<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RADYNE CORP.
(Exact name of Registrant as specified in its charter)
NEW YORK 3665 11-2569467
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
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3138 EAST ELWOOD STREET
PHOENIX, ARIZONA 85034
(602) 437-9620
(Address, including zip code and telephone number,
including area code, of Registrant's principal executive offices)
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ROBERT C. FITTING, CHIEF EXECUTIVE OFFICER
RADYNE CORP.
3138 EAST ELWOOD STREET
PHOENIX, ARIZONA 85034
(602) 437-9620
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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COPY TO:
JOHN B. WADE, III, ESQ.
DORSEY & WHITNEY LLP
250 PARK AVENUE
NEW YORK, NY 10177
(212) 415-9311/(212) 953-7201 (TELECOPY)
<PAGE>
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. /_/
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to item 11(a)(1)
of this form, check the following box. /_/
If this Form is filed to register additional securities pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. /_/
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. /_/
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. /_/
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /_/
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
4,745,076
Common Stock, par value $.002 per share Shares(1) $3.73 $17,699,133 $4,921
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4,745,076
Subscription Rights to Purchase Common Subscription
Stock Rights $0.00 $0.00 $0.00
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TOTAL -- -- $17,699,133 $4,921
</TABLE>
(1) Issuable upon exercise of Rights which are being distributed to
shareholders of Radyne Corp.
<PAGE>
------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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<PAGE>
RADYNE CORP.
CROSS REFERENCE SHEET
(PURSUANT TO ITEM 501(b) OF REGULATION S-K)
<TABLE>
<CAPTION>
S-2 ITEM NUMBER AND CAPTION LOCATION OR CAPTION
- --------------------------- IN PROSPECTUS
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<S> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus ............................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus ...................... Inside Front and Outside Back
Cover Pages
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges ....... Prospectus Summary; Risk Factors
4. Use of Proceeds .......................... Prospectus Summary; Purpose of
the Rights Offering and Use of
Proceeds
5. Determination of Offering Price ......... Purpose of the Rights Offering
and Use of Proceeds
6. Dilution ................................. Dilution
7. Selling Security Holders ................. Not Applicable
8. Plan of Distribution ..................... Outside Front Cover Page; The
Rights Offering
9. Description of Securities to be
Registered ............................... Outside Front Cover Page; The
Rights Offering; Description of
Capital Stock
10. Interest of Named Experts and Counsel ... Not Applicable
11. Information with Respect to the
Registrant .............................. Outside Front Cover Page;
Prospectus Summary; Risk
Factors; Purpose of Rights
Offering and Use of Proceeds;
Price Range of Common Stock;
Dividend Policy; Business;
Shares Eligible for Future Sale;
Description of Capital Stock
12. Incorporation of Certain Information
by Reference ............................ Where You Can Find More
Information
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities ............................. Not Applicable
</TABLE>
<PAGE>
PROSPECTUS
RADYNE CORP.
4,745,076 SHARES
OF COMMON STOCK, PAR VALUE $.002 PER SHARE
AND
4,745,076 SUBSCRIPTION RIGHTS
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<TABLE>
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PER SHARE TOTAL
--------- -----
<S> <C> <C>
Subscription
Price ............................................. $3.73 $17,699,133
Underlying
Discount .......................................... N/A N/A
----- -----------
Total Proceeds
to Radyne ......................................... $3.73 $17,699,133
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</TABLE>
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Radyne Corp. manufactures and designs digital data communications equipment for
satellite telecommunications systems.
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The proceeds of this offering will be used to repay Radyne Corp.'s majority
shareholder in connection with its financing of Radyne's recent acquisition of
ComStream Holdings, Inc. and earlier working capital loans. Any additional funds
remaining will be used for general working capital purposes.
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THE SUBSCRIPTION RIGHTS
- Each Radyne shareholder of record on January __, 1999 will be
entitled to purchase four shares of common stock for every
five shares currently owned.
- The purchase price per share is $3.73.
- The subscription rights expire at 5:00 p.m. New York time on
___________, 1999, unless extended.
THE COMMON STOCK
- One share is issuable upon the exercise of one subscription
right.
- Voting rights for the new shares will be equal to the voting
rights of shares currently outstanding.
THE OFFERING
- You cannot revoke a decision to exercise.
- Continental Stock Transfer & Trust Company will act as
subscription agent. Payment for any shares of common stock
should be sent to Continental Stock Transfer & Trust.
- [California residents may not participate in this offering.]
RADYNE'S COMMON STOCK IS CURRENTLY TRADED OVER THE COUNTER AND IS NOT
LISTED ON ANY SECURITIES EXCHANGE OR QUOTED ON NASDAQ.
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YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS ON PAGE 6 BEFORE
PURCHASING ANY OF THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------
The date of this Prospectus is January __, 1999
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Radyne Corp. is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and files reports and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any reports or other information Radyne Corp. at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
You may also request copies of these documents upon payment of a duplicating
fee, by writing to the SEC's Public Reference Section. Please call the SEC at
l-800-SEC-0330 for further information on the public reference rooms. Radyne
Corp.'s SEC filings are also available to the public from commercial document
retrieval services and at the web site maintained by the SEC at
"http://www.sec.gov."
Radyne Corp. filed a registration statement with respect to the shares of
Common Stock and Rights to purchase Common Stock we are offering. Pursuant to
SEC rules and regulations, this document does not contain all of the information
that you can find in such registration statement. You may read and copy this
information in the same way as any other information that Radyne Corp. files
with the SEC.
Statements in this document concerning any document filed as an exhibit to
the registration statement are not necessarily complete and, in each instance,
reference is made to the copy of the complete document filed as an exhibit to
the registration statement. Each of those statements is qualified in its
entirety by reference to the complete document. These documents, filed with the
SEC, may be inspected and copied, and obtained by mail, from the SEC as set
forth above and will be available for inspection and copying at the principal
executive offices of Radyne Corp. at 3138 East Elwood Street, Phoenix, AZ 85034
during regular business hours by any interested securityholder of Radyne Corp.
or his or her representative who has been so designated in writing.
The SEC allows us to "incorporate by reference" information into this
document, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC, including
Radyne Corp.'s annual, quarterly and current reports. The information
incorporated by reference is deemed to be part of this document, except for any
information superseded by information in this document. The information
incorporated by reference is an important part of this prospectus.
This document incorporates by reference the documents set forth below that
Radyne Corp. previously filed with the SEC. These documents contain important
information about Radyne Corp. and its finances.
Radyne Corp. incorporates by reference into this Prospectus:
- its Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1997, which contains audited financial statements
for the Company's latest fiscal year for which a Form 10-K was
required to have been filed and
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incorporates by reference certain portions of the Company's
definitive Information Statement for the Annual Meeting of
Stockholders held May 5, 1998;
- its quarterly reports on Form 10-Q for the quarters ended
March 31, 1998, June 30, 1998 and September 30, 1998;
- all other reports filed by the Company pursuant to Section
13(a) or 15(d) of the Exchange Act since December 31, 1997,
including but not limited to, the Form 8-Ks filed on July 24,
1998, July 31, 1998, August 28, 1998, October 30, 1998 and
December 24, 1998; and
- the description of Radyne's Common Stock, $.002 par value, as
contained in its registration statement on Form 8-A, filed
with the Commission on March 8, 1984, as amended on July 25,
1988.
