ 3,598,732 1,298,715
Furniture and fixtures 2,661,195 373,548
Leasehold improvements 312,425 --
----------- -----------
6,572,352 1,672,263
Less accumulated depreciation and amortization (1,038,707) (349,712)
----------- -----------
Property and equipment, net $ 5,533,645 1,322,551
=========== ===========
(6) Accrued Expenses
Accrued expenses at December 31 consist of the following:
1998 1997
---------- ----------
Wages, vacation and related payroll taxes $1,355,316 486,840
Interest 803,929 183,968
Professional fees 378,817 85,500
Warranty reserve 679,964 105,000
Severance 1,282,761 --
Lease buyout (notes 9 and 15) 2,443,110 --
Other 2,196,444 39,724
---------- ----------
Total accrued expenses $9,140,341 901,032
========== ==========
(Continued)
F-12
(7) Notes Payable
In 1997, the Company had a note payable under a line of credit agreement
with a bank that permitted outstanding borrowings of $4,500,000. At
December 31, 1997, outstanding borrowings against the line were $4,500,000
plus accrued interest. In 1998, the Company repaid the note and accrued
interest with proceeds from affiliated debt (note 16).
The Company has a $20,500,000 credit agreement with a bank expiring
September 29, 1999. STPL has issued a nonbinding letter of awareness in
connection with this credit agreement. Borrowings under the line of credit
bear interest at a fluctuating rate equal to LIBOR or the bank's Quoted
Rate plus 1 percent per annum (6.125 percent and 6.938 percent as of
December 31, 1998 and 1997, respectively). At December 31, 1998 and 1997,
outstanding borrowings against the line were $8,000,000 and $5,000,000,
respectively, plus accrued interest. This credit facility is an uncommitted
line of credit which the bank may modify or cancel without prior notice. As
of December 31, 1998, the Company violated one debt covenant which was
waived by the bank.
In connection with the purchase of Comstream, the Company executed a
$7,000,000 note payable to the former owner of Comstream. The note bears
interest at a rate of 8.0 percent per annum and is payable in full on July
15, 1999. At any time prior to July 15, 1999, the holder of the note has
the option to convert 20% of the original principal balance into shares of
the Company's common stock and at any time after July 15, 1999, prior to
payment in full, the holder of the note has the option to convert the
outstanding balance into shares of the Company's common stock at $3.73 per
share.
(8) Obligations Under Capital Leases
The Company leases machinery and equipment under capital leases. The cost
and accumulated depreciation of the equipment was $501,494 and $181,645,
respectively, at December 31, 1998 and is included in property and
equipment in the accompanying balance sheets and is being depreciated over
the estimated useful lives of the machinery and equipment.
Payments on capital lease obligations due after December 31, 1998 are as
follows:
1999 $ 131,807
2000 55,516
2001 37,498
2002 9,952
----------
Total minimum lease payments 234,773
Less amount representing interest at rates of 4.6% to 12.3% (21,294)
----------
Present value of minimum lease payments 213,479
Less current installments 124,891
----------
Capital lease obligations due after one year $ 88,588
==========
(Continued)
F-13
(9) Commitments
Rent expense was approximately $517,853, $94,000, $44,000 and $95,000 for
the years ended December 31, 1998 and 1997, the six-month period ended
December 31, 1996, and the year ended June 30, 1996. Future minimum rentals
under leases after December 31, 1998 are as follows:
1999 $ 1,701,129
2000 1,636,703
2001 1,646,834
2002 1,712,539
2003 1,919,934
Thereafter 4,797,014
------------
$ 13,414,153
============
Prior to October 15, 1998, Comstream leased two buildings (of different
size) from the same landlord. As a result of the acquisition of Comstream
by Radyne, Radyne assumed the lease for the larger building. Subsequent to
October 15, 1998, and in an effort to reduce operating costs, management of
the Company negotiated a buyout of that lease for $2,000,000 plus other
costs, including rent payments through March 1999, and executed a new lease
for the smaller second building leased by Comstream. Additionally, the
Company negotiated a cost reimbursement of $1,265,000 from the former owner
of Comstream. The recovery is recorded as other receivable as of December
31, 1998. The $2,000,000 cash buyout is due in two equal installments of
$1,000,000 on March 1, 1999 and September 1, 1999. At December 31, 1998,
$2,443,000 of the costs are included in accrued expenses.
The Company generally has commitments with certain suppliers and
subcontract manufacturers to purchase certain components and estimates its
non-cancelable obligations to be approximately $5,000,000 to $8,000,000 at
any give time.