Copies of our Annual Report on Form 10-K for the year ended December 31,
1997 and our Quarterly Report on Form l0-Q for the quarter ended September 30,
1998 accompany this prospectus. Other documents incorporated by reference may be
obtained through the SEC and are available from Radyne Corp. without charge,
other than exhibits, unless we have specifically incorporated by reference an
exhibit in this document. You may obtain documents incorporated by reference in
this document by making a request to Radyne Corp. by telephone at (602) 437-9620
or in writing at the following address:
Director of Administration
Radyne Corp.
3138 East Elwood Street
Phoenix, AZ 85034.
You should rely only on the information contained in this document or that
we have referred you to. We have not authorized anyone to provide you with
information that differs from such information. We are not making an offer of
these securities in any state where the offer is not permitted. You should not
assume that the information in this prospectus or any prospectus supplement is
accurate as of any date other than the date on the front of those documents.
ii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. FOR THE MEANINGS OF CERTAIN TECHNICAL TERMS USED
IN THIS PROSPECTUS IN REGARD TO THE BUSINESS OF RADYNE COMSTREAM, PLEASE SEE THE
GLOSSARY COMMENCING ON PAGE 42.
THE COMPANY
Radyne Corp. and its subsidiaries ("Radyne Comstream") have engaged in the
advanced design and production of digital data communications equipment for
satellite telecommunications systems for over seventeen years. Since our
inception in 1980, we have established ourselves as a supplier in the satellite
ground equipment business. We design, manufacture and sell satellite modems and
earth stations, satellite broadcast receivers, frequency converters, ancillary
products and equipment racks containing integrated modems and supporting
equipment for data, audio and TV communications.
Radyne Corp. was forced to file for Chapter 11 bankruptcy protection in
April 1994. We successfully emerged from bankruptcy in December 1994 upon the
acquisition of approximately 91% of Radyne Corp.'s Common Stock by Engineering
and Technical Services, Inc. ("ETS"), then a major customer of ours. On August
12, 1996, ETS was acquired by Singapore Technologies Pte Ltd through its wholly
owned subsidiary, Stetsys Pte Ltd, and the latter's wholly owned subsidiary,
Stetsys US, Inc. (collectively, "ST"). As a result, approximately 91% of Radyne
Comstream's Common Stock is now held by ST. See "Business--Bankruptcy
Reorganization."
In 1995, ETS caused us to install a new management team, who moved our
operations from New York to Phoenix, Arizona. As part of this management change,
we hired an almost completely new staff of engineering, sales and support
personnel, with funding advanced by ETS and subsequently ST. The new Radyne
Comstream team has reinstituted our research, development and marketing programs
and reinvigorated our product line.
Consistent with our new growth strategy, on October 15, 1998 we
acquired ComStream Holdings, Inc. ("Comstream") from Spar Aerospace Limited,
a Canadian advanced technology company ("Spar"). Comstream is an
international provider of digital transmission solutions for voice, data,
audio and video applications with offices in the United States, Singapore,
Indonesia, China and the United Kingdom. We acquired Comstream in an effort
to expand our core business, supplement our product lines and take advantage
of Comstream's trademark and distribution channels, and based on our belief
that the combined companies could realize certain synergies. In addition, we
believed that Comstream's recurring costs were very excessive and that
substantial savings could be realized. To date, we have reduced ongoing costs
in Comstream by almost $1,000,000 per month. See "Business."
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Radyne Corp. was incorporated in the State of New York on November 25,
1980. Our current headquarters address is 3138 East Elwood Street, Phoenix,
Arizona 85034 and our telephone number is (602) 437-9620.
PURPOSE OF THE RIGHTS OFFERING AND USE OF PROCEEDS
This Rights offering is intended to raise approximately $17,700,000 in
gross proceeds to repay ST for the $10,000,000 of financing which it provided in
connection with the Comstream acquisition and approximately $5,618,000 in
principal amount of earlier working capital loans. Any additional funds
remaining will be used for general working capital purposes.
If we complete the Rights offering, the maximum gross proceeds to Radyne
Comstream would be approximately $17,700,000 before payment of related fees and
expenses estimated to be $300,000. However, although we have been informed that
ST intends to fully exercise its Rights, no assurance can be given that any or
all of the Rights received by others will be exercised. Shares underlying any
unexercised Rights will not be reoffered to the public or otherwise issued at
this time. Therefore, the actual proceeds from the Rights offering could be
somewhat less.
The Subscription Price has been established by the Board of Directors at
$3.73 per share, which the Board determined to be the fair market value of the
Common Stock based on the negotiated conversion price of the convertible note
issued to Spar in connection with the Comstream acquisition. See "Purpose of the
Rights Offering and Use of Proceeds."
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<PAGE>
SUMMARY OF THE RIGHTS OFFERING
<TABLE>
<S> <C>
The Rights ........... Shareholders, [other than residents of California,] will
receive four Rights for every five shares of Common
Stock held on the Record Date. An aggregate of
approximately 4,745,076 Rights will be distributed.
Holders of the Rights are entitled to purchase one share
of Common Stock for each Right exercised at the
Subscription Price. The Rights will be transferable. No
fractional Rights will be issued. Each Right will
entitle a shareholder to purchase one share of Common
Stock at $3.73 per share.
Subscription Price ... $3.73 per share of Common Stock.
Record Date .......... January __, 1999.
Transferability of
Shareholder Rights .. The Rights will be transferable, but it is not
anticipated that a market will be made in the Rights or
that they will be listed for trading on any exchange.
[Because subscriptions cannot be accepted from residents
of California, no shareholder may transfer Rights to
residents of such state.]
Expiration Date ...... 5:00 p.m., New York time, on __________, 1999 unless the
Board of Directors determines that a material event has
occurred that necessitates one or more extensions of the
Expiration Date to permit adequate disclosure of
information concerning such event.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Procedure for
Exercising Rights ... Rights may be exercised by properly completing the
certificate evidencing such Rights (a "Subscription
Certificate") and forwarding the Subscription
Certificate to the Subscription Agent or Radyne
Comstream (or following the Guaranteed Delivery
Procedures, referred to below) on or prior to the
Expiration Date, together with payment in full of the
Subscription Price with respect to such Rights. If the
mail is used to forward Subscription Certificates, it is
recommended that insured, registered mail be used. The
exercise of a Right may not be revoked or amended. If
time does not permit a holder of a Right to deliver a
Subscription Certificate to the Subscription Agent or
Radyne Comstream on or before the Expiration Date, such
person should make use of the Guaranteed Delivery
Procedures described under "The Rights
Offering--Exercise of Rights."
THE EXERCISE OF RIGHTS IS IRREVOCABLE ONCE MADE. NO
INTEREST WILL BE PAID ON THE MONEY DELIVERED IN PAYMENT
OF THE SUBSCRIPTION PRICE. If paying by uncertified
personal check, please note that the funds paid thereby
may take at least five business days to clear.
Accordingly, persons who wish to pay the Subscription
Price by means of uncertified personal check are urged
to make payment sufficiently in advance of the
Expiration Date to ensure that such payment is received
and clears by such date. Shareholders are urged to
consider payment by means of certified or cashier's
check or money order. A Right may not be exercised in
part and fractional shares will not be issued.
Persons Holding
Shares, or Wishing to
Exercise Rights,
Through Others ....... Persons who hold their Radyne Corp. shares and rights
with a broker, dealer, commercial bank, trust company or
other nominee should contact the appropriate institution
or nominee and request it to effect the transactions for
them.
Issuance of Common
Stock .............. Certificates representing shares of Common Stock
issuable upon exercise of Rights (the "Rights Shares")
will be delivered to the holder of such Rights as soon
as practicable after such Rights are validly exercised.
Funds delivered to the Subscription Agent will be held
by the Subscription Agent until the issuance of the
related Rights Shares. No interest will be paid to
holders of the Rights on funds held by the Subscription
Agent regardless of whether such funds are applied to
the Subscription Price or returned to the Holders.
</TABLE>
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<TABLE>
<S> <C>
Subscription Agent ... Continental Stock Transfer & Trust Company
Information .......... Any questions regarding this offering, including the
procedure for exercising Rights, and requests for
additional copies of this Prospectus, the Subscription
Certificate or the notice of guaranteed delivery should
be directed to Radyne Comstream at 3138 East Elwood
Street, Phoenix, Arizona 85034, Attention: Director of
Administration. Telephone: (602) 437-9620.
Maximum Shares of
Common Stock
Outstanding after the
Rights Offering .... 10,676,422 shares based on 5,931,346 shares outstanding
on December 31, 1998. Does not give effect to the
issuance of 2,071,942 shares reserved for issuance upon
the exercise of options previously granted or that may
be granted from time to time under the 1996 Incentive
Stock Option Plan or the possible conversion of an
outstanding convertible note into an additional
1,876,675 shares.
</TABLE>
For more information regarding this offering, including the procedure for
exercising Rights, see "The Rights Offering."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
See "Certain Federal Income Tax Consequences" for a discussion of certain
tax consequences that should be considered in connection with this offering.
RISK FACTORS
The purchase of Common Stock in the Rights Offering or the purchase of
Rights in the secondary market involves investment risks relating to Radyne
Comstream, to the data communications equipment industry in general and to this
offering. Investors are urged to read and consider carefully the information set
forth under the heading "Risk Factors."
The Board of Directors of Radyne Comstream Makes No Recommendation to
Holders as to Whether a Holder Should Exercise Rights to Purchase Shares of
Common Stock in The Rights Offering. In Addition, The Board Makes No
Recommendation to Any Person as to Whether a Person Should Purchase Rights.
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<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OR RIGHTS IS HIGHLY SPECULATIVE AND
INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD INVEST IN THESE SECURITIES ONLY IF
YOU CAN AFFORD THE LOSS OF YOUR ENTIRE INVESTMENT. PRIOR TO MAKING AN INVESTMENT
DECISION, YOU SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE OTHER MATTERS
REFERRED TO IN THIS PROSPECTUS, OR INCORPORATED BY REFERENCE, THE FOLLOWING RISK
FACTORS. INFORMATION CONTAINED AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS
CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT WHICH CAN BE IDENTIFIED BY
THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY,"
"WILL," "SHOULD" OR "ANTICIPATES" OR THE NEGATIVES OF SUCH TERMS OR OTHER
VARIATIONS ON SUCH TERMS OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF
STRATEGY. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM SUCH
FORWARD-LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW. OTHER FACTORS CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS COULD ALSO CAUSE ACTUAL RESULTS TO VARY MATERIALLY
FROM THE FUTURE RESULTS INDICATED IN SUCH FORWARD-LOOKING STATEMENTS.
HISTORY OF LOSSES MAY CONTINUE
On a pro forma basis, Radyne Comstream incurred losses from continuing
operations of $12,186,000 during the nine months ended September 30, 1998 and
$6,826,000 during the year ended December 31, 1997. Radyne Comstream has been
largely dependent upon loans from controlling shareholders to satisfy its
working capital requirements. Accordingly, the likelihood of Radyne Comstream's
future success must be considered in light of Radyne Corp.'s bankruptcy in 1994
and the possibility of future operating losses, as well as the problems,
expenses, difficulties, risks and complications frequently encountered in
connection with similarly situated companies. In addition, our future plans for
Radyne Comstream are subject to known and unknown risks and uncertainties that
may cause Radyne Comstream's actual results in future periods to be materially
different from any future performance implied in this Prospectus. See
"Additional Financing Requirements."
SIGNIFICANT LEVEL OF DEBT REQUIRES LARGE AMOUNT OF RESOURCES
Radyne Corp. has been largely dependent on a succession of short-term
loans and guarantees from its controlling shareholder, ST, and affiliates of ST
since it emerged from Chapter 11 protection on December 16, 1994. Prior to its
acquisition by Radyne, Comstream had been dependent on borrowings facilitated by
Spar. At present, Radyne Comstream has short-term indebtedness to ST of
$15,618,272, plus interest, payable on March 31, 1999, and has a $20,500,000
bank line of credit on which it owes approximately [$8,500,000]. In addition,
Radyne Comstream owes Spar $7,000,000 in connection with the Comstream
acquisition. Most of the proceeds from this offering will be used to repay the
loans from ST. Although Radyne Comstream's indebtedness to the bank or Spar is
not supported by a guarantee or any other form of binding agreement, ST has
provided the bank with a letter of awareness. All loans pursuant to
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<PAGE>
the bank line are demand loans. There can be no assurance that the bank will not
demand repayment at an inopportune time for Radyne Comstream or that ST will
continue to assist Radyne Comstream in maintaining such financing. If Radyne
Comstream were to fail to realize substantially the anticipated net proceeds of
this offering, its ability to repay its overall indebtedness, including its
indebtedness to ST, and its financial condition could be materially adversely
affected. See "Purpose of the Rights Offering and Use of Proceeds."
ADDITIONAL FINANCING REQUIREMENTS
Based on our operating plan, we believe that in addition to the net
proceeds of this offering, Radyne Comstream will require substantial additional
financing in the next year. Specifically, we will need to repay the $7,000,000
note issued to Spar in connection with the Comstream acquisition. Accordingly,
there can be no assurance that our resources will be sufficient to satisfy our
capital requirements for such period. In addition to repaying debt, we
anticipate that Radyne Comstream may require additional financing in order to
meet its current plans for expansion. Such financing may take the form of the
issuance of common or preferred equity securities or debt securities, or may
involve additional bank financing. We may be unable to obtain such additional
capital on a timely basis, on favorable terms, or at all. See "Purpose of the
Rights Offering and Use of Proceeds."
HEAVY DEPENDENCE ON INTERNATIONAL SALES; SUBSTANTIAL DISRUPTIONS IN OVERSEAS
MARKETS
Radyne Comstream's strategy involves a commitment to expanding its
business in overseas markets. Part of the rationale for pursuing overseas, as
opposed to domestic, markets is the substantially greater need for our wireless
communications technology in developing and underdeveloped countries. Such
countries typically lack the infrastructure for building land based
telecommunications systems and often involve vast distances and rugged terrain
over which any such systems could be installed. As a result, we have dedicated
substantial resources to penetrating markets in Europe, the Middle East, Canada,
Latin America and Asia. While this activity fits with Radyne Comstream's
long-term strategy, recent market volatility in Latin America and Asia may cause
short-term problems which may have longer term negative effects. Export sales,
as a percentage of net sales, were approximately 62% in the nine months ended
September 30, 1998 and 64% for the year ended December 31, 1997 on a pro forma
basis. As a result, the possibility of substantial future disruptions and the
impact of events to date could have a material adverse effect on our business,
financial condition and results of operations. See "Business--Sales and
Marketing."
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<PAGE>
DEPENDENCE ON DISTRIBUTORS AND PRINCIPAL CUSTOMERS
Sales to key customers and certain distributors have constituted and are
anticipated to constitute a significant portion of Radyne Comstream's business.