(10) Income Taxes
Income tax expense amounted to $0 for the years ended December 31, 1998 and
1997, the six-month period ended December 31, 1996 and the year ended June
30, 1996. The actual tax expense (benefit) for these periods differs from
"expected" tax expense for those periods as follows:
Six-month
Year ended Year ended period ended Year ended
December 31, December 31, December 31, June 30,
1998 1997 1996 1996
----------- ----------- ----------- -----------
Computed "expected" tax expense $(4,803,000) (597,000) (704,000) (893,000)
State tax benefit (541,000) (64,000) (75,000) (95,000)
Change in valuation allowance 5,190,000 613,000 775,000 988,000
Other adjustments 154,000 48,000 4,000 --
----------- ----------- ----------- -----------
Total $ -- -- -- --
=========== =========== =========== ===========
(Continued)
F-14
Deferred tax assets at December 31 consisted of the following:
1998 1997
------------ ------------
Deferred tax assets:
Cumulative tax effect of net operating
loss carryforwards $ 8,459,000 4,620,000
Tax credits 155,000 210,000
Temporary differences 3,734,000 (107,000)
Valuation allowance (12,348,000) (4,723,000)
------------ ------------
$ -- --
============ ============
The net change in the total valuation allowance for the years ended
December 31, 1998 and 1997 was $7,625,000 and $613,000, respectively. At
December 31, 1998, the Company has net operating loss carryforwards of
approximately $22,608,000 expiring in various years through 2013 and
general business credit carryforwards of $155,000 expiring in various years
through 2004 for utilization against taxable income/taxes payable of future
periods, if any. Approximately $6,200,000 of the Company's net operating
loss and tax credit carryforwards are subject to an annual limitation under
Internal Revenue Code Section 382, in future years, as a result of changes
in ownership of the Company's stock. Management believes that the inability
to utilize net operating loss and tax credit carryforwards to offset future
taxable income within the carryforward periods under existing tax laws and
regulations is more likely than not. Accordingly, a 100 percent valuation
allowance has been recorded against the net deferred tax assets as of
December 31, 1998 and 1997.
(11) Significant Customers and Export Sales
During 1998, no customers represented greater than 10 percent of net sales.
During 1997, one customer represented 14.5 percent of net sales. For the
six-month period ended December 31, 1996, two customers represented 15.6
percent and 18.3 percent of net sales. During the year ended June 30, 1996,
one customer represented 12.7 percent of net sales.
Export sales were 50 percent, 55 percent, 66 percent and 50 percent of net
sales for the years ended December 31, 1998 and 1997, the six-month period
ended December 31, 1996, and the year ended June 30, 1996, respectively.
Export sales are comprised of the following:
Six-month
Year ended Year ended period ended Year ended
December 31, December 31, December 31, June 30,
1998 1997 1996 1996
---------- ---------- ------------ ----------
Europe 63% 13% -- 38%
Latin America 18% 22% 37% --
Asia 14% 58% 46% 46%
Other 5% 7% 17% 16%
--- --- --- ---
100% 100% 100% 100%
=== === === ===
The Company has two primary product lines: 1) satellite modems and
earthstations, and 2) broadcast products. The sales of satellite modems and
earthstations accounted for approximately 75% of 1998 net sales.
Information concerning the breakout of sales by these two product lines for
periods prior to 1998 is not available.
(Continued)
F-15
(12) Loss Per Share
A summary of the reconciliation from basic loss per share to diluted loss
per share follows:
Years ended Six-month Year
December 31, period ended ended
----------------------------- December 31, June 30,
1998 1997 1996 1996
------------ ------------ ------------ ----------
Income (loss) available to
common stockholders $(14,126,945) (1,756,716) (2,069,974) (2,625,097)
============ ============ ============ ==========
Basic EPS-weighted average
shares outstanding 5,931,346 5,012,664 3,750,699 3,742,227
============ ============ ============ ==========
Basic loss per share $ (2.38) (.35) (.55) (.70)
============ ============ ============ ==========
Basic EPS-weighted average
shares outstanding 5,931,346 5,012,664 3,750,699 3,742,227
Effect of dilutive securities -- -- -- --
------------ ------------ ------------ ----------
Dilutive EPS-weighted average
shares outstanding 5,931,346 5,012,664 3,750,699 3,742,227
============ ============ ============ ==========
Diluted loss per share $ (2.38) (.35) (.55) (.70)
============ ============ ============ ==========
Stock options not included in
diluted EPS since
antidilutive 691,559 169,818 72,563 --
============ ============ ============ ==========
(13) Employee Benefit Plan
The Company has a qualified contributory 401(k) plan that covers all
employees in Phoenix, Arizona, who have attained the age of 18 and are
employed at the enrollment date. Matching contributions were $31,690,
$30,230, $8,576 and $11,606 for the years ended December 31, 1998 and 1997,
the six-month period ended December 31, 1996, and the year ended June 30,
1996, respectively. Each participant may elect to contribute up to 15
percent of his or her gross compensation up to the maximum amount allowed
by the Internal Revenue Service. The Company matches up to 1 percent of the
employee's salary.
The Company has a qualified contributory 401(k) plan that covers all
full-time employees in San Diego, California, who have been employed
continuously for at least 30 days before enrollment date. Matching
contributions were $30,450 for the period October 15, 1998 through December
31, 1998. Each participant
(Continued)
F-16
may elect to contribute up to 15 percent of his or her gross compensation
up to the maximum amount allowed by the Internal Revenue Service. The
Company matches $.35 for every dollar up to 7 percent of the participant's
contribution.
(14) Stock Options
In November 1996, the Board of Directors adopted the 1996 Incentive Stock
Option Plan (the "Plan"), which was approved by the stockholders on January
8, 1997. The Plan provided for the grant of options to employees of the
Company to purchase up to 1,282,042 shares of common stock. The option
price per share under the Plan may not be less than the fair market value
of the stock (110 percent of the fair market value for an optionee who is a
10 percent stockholder) on the day the option is granted. In November 1998,
the Plan was amended to increase the options available by 900,000,
providing a total of 2,182,042 options available to purchase shares of
common stock.
Rights Offering - In November 1996, the Board of Directors approved the
distribution to stockholders, other than the Company's principal
stockholder, ST, of subscription rights for the purchase of up to 215,833
shares of the Company's common stock at a price of $2.50 per share. The
Board of Directors further approved the distribution of subscription rights
to an affiliate of ST to purchase up to 2,040,000 shares of the Company's
common stock at a price of $2.50 per share. This Rights Offering became
effective on May 12, 1997 and was concluded in June 1997. ST's affiliate
exercised 1,976,000 of its rights and individuals associated with such
affiliate exercised another 34,000. An additional 51,525 rights issued to
stockholders other than ST were exercised. In a related offering under the
Company's Incentive Stock Option Plan, 110,100 shares of the Company's
common stock were purchased by employees at $2.50 per share. Total proceeds
received from the Rights Offering were partially offset by approximately
$336,000 of associated costs. The proceeds from the exercise of these
rights were used, in part, to satisfy notes payable to affiliates shown on
the accompanying consolidated balance sheet at December 31, 1996.
At December 31, 1997, the Company had 690,665 options outstanding at an
exercise price of $2.50 per share. 30,500 options were exercisable at the
rate of 25 percent 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. These options became exercisable, if and when the
Company's earnings before interest and taxes (calculated without regard to
any charge for compensation paid or payable under the Plan) exceeded
certain levels. In October 1998, as a result of the Comstream acquisition,
the restrictions were deemed satisfied and the Company accelerated the
vesting of these 660,165 options. The Company recorded compensation expense
of $1,155,477 to account for the cash bonus associated with these options.
At December 31, 1998, the Company had 1,205,957 options outstanding at
exercise prices ranging from $2.50 to $3.125 per share.
(Continued)
F-17
The Company applies APB Opinion 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss and loss per share would
have been reduced to the pro forma amounts indicated below:
December 31,
------------------------------
1998 1997
-------------- -------------
Net loss As reported $ (14,126,945) $ (1,756,716)
Pro forma $ (14,883,359) $ (2,028,121)
Loss per Share-Basic As reported $ (2.38) $ (.35)
Pro forma $ (2.51) $ (.40)
Loss per Share-Diluted As Reported $ (2.38) $ (.35)
Pro forma $ (2.51) $ (.40)
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting
period of three years.
The fair value of options granted under the Plan was estimated on the date
of grant with vesting periods ranging from one to three years using the
Black-Scholes option-pricing model with the following weighted average
assumptions used: no dividend yield, expected volatility of 105 percent -
118 percent, risk free interest rate of 6.125 percent - 5.87 percent, and
expected lives of five years.