On a pro forma basis, one customer accounted for approximately 10% of net sales
for the nine-month period ended September 30, 1998 and approximately 9% of net
sales for the year ended December 31, 1997. Decreased sales to such customer or
the loss of any of these distributors could have a material adverse effect on
the operating results and financial condition of Radyne Comstream. Radyne
Comstream's distributors are not obligated to purchase any minimum quantity of
its products. We can provide no assurance that such distributors will continue
to purchase products or that Radyne Comstream will be able to enter into
favorable agreements with other distributors for the sale of its products. See
"Business--Sales and Marketing."
DEPENDENCE ON KEY PERSONNEL AND RECRUITMENT
Our future performance is significantly dependent on the continued active
participation of Robert C. Fitting, President and Chief Executive Officer, and
Steve Eymann, Executive Vice President and Chief Technical Officer. Should
either of these key employees leave or otherwise become unavailable to us,
Radyne Comstream's business and results of operations could be materially
adversely affected. Our continued ability to attract and retain highly skilled
personnel is critical to the operations and expansion of Radyne Comstream. To
date, we have been able to attract and retain the personnel necessary for our
limited operations. However, we may not be able to do so in the future,
particularly as we expand the business. If we are unable to attract and retain
personnel with the necessary skills when needed, our business and expansion
plans could be materially adversely affected.
DEPENDENCE ON SUPPLIERS TO MANUFACTURE OUR PRODUCTS
Radyne Comstream outsources the purchase, assembly and testing of certain
of its subsystems and products to a small number of qualified vendors. Other
products are assembled and tested at either our San Diego, California or
Phoenix, Arizona facilities using subsystems and circuit boards supplied by
subcontractors. Although we believe that we maintain adequate stock to reduce
the procurement lead time for certain components, our products use a number of
specialized chips and customized components or subassemblies produced by a
limited number of suppliers. In the event that such vendors and suppliers are
unable to fulfill our requirements, we could experience an interruption in
production until an alternative source of supply was developed. We believe that
there are a number of companies capable of providing replacements for the types
of unique chips and customized components and subassemblies used in Radyne
Comstream's products. See "Business--Manufacturing."
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<PAGE>
RAPID TECHNOLOGICAL CHANGE; RISK OF OBSOLESCENCE OF OUR PRODUCTS
The technology used in modems, converters and related equipment changes
rapidly. Radyne Comstream's competitors may succeed in developing or marketing
products or technologies that are more effective and/or less costly and which
render our products obsolete or non-competitive. In addition, new technologies
could be developed that replace or reduce the value of our products. For
example, as more fiber cables are laid under the oceans or otherwise brought
into service, the use of satellites for international telephony is slowing. Our
success will depend in part on our ability to respond quickly to technological
changes through the development and improvement of our products. Accordingly, we
believe that a substantial amount of capital will need to be allocated to
research and development activities in the future. There can be no assurance
that Radyne Comstream's product development efforts will be successful. Failure
to improve our existing products and develop new products could have a material
adverse effect on our business, financial condition and results of operations.
See "Business--Industry Overview", "Business--Research and Development" and
"Business--Competition."
HIGH COST OF RESEARCH AND DEVELOPMENT
Our research and development efforts to date have been devoted to the
design and development of new products for the satellite communications and
telecommunications industries. Radyne Comstream's future growth depends on
increasing the market share for its new products and adapting existing satellite
communications products to new applications, and the introduction of new
communications products that will find market acceptance and benefit from Radyne
Comstream's established international distribution channels. Accordingly, we are
actively applying our communications expertise to design and develop new
hardware and software products and enhance existing products. On a pro forma
basis, the Company expended $9,172,000 in the nine months ended September 30,
1998 and $10,529,000 in the year ended December 31, 1997, on research and
development activities. However, Radyne Comstream may not continue to have
access to sufficient capital to fund the necessary research and development and
such efforts, even if adequately funded, may not prove successful. See
"Business--Research and Development."
RISK FROM COMPETITORS
We have a number of major competitors in the satellite communications
field. These include large companies, such as Hughes Network Systems, NEC and
California Microwave which have significantly larger and more diversified
operations and greater financial, marketing, human and other resources than
Radyne Comstream. We believe that we have been able to compete by concentrating
our sales efforts in the international market, utilizing the resources of local
distributors, and by emphasizing product features and quality. However, most of
our competitors offer products which have one or more features or functions
similar to those offered by Radyne Comstream. We believe that the quality,
performance and capabilities of our
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products, our ability to customize certain network functions and the relatively
lower overall cost of our products, as compared to the costs generally offered
by Radyne Comstream's major competitors, have contributed to Radyne Comstream's
ability to compete successfully. However, our major competitors have the
resources available to develop products with features and functions competitive
with or superior to those offered by us. Such competitors may successfully
develop such products, which may prevent us from maintaining a lower cost
advantage for our products. Moreover, we may experience increased competition in
the future from these, other currently unknown competitors or future entrants to
the business. See "--Heavy Dependence on International Sales; Substantial
Disruptions in Overseas Markets", and "Business--Competition."
RISK OF PATENT INFRINGEMENT CLAIMS
We believe that improvement of existing products, reliance upon trade
secrets, copyrights and unpatented proprietary know-how and the development of
new products are generally as important as patent protection in establishing and
maintaining a competitive advantage. Because patents often provide only narrow
protection which may not provide a competitive advantage in areas of rapid
technological change and because patent applications require public disclosure
of information which may otherwise be subject to trade secret protection, Radyne
Comstream has been cautious in obtaining patents on existing products. We have a
number of patents, copyrights and other intellectual property rights in the form
of software and integrated circuit designs. However, our technology could be
found to infringe upon the intellectual property of others. If our technology
should be found to impermissibly utilize the intellectual property of others,
Radyne Comstream's ability to utilize the technology could be materially
restricted or prohibited. In such event, we might be required to obtain licenses
from third parties to utilize the patents or proprietary rights of others. We
might be unable to obtain such licenses on acceptable terms or at all. In
addition, in such event, we could incur substantial costs in defending against
infringement claims made by third parties or in enforcing our own intellectual
property rights. It should also be noted that some foreign countries in which
Radyne Comstream's products are sold provide less protection to intellectual
property than do the laws of the United States. Any misappropriation of Radyne
Comstream's products could adversely affect our business. See
"Business--Technology."
DIFFICULTY OF SUCCESSFULLY INTEGRATING AN ACQUISITION
In pursuit of our business strategy, we recently acquired Comstream. The
successful integration of Comstream is subject to risks commonly encountered in
making acquisitions of companies or their services and technologies. Such risks
include, among other things, the difficulty associated with assimilating the
operations and personnel of the acquired companies, the potential disruption of
our ongoing business, the inability of management to maximize our financial and
strategic position through the successful integration of acquired customers,
network facilities, technology, other assets, and distribution networks,
additional expenses associated with the amortization of acquired intangible
assets, the inability to maintain uniform standards,
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controls, procedures and policies and the impairment of relationships with
employees as a result of the integration of new management personnel. In
addition, part of our interest in acquiring Comstream was based on our belief
that we could achieve substantial cost savings in its business. We may be unable
to fully achieve such savings or overcome these or other risks associated with
this acquisition. See "Purpose of the Rights Offering and Use of Proceeds."
CONTROL BY PRINCIPAL STOCKHOLDER
Upon the closing of this offering, ST, which currently owns approximately
91% of Radyne Comstream's outstanding Common Stock, will continue to maintain a
substantially similar level of control. ST will, therefore, continue to have the
ability to elect all of Radyne Comstream's directors and to control the outcome
of all issues submitted to a vote of Radyne Comstream's stockholders. As a
result of ST's substantial ownership interest in the Common Stock, it may be
more difficult for a third party to acquire Radyne Comstream. A potential buyer
would likely be deterred from any effort to acquire Radyne Comstream absent the
consent of ST or its participation in the transaction.
We are subject to Section 912 of the New York Business Corporation Law,
which restricts certain business combinations that are not approved by a
corporation's board of directors.
NO DIVIDENDS
We have not paid any cash dividends on the Common Stock since inception
and do not intend to pay any dividends to our stockholders in the foreseeable
future. We currently intend to reinvest earnings, if any, in the development and
expansion of our business. See "Dividend Policy" and "Description of Common
Stock."
SIGNIFICANT DISCRETION OVER USE OF PROCEEDS BY BOARD OF DIRECTORS
Substantially all of the net proceeds from this offering are expected to
be allocated to reducing debt owed to ST in connection with both the Comstream
acquisition and certain working capital loans. However, such proceeds may be
utilized in the discretion of the Board of Directors. As a result, investors
will not know in advance how such net proceeds will be utilized by Radyne
Comstream. See "Purpose of the Rights Offering and Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION; NET TANGIBLE BOOK VALUE DEFICIENCY BEFORE
OFFERING
Upon the closing of this offering, investors will incur immediate and
substantial dilution in the per share net tangible book value of their Common
Stock. At December 31, 1997, after giving effect to the receipt by Radyne
Comstream of the maximum net proceeds of the Rights Offering, Radyne Comstream,
would have had a pro forma net tangible book value of
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approximately $0.40 per share. Net tangible book value is the amount of Radyne
Comstream's total assets minus intangible assets and liabilities. See
"Dilution."
To the extent that Rights are exercised, those shareholders who do not
exercise their Rights in full will realize a dilution in their percentage voting
interest and ownership interest in future net earnings, if any, of Radyne
Comstream. Radyne Comstream cannot predict the effect, if any, this offering
will have on the market price of the Common Stock. See "Market Considerations;
Volatility of Stock Price" below.
Radyne Comstream currently has outstanding under the 1996 Incentive Stock
Option Plan options exercisable to purchase an aggregate of 721,332 shares of
Common Stock at an exercise price of $2.50 per share (in the case of 656,957 of
such options, the optionee/employee would be entitled to a bonus of $1.72 per
share upon exercise) and 77,750 shares at $3.125 per share. Options on an
additional 146,625 shares and 233,250 shares will become exercisable at $2.50
per share and $3.125 per share, respectively, over the next three years,
assuming that the grantees, employment does not terminate prematurely. An
additional 892,985 shares are available for options yet to be granted under the
Plan. Exercise of the options granted under the 1996 Incentive Stock Option Plan
would further reduce a shareholder's percentage voting and ownership interest.
SHARES ELIGIBLE FOR FUTURE SALE
The sale, or availability for sale, of a substantial number of shares of
Common Stock in the public market subsequent to this offering pursuant to Rule
144 under the Securities Act ("Rule 144") or otherwise could materially
adversely affect the market price of the Common Stock and could impair Radyne
Comstream's ability to raise additional capital through the sale of its equity
securities or debt financing. Upon completion of this offering, if all Rights
are fully exercised, there would be approximately 10,676,422 shares of Common
Stock issued and outstanding. Of these shares, Radyne Comstream believes that
approximately 999,622 would be freely transferable. The remaining approximately
9,676,800 shares would be held by ST and would be eligible for resale subject to
the volume and manner of sale limitations of Rule 144 under the Securities Act.
DISCLOSURES RELATING TO LOW PRICED STOCKS MAY NEGATIVELY AFFECT LIQUIDITY
Radyne Comstream's securities are subject to Rule 15g-9 under the Exchange
Act which imposes additional sales practice requirements for broker-dealers
which sell penny stocks to persons other than established customers and
accredited investors as defined in Regulation D under the Securities Act. For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale.
The SEC regulations define a "penny stock" to be any equity security not
registered on a national securities exchange or for which quotation information
is disseminated on NASDAQ
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that has a market price (as therein defined) of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exceptions.
Unless exempt, the rules require delivery, prior to a transaction in a penny
stock, of a disclosure schedule prescribed by the SEC relating to the penny
stock market. Disclosure is also required to be made about commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks. Consequently, such rule
may adversely affect the ability of broker-dealers to sell Radyne Comstream's
securities and may adversely affect the ability of purchasers in this offering
to sell any of the securities acquired hereby in the secondary market.
MARKET CONSIDERATIONS; VOLATILITY OF STOCK PRICE
Radyne Comstream cannot predict the effect that this offering will have on
the trading price of the Common Stock. There can be no assurance that the market
price of the Common Stock will not fall [remain] below the Subscription Price or
that, following the exercise of Rights, a Rights holder will be able to sell
shares acquired in this offering at a price equal to or greater than the
Subscription Price. Since Radyne Comstream emerged from bankruptcy, the price of
the Common Stock, which trades in the over-the-counter market under the OTC
Bulletin Board symbol "RADN" (prior to January 1997, the symbol was "RDYN"), has
varied widely and the price of the Common Stock or the Shareholder Rights may be
subject to significant fluctuation in the future. See "Price Range of Common
Stock" and "Dividend Policy." There has been no prior market for the Rights.
YEAR 2000 RISKS
The Year 2000 issue concerns the fact that certain computer systems and
processors may recognize the designation "00" as the year 1900 when it is
intended to mean the Year 2000, resulting in system failure or miscalculations.
Certain dates in 1999 may also cause problems for certain computer programs.
Commencing in 1997, we began a comprehensive review of our information
technology systems, upon which we are dependent for the conduct of day to day
business operations, in order to determine the adequacy of those systems in
light of future business requirements. Year 2000 readiness was one of the
factors considered in the review process. We have completed our review of
internal systems at our Phoenix facility, but our review of the San Diego and
other Comstream facilities is ongoing. The majority of Radyne Comstream's
application software programs are purchased from and maintained by vendors.
Therefore, we are working with these software vendors to verify these
applications are, or will become, Year 2000 compliant. We recognize the
potential business impact related to the Year 2000 computer system issue and we
are implementing a plan to assess and improve Radyne Comstream's state of
readiness with respect to such issue. We presently believe that all mission
critical systems are Year 2000 compliant and that the Year 2000 issue will not
pose significant operational problems for Radyne Comstream's internal systems.
However, it is possible that the scope of the Year 2000 problem could be greater
than originally believed and that our efforts
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could prove inadequate. All Year 2000 costs to date have been expensed and we do
not expect to incur any significant future costs related to the Year 2000 issue.
However, we may choose to upgrade certain existing software that is already Year
2000 compliant, in which case the costs related to those upgrades will be
capitalized in the normal course of business.