A summary of the aforementioned stock plan activity follows:
Weighted
Average
Price Per
Number Share
---------- ---------
Balance, December 31, 1996 684,395 $2.50
Granted 15,500 2.50
Forfeited (9,230) 2.50
---------- -----
Balance, December 31, 1997 690,665 2.50
Granted 553,000 2.89
Forfeited (37,708) 2.50
---------- -----
Balance, December 31, 1998 1,205,957 $2.68
========== =====
(Continued)
F-18
A summary of stock options granted at December 31, 1998 follows:
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding at Remaining Exercise Exercisable at Exercise
Exercise Prices 12/31/98 Contractual Life Price 12/31/98 Price
--------------- ----------- ---------------- --------- ----------- --------
$ 2.50 676,957 1 years 2.50 591,957 2.50
$ 2.50 6,500 2 years 2.50 3,250 2.50
$ 2.50 to 3.125 522,500 3 years 2.91 130,375 2.90
----------- --------- ---------- --------
1,205,957 $ 2.82 725,582 $ 2.57
=========== ========= ========== ========
(15) Restructuring Costs
In November 1998, the Company announced a corporate restructuring
cost-cutting initiative, and provided a restructuring charge of
approximately $3,100,000. Included in this restructuring charge was
approximately $1,100,000 in termination benefits for technical, sales and
administrative staff. The remaining $2,000,000 was comprised of $1,300,000
for the lease buyout discussed in note 9 and $700,000 of leasehold
improvements that were abandoned upon movement to a new building in San
Diego, California. At December 31, 1998, the remaining balance in the
accrued expenses related to the restructuring costs comprises remaining
termination benefits and costs associated with the lease buyout.
(16) Related Party Transactions
Sales to a subsidiary of STPL for the years ended December 31, 1998 and
1997, the six-month period ended December 31, 1996 and the year ended June
30, 1996 were $50,000, $152,500, $307,300 and $311,600, respectively.
Sales to Agilis Communication Technologies Pte Ltd ("Agilis"), an affiliate
of ST, amounted to $65,000, $540,000, $375,000 and $118,900 for the years
ended December 31, 1998 and 1997, the six-month period ended December 31,
1996 and the year ended June 30, 1996, respectively.
Prior to 1997, a former majority stockholder of the Company provided
management services to the Company, for which it charged the Company
$60,000 and $120,000 for the six-month period ended December 31, 1996 and
the year ended June 30, 1996, respectively.
Interest expense on notes payable to affiliates was $581,000, $148,000,
$205,900 and $248,400 for the years ended December 31, 1998 and 1997, the
six-month period ended December 31, 1996 and the year ended June 30, 1996,
respectively, of which $581,000, $0 and $152,400 were included in accrued
expenses in the accompanying balance sheet as of December 31, 1998, 1997
and 1996, respectively.
During 1998, an ST affiliate made loans of $5,618,272 to the Company. The
loans bear interest at rates ranging from 6.625 percent to 6.844 percent
per annum with the principal and accrued interest due in March 2000. The
proceeds of the loans were used in part by the Company to repay a note
payable under a line of credit agreement which was outstanding at December
31, 1997 (note 7).
(Continued)
F-19
During August 1998 the Company executed a note to ST for $10,000,000 the
proceeds of which were used for the purchase of Comstream. This note bears
interest at a rate of 6.375 percent per annum. The note, plus any accrued
interest, is due March 31, 2000.
The Company had notes receivable from stockholders totaling $40,086 at
December 31, 1997. These notes had an interest rate of 4 percent and were
paid in June 1998.
(17) Contingencies
The Internal Revenue Service is currently conducting examinations of the
Company with respect to income tax for the calendar year ended December 31,
1995. The State of California Board of Equalization is currently conducting
examinations with respect to personal property tax and sales tax for the
calendar years ended December 31, 1995, 1996 and 1997. The examinations are
currently in process and management does not expect a material adverse
effect on the financial position of the Company resulting from the
resolutions of the examinations. Accordingly, no provision has been made in
the accompanying consolidated financial statements for losses, if any, that
might ultimately result from the examinations.
The Company is involved in litigation and claims arising in the normal
course of operations. In the opinion of management based on consultation
with legal counsel, losses, if any, from this litigation are covered by
insurance or are immaterial; therefore, no provision has been made in the
accompanying consolidated financial statements for losses, if any, that
might result from the ultimate outcome of these matters.
(18) Year 2000 Problem
In 1998, the Company developed a plan to deal with the Year 2000 problem.
The plan provides for the conversion efforts to be completed by September
30, 1999. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year.