As part of our comprehensive review, we are continuing to verify the Year
2000 readiness of third parties (vendors and customers) with whom Radyne
Comstream has material relationships. This is a particular concern in light of
our reliance on overseas assembly operations. We are not able to determine the
effect on results of operations, liquidity and financial condition in the event
our material vendors and customers are not Year 2000 compliant. Our inability to
accurately forecast such effects may prevent Radyne Comstream from taking
necessary steps to rectify any Year 2000 problems in advance. Moreover it is
impossible to predict the extent, if any, to which customers may allocate funds
to the solution of their own Year 2000 problems instead of purchasing our
products. We will continue to monitor the progress of our material vendors and
customers and formulate a contingency plan if and when we conclude that a
material vendor or customer may not be compliant. A Year 2000 readiness survey
was recently sent to all of our material vendors and customers. The readiness
surveys are currently being collected for review and analysis. We have also
started to generate a formal Year 2000 plan. This plan document should be
completed by March 31, 1999. While we believe our efforts to date are adequate
to prevent any Year 2000 problem from having an adverse effect on Radyne
Comstream, our assessment may turn out to be inaccurate. Moreover, we have no
ability to assess the Year 2000 readiness of our material vendors and suppliers
other than based on the information they provide to us. In the event that such
information proves inaccurate, Radyne's business, financial condition and
results of operations could be adversely effected.
PURPOSE OF THE RIGHTS OFFERING AND USE OF PROCEEDS
ESTABLISHMENT OF SUBSCRIPTION PRICE
This section contains forward-looking statements. See "Special Note
Regarding Forward-Looking Statements."
The Subscription Price has been independently established by the Board of
Directors at $3.73 per share, which the Board determined to be the fair market
value of the Common Stock. The Board made this determination based on the
conversion price fixed in the convertible note issued to Spar in connection with
the Comstream acquisition. Through arms length negotiations, this price was set
at fifty cents below the average trading price of the Common Stock for the five
trading days following the announcement of the acquisition and this offering.
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<PAGE>
USE OF PROCEEDS
The maximum net proceeds we will receive from the sale of the Rights, net
of estimated expenses payable by Radyne Comstream, are estimated to be
approximately $17,400,000. We intend to use substantially all of the net
proceeds of this offering to repay indebtedness to ST. Any excess will be used
for general corporate and working capital purposes.
The indebtedness to ST which we intend to repay with the proceeds of this
offering equals $15,618,272 in principal amount, with interest and maturities as
follows:
<TABLE>
<CAPTION>
DATE OF NOTE PRINCIPAL INTEREST RATE MATURITY
- ------------ --------- ------------- --------
<S> <C> <C> <C>
January 5, 1998 $ 500,000.00 6.84375% March 31, 1999
January 15, 1998 $ 4,618,271.87 6.84375% March 31, 1999
April 14, 1998 $ 250,000.00 6.625% March 31, 1999
August 13, 1998 $ 250,000.00 6.75% March 31, 1999
August 28, 1998 $10,000,000.00 6.375% March 31, 1999
</TABLE>
Of this indebtedness, $10,000,000 was borrowed for the Comstream
acquisition and the balance was incurred for short-term working capital purposes
or to repay other indebtedness incurred for such purposes.
DILUTION
On a pro forma basis, the net tangible book value (deficit) of Radyne
Comstream at September 30, 1998, was approximately $(13,107,000), or $(2.21)
per share of Common Stock. Net tangible book value per share of Common Stock
represents the tangible assets (total assets less intangible assets) less
total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of the Rights and the Common
Stock issuable pursuant to the Rights, and the application of the net
proceeds from such transactions, the net tangible book value of the Common
Stock at September 30, 1998 on a pro forma basis would have been
approximately $4,293,000 or $0.40 per share. This represents an immediate
increase in net tangible book value of $2.61 per share to existing
shareholders and an immediate dilution to purchasers of Common Stock through
the exercise of Rights of $3.33 (89%) per share.
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<PAGE>
<TABLE>
<CAPTION>
PER SHARE
----------------
<S> <C> <C>
Rights offering price .............................................. $ 3.73
Net tangible book value (deficit) at September 30, 1998 ............ $(2.21)
Increase attributable to sale of Common Stock pursuant to Rights ... $ 2.61
Pro forma net tangible book value after this offering(1) ........... $ 0.40
------
Dilution to new investors .......................................... $ 3.33
------
------
</TABLE>
(1) After deducting offering expenses of approximately $300,000 payable by
Radyne Comstream.
The foregoing computations exclude (i) 867,957 shares of Common Stock
issuable upon exercise of outstanding stock options at an exercise price of
$2.50 per share and another 311,000 shares under options with an exercise
price of $3.125 per share and (ii) 892,985 shares reserved for future grants
under Radyne Comstream's 1996 Incentive Stock Option Plan.
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<PAGE>
THE RIGHTS OFFERING
SUBSCRIPTION RIGHTS
Shareholders, [other than residents of California,] will receive four
Rights for every five shares of Common Stock held on the Record Date. An
aggregate of approximately 4,745,076 Rights will be distributed. Holders are
entitled to purchase at the Subscription Price one share of Common Stock for
each Right held. The Rights will expire on the Expiration Date. The Rights will
be transferable. No fractional Rights will be issued.
EXPIRATION DATE
The Rights will expire at 5:00 p.m., New York time, on ____, 1999, except
that Radyne Comstream reserves the right to extend the exercise period on one or
more occasions if the Board of Directors determines that the occurrence of a
material event necessitates an amendment of the Registration Statement or
recirculation of this Prospectus in order to permit time for the distribution of
such information. After the Expiration Date, unexercised Rights will be null and
void. Radyne Comstream will not be obligated to honor any purported exercise of
such Rights received by the Subscription Agent or Radyne Comstream after the
Expiration Date, regardless of when the documents relating to such exercise were
sent, except pursuant to the guaranteed delivery procedures described below.
If Radyne Comstream elects to extend the Expiration Date, it will issue a
press release to such effect not later than the first business day following the
most recently announced Expiration Date. In the event that Radyne Comstream
elects to extend the Expiration Date by more than 14 calendar days, it will, in
addition, cause written notice of such extension to be promptly sent to all
Rights holders of record.
EXERCISE OF RIGHTS
Rights may be exercised by delivering to the Subscription Agent or Radyne
Comstream, at or prior to 5:00 p.m., New York time, on the Expiration Date, the
properly completed and executed Subscription Certificate evidencing such Rights
with any required signatures guaranteed, together with payment in full of the
Subscription Price for each Right exercised. Such payment in full must be by
check drawn upon a U.S. bank or postal, telegraphic or express money order
payable to Continental Stock Transfer & Trust Company, as Subscription Agent;
provided, however, that checks or money orders sent directly to Radyne Comstream
should be made payable to Radyne Corp. Payment of the Subscription Price will be
deemed to have been received by the Subscription Agent or Radyne Comstream, as
the case may be, only upon (a) clearance of any uncertified check, or (b)
receipt by the Subscription Agent or Radyne Comstream as the case may be, of any
certified check drawn upon a United States bank or of any postal, telegraphic or
express money order.
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<PAGE>
IF PAYING BY UNCERTIFIED PERSONAL CHECK, PLEASE NOTE THAT THE FUNDS PAID
THEREBY MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR. ACCORDINGLY, HOLDERS OF
RIGHTS WHO WISH TO PAY THE SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL
CHECK ARE URGED TO MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO ENSURE THAT SUCH PAYMENT IS RECEIVED AND CLEARS BY SUCH DATE AND ARE URGED TO
CONSIDER PAYMENT BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
The address to which the Subscription Certificates and payment of the
Subscription Price with respect to Rights should be delivered to the
Subscription Agent is set forth below under "Subscription Agent."
If a holder of Rights wishes to exercise Rights, but time will not permit
such holder of Rights to cause the Subscription Certificate or Subscription
Certificates evidencing such Rights to reach the Subscription Agent or Radyne
Comstream on or prior to the Expiration Date, such Rights may nevertheless be
exercised if all of the following conditions (the "Guaranteed Delivery
Procedures") are met:
(i) such holder of Rights has caused payment in full of the
Subscription Price for each Rights Share being subscribed for to be
received (in the manner set forth above) by the Subscription Agent on or
prior to the Expiration Date;
(ii) the Subscription Agent receives, on or prior to the Expiration
Date, a guaranteed notice (a "Notice of Guaranteed Delivery") from a
member firm of a registered national securities exchange or a member of
the National Association of Securities Dealers, Inc., or from a commercial
bank or trust company having an office or correspondent in the United
States (each, an "Eligible Institution"), substantially in the form
available upon request from the Subscription Agent whose address and
telephone numbers are set forth under "Subscription Agent" below, stating
the name of the exercising holder of Rights, the number of Rights
represented by the Subscription Certificate(s) held by such exercising
holder of Rights, the number of shares of Common Stock being subscribed
for and guaranteeing the delivery to the Subscription Agent of any
Subscription Certificate(s) evidencing such Rights within three business
days following the date of the Notice of Guaranteed Delivery; and
(iii) the properly completed Subscription Certificate(s), with any
required signatures guaranteed, is received by the Subscription Agent
within three business days following the date of the Notice of Guaranteed
Delivery relating thereto. The Notice of Guaranteed Delivery may be
delivered to the Subscription Agent in the same manner as Subscription
Certificates at the address set forth under "Subscription Agent" below, or
may be transmitted to the Subscription Agent by facsimile transmission
(telecopy no. (212) 509-5150).
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<PAGE>
A holder of Rights who holds shares of Common Stock for the account of
others, such as a broker, a trustee or a depository for securities, should
notify the respective beneficial owners of such shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights. If the beneficial owner so instructs, the record holder
of such Rights should complete the Subscription Certificate and submit it to the
Subscription Agent with the proper payment. In addition, the beneficial owner of
Common Stock or Rights held through such a holder of record should contact the
rights holder and request the Rights holder to effect transactions in accordance
with the beneficial owner's instructions.
Unless a Subscription Certificate (i) provides that the shares of Common
Stock to be issued pursuant to the exercise of Rights represented thereby are to
be delivered to the Holder or (ii) is submitted for the account of an Eligible
Institution, signatures on such Subscription Certificate must be guaranteed by
an Eligible Institution.
If either the number of shares of Common Stock being subscribed for is not
specified on the Subscription Certificate, or the amount delivered is not enough
to pay the Subscription Price for all Common Stock to be subscribed for, the
number of Common Stock subscribed for will be assumed to be the maximum amount
that could be subscribed for upon payment of such amount, after allowance for
the Subscription Price of any specified Common Stock.
These instructions should be read carefully and followed in detail.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT OR RADYNE COMSTREAM WILL BE AT THE
ELECTION AND RISK OF THE RIGHTS HOLDER, BUT IF SENT BY MAIL IT IS RECOMMENDED
THAT SUCH CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE
ALLOWED TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT OR RADYNE COMSTREAM AND
CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., NEW YORK TIME, ON THE EXPIRATION DATE.
BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR, RIGHTS HOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY
MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
[Because the cost of qualifying the Common Stock for sale in the State of
California would have been disproportionately high as compared to the expected
proceeds of such sales, the Common Stock has not been so qualified. Accordingly
subscriptions cannot be accepted from residents of California.]
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by Radyne Comstream, whose
determinations will be final and
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binding. Radyne Comstream, in its sole discretion, may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as Radyne Comstream
determines in its sole discretion. NEITHER RADYNE COMSTREAM NOR THE SUBSCRIPTION
AGENT WILL BE UNDER ANY DUTY TO GIVE NOTIFICATION OF ANY DEFECT OR IRREGULARITY
IN CONNECTION WITH THE SUBMISSION OF SUBSCRIPTION CERTIFICATES OR INCUR ANY
LIABILITY FOR FAILURE TO GIVE SUCH NOTIFICATION.
Any questions or requests for assistance concerning the method of
exercising Rights or requests for additional copies of this Prospectus or the
Notice of Guaranteed Delivery should be directed to Radyne Comstream at 3138
East Elwood Street, Phoenix, Arizona 85034, Attention: Director of
Administration, telephone: (602) 437-9620.
NO REVOCATION
ONCE A HOLDER OF RIGHTS HAS EXERCISED THOSE RIGHTS, SUCH EXERCISE MAY NOT
BE REVOKED.
FRACTIONAL SHARES
Fractional Rights will not be distributed by Radyne Comstream and a Right
may not be exercised in part.
METHOD OF TRANSFERRING SHAREHOLDER RIGHTS
The Shareholder Rights evidenced by a single Subscription Certificate may
be transferred in whole by endorsing the Subscription Certificate for transfer
in accordance with the accompanying instructions. A portion of the Rights
evidenced by a single Subscription Certificate may be transferred (but only in
units to purchase whole shares) by delivering to the Subscription Agent a
Subscription Certificate properly endorsed for transfer, with instructions to
register such portion of the Rights in the name of the transferee (and to issue
a new Subscription Certificate to the transferee evidencing such transferred
Rights). In such event, a new Subscription Certificate evidencing the balance of
the Rights will be issued to the holder of the Rights or, if the holder of the
Rights so instructs, to an additional transferee.
Holders of Rights wishing to transfer all or a portion of their Rights
(but only in units to purchase whole shares) should allow a sufficient amount of
time prior to the Expiration Date for (i) the transfer instructions to be
received and processed by the Subscription Agent, (ii) a new Subscription
Certificate to be issued and transmitted to the transferee or transferees with
respect to transferred Rights, and to the transferor with respect to retained
Rights, if any, and (iii) the Rights evidenced by such new Subscription
Certificates to be exercised or sold by the recipients thereof. If time does not
permit a transferee of a Right who wishes to exercise its Right to deliver
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<PAGE>
its Subscription Certificate to the Subscription Agent on or before the
Expiration Date, such transferee should make use of the Guaranteed Delivery
Procedure described under "Exercise of Rights" above. Neither Radyne Comstream
nor the Subscription Agent shall have any liability to a transferee or
transferor of Rights if Subscription Certificates or new Subscription
Certificates are not received in time for exercise or sale prior to the
Expiration Date.
It is not anticipated that a market will be made in the Rights or that
they will be traded on any exchange. There is no assurance that any market will
develop for the Rights. In any event, trading in the Rights will cease at the
close of business on the business day preceding the Expiration Date. [Because
subscriptions cannot be accepted from residents of California, Rights may not be
transferred to such residents.]
FEES AND EXPENSES
Except for the fees charged by the Subscription Agent (which will be paid
by Radyne Comstream as described below), all commissions, fees and other
expenses (including brokerage commissions and transfer taxes) incurred in
connection with the purchase or sale of Rights will be for the account of the
transferor of the Rights, and none of such commissions, fees or expenses will be
paid by Radyne Comstream or the Subscription Agent.
All fees and other expenses incurred in connection with the exercise of
Rights will be for the account of the holder of such Rights, and none of such
fees or expenses will be paid by Radyne Comstream or the Subscription Agent.