The Company has identified all internal mission critical systems and plans
to begin remediation efforts, consisting of system upgrades, in the second
quarter of 1999. The Company has also determined that its core products do
not contain date-sensitive components; however, the Company expects to
begin communicating with its customers on the status of its products in the
second quarter of 1999. Management is currently assessing the Year 2000
remediation efforts of the Company's significant suppliers. Although
management believes its efforts minimize the potential adverse effects on
the Company of a supplier's failure to be Year 2000 compliant on time,
there can be no absolute assurance that all its suppliers will become Year
2000 compliant on time or in a way that will be compatible with the
Company's systems. The Company does not believe expenditures to be Year
2000 compliant will cost in excess of $100,000, and is expensing all costs
associated with these systems changes as the costs are incurred. However,
there can be no assurance that the Company will be able to completely
resolve all Year 2000 issues or that the ultimate cost to identify and
implement solutions to all Year 2000 problems will not be material to the
Company.
(19) Subsequent Events
In January and February 1999, the Company had additional draws on the line
of credit totaling $1,500,000 at interest rates ranging from 5.97% to
6.06%.
(Continued)
F-20
In January 1999, the Company filed a Form S-2 with the Securities and
Exchange Commission to register a rights offering of 4,745,076 shares of
common stock at a price of $3.73 per share. Each stockholder of record will
be entitled to purchase four shares of common stock for every five shares
currently owned.
(20) Quarterly Financial Data - Unaudited
A summary of the quarterly data for the years ended December 31, 1998 and
1997 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
1998:
Total revenues $ 3,949 2,718 3,307 11,138 21,112
========= ====== ===== ======= =======
Gross profit $ 1,194 48 1,027 3,034 5,303
========= ====== ===== ======= =======
Operating expenses $ 1,506 1,577 1,384 13,788 18,255
========= ====== ===== ======= =======
Loss before interest expense $ (312) (1,529) (357) (10,754) (12,952)
========= ====== ===== ======= =======
Net loss $ (490) (1,727) (550) (11,360) (14,127)
========= ====== ===== ======= =======
Basic loss per common share $ (.08) (.29) (.09) (1.92) (2.38)
========= ====== ===== ======= =======
Diluted loss per common share $ (.08) (.29) (.09) (1.92) (2.38)
========= ====== ===== ======= =======
1997:
Total revenues $ 2,741 2,812 4,434 3,460 13,447
========= ====== ===== ======= =======
Gross profit $ 1,061 1,158 2,036 1,170 5,425
========= ====== ===== ======= =======
Operating expenses $ 1,363 1,499 1,788 1,854 6,504
========= ====== ===== ======= =======
Income (loss) before interest expense $ (302) (341) 248 (684) (1,080)
========= ====== ===== ======= =======
Net income (loss) $ (474) (504) 86 (865) (1,757)
========= ====== ===== ======= =======
Basic loss per common share $ (.13) (.11) .01 (.12) (.35)
========= ====== ===== ======= =======
Diluted loss per common share $ (.13) (.11) .01 (.12) (.35)
========= ====== ===== ======= =======
(Continued)
F-21
Radyne Comstream
Schedule II - Valuation and Qualifying Accounts
For the Years ended December 31, 1998 and 1997, the six-month period
ended December 31, 1996
And the year ended December 31, 1996
Balance at Charged to Charged to Balance at
Beginning of costs and other end of
Period expenses accounts Deductions period
----------- --------- --------- ---------- ---------
Allowance for doubtful
Receivables:
Year ended December 31, 1998 $ 15,000 155,000 462,815 * -- 632,815
=========== ========= ========= ======= =========
Year ended December 31, 1997 $ 13,000 2,000 -- -- 15,000
=========== ========= ========= ======= =========
Six-month period ended
December 31, 1996 $ 13,000 -- -- -- 13,000
=========== ========= ========= ======= =========
Year ended June 30, 1996 $ 13,829 -- -- 829 13,000
=========== ========= ========= ======= =========
Reserve for obsolescence:
Year ended December 31, 1998 $ 291,000 1,260,469 -- -- 1,551,469
=========== ========= ========= ======= =========
Year ended December 31, 1997 $ 486,000 -- -- 195,000 291,000
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Six-month period ended
December 31, 1996 $ 76,907 409,093 -- -- 486,000
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Year ended June 30, 1996 $ 76,907 -- -- 76,907
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* Balance represents allowance acquired during purchase of Comstream
Holdings, Inc.