SUBSCRIPTION AGENT
Radyne Comstream has appointed Continental Stock Transfer & Trust Company
as Subscription Agent for this offering. The Subscription Agent's address, which
is its address to which the Subscription Certificates and payment of the
Subscription Price must be delivered, as well as the address to which Notice of
Guaranteed Delivery must be delivered, is:
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
(212) 509-4000
Subscription Price payments received by the Subscription Agent will be
held thereby, pending the application or return of such payments in accordance
with the terms of this offering.
Radyne Comstream will pay the Subscription Agent reasonable and customary
compensation for its services in connection with this offering and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
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THE BOARD OF DIRECTORS OF RADYNE COMSTREAM MAKES NO RECOMMENDATION TO
HOLDERS OF RIGHTS WITH RESPECT TO WHETHER A HOLDER OF RIGHTS SHOULD EXERCISE
RIGHTS TO PURCHASE SHARES OF COMMON STOCK OR TO INVESTORS WITH RESPECT TO
WHETHER AN INVESTOR SHOULD PURCHASE SHARES OF COMMON STOCK, OR TO PERSONS WITH
RESPECT TO WHETHER A PERSON SHOULD PURCHASE RIGHTS.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Dorsey & Whitney LLP, counsel to Radyne Comstream, the
following are the federal income tax consequences of the Rights Offering that
are likely to be material to the holders of the Rights (other than certain
holders of the Rights described in the following paragraph) upon the issuance,
exercise, transfer and lapse of the Rights.
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), the Treasury Regulations promulgated thereunder, judicial
authority and current administrative rulings and practice, all of which are
subject to change on a prospective or retroactive basis, and on the accuracy of
certain representations of Radyne Comstream. The tax consequences of this
offering under state, local and foreign law are not discussed. Moreover, special
considerations not described herein may apply to certain taxpayers, such as
financial institutions, broker-dealers, life insurance companies, regulated
investment companies, foreign entities, individuals who are not citizens or
residents of the United States for federal income tax purposes, tax-exempt
organizations or accounts and corporations affiliated with Radyne Comstream. The
discussion is limited to those who have held the Common Stock, and will hold the
Rights and any Common Stock acquired upon the exercise of Rights as capital
assets (generally, property held for investment) within the meaning of Section
1221 of the Code.
ISSUANCE OF THE RIGHTS. Holders of Common Stock will not recognize taxable
income for federal income tax purposes in connection with the receipt of the
Rights.
BASIS AND HOLDING PERIOD OF THE RIGHTS. If either (i) the fair market
value of the Rights on the date of distribution is equal to 15% or more of the
fair market value (on such date) of the Common Stock with respect to which they
are received or (ii) the shareholder properly elects, in the shareholder's
federal income tax return for the taxable year in which the Rights are received,
to allocate part of the basis of such Common Stock to the Rights, then upon
exercise or transfer of the Rights, the shareholder's basis in such Common Stock
will be allocated between the Common Stock and the Rights exercised or
transferred in proportion to the fair market values of each on the date of
distribution. Except as provided in the preceding sentence, the basis of the
Rights received by a shareholder as a distribution with respect to such
shareholder's Common Stock will be zero.
The holding period of a shareholder with respect to the Rights received as
a distribution on such shareholder's Common Stock will include the shareholder's
holding period for the Common Stock with respect to which the Rights were
issued.
In the case of a purchaser of Rights, the tax basis of such Rights will be
equal to the purchase price paid therefor, and the holding period for such
Rights will commence on the day following the date of the purchase.
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TRANSFER OF THE RIGHTS. A shareholder who sells the Rights prior to
exercise will recognize gain or loss equal to the difference between the amount
realized from the sale and such shareholder's basis (if any) in the Rights sold.
Such gain or loss will be capital gain or loss if gain or loss from a sale of
the underlying Rights Shares would be characterized as capital gain or loss at
the time of such sale. Any gain or loss recognized on a sale of Rights acquired
by purchase will be capital gain or loss if the underlying Rights Shares would
be a capital asset in the hands of the seller.
LAPSE OF THE RIGHTS. Shareholders who allow the Rights received by them to
lapse will not recognize any gain or loss, and no adjustment will be made to the
basis of the Common Stock, if any, owned by such shareholders.
Purchasers of the Rights will be entitled to a loss equal to their tax
basis in the Rights, if such Rights expire unexercised. Any loss recognized on
the expiration of the Rights acquired by purchase will be a capital loss if the
underlying Rights Shares would be a capital asset in the hands of the purchaser.
EXERCISE OF THE SHAREHOLDER RIGHTS; BASIS AND HOLDING PERIOD OF COMMON
STOCK. Holders of Rights will not recognize any gain or loss upon the exercise
of Rights. The basis of the Common Stock acquired through exercise of the Rights
will be equal to the sum of the Subscription Price paid therefor and the
holder's basis in such Rights (if any).
The holding period for the Common Stock acquired through exercise of the
Rights will begin on the date the Rights are exercised.
INFORMATION REPORTING AND WITHHOLDING
Under the backup withholding rules of the Code, a holder of the Rights may
be subject to backup withholding at the rate of 31 percent with respect to
payments made pursuant to this offering, unless such Rights holder (i) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (ii) provides a correct taxpayer identification
number and certifies under penalties of perjury that the taxpayer identification
number is correct and that the holder of Rights is not subject to backup
withholding because of a failure to report all dividends and interest income.
Any amount withheld under these rules will be credited against such person's
federal income tax liability. Radyne Comstream may require holders of the Rights
to establish exemption from backup withholding or to make arrangements
satisfactory to Radyne Comstream with respect to the payment of backup
withholding.
THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH HOLDER IS URGED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR
WITH RESPECT TO THE TAX CONSEQUENCES OF THE RIGHTS OFFERING APPLICABLE TO HIS OR
HER OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF
FEDERAL, STATE AND LOCAL INCOME AND OTHER TAX LAWS.
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PRICE RANGE OF COMMON STOCK
Radyne Comstream's Common Stock is traded in the over-the-counter market
under the OTC Bulletin Board symbol "RADN". However, there is no established
trading market as actual transactions are infrequent. The following table sets
forth the range of high and low trading prices as reported by the National
Quotation Bureau, Inc. for the periods indicated. At December 31, 1998, Radyne
Comstream had approximately 448 shareholders of record. Radyne Comstream
believes that the number of beneficial owners is actually in excess of 1,600,
due to the fact that a large number of shares are held in street name.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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
</TABLE>
On January 5, 1999 the last sale price of the Common Stock as reported by
the OTC Bulletin Board was $3-3/8 per share.
DIVIDEND POLICY
Radyne Comstream has not paid dividends on the Common Stock since
inception and does not intend to pay any dividends to its stockholders in the
foreseeable future. Radyne Comstream currently intends to reinvest earnings, if
any, in the development and expansion of its business. The declaration of
dividends in the future will be at the election of the Board of Directors and
will depend upon the earnings, capital requirements and financial position of
Radyne Comstream, general economic conditions and other pertinent factors.
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BUSINESS
Radyne Comstream has engaged in the advanced design and production of
digital data communications equipment for satellite telecommunications systems
for over seventeen years. Since Radyne Comstream's inception in 1980, it has
established itself as a supplier in the satellite ground equipment business. We
design, manufacture and sell satellite modems and earth stations, satellite
broadcast receivers, frequency converters, ancillary products and equipment
racks containing integrated modems and supporting equipment for data, audio, and
TV communications.
Radyne Corp. was forced to file for Chapter 11 bankruptcy protection in
April 1994. It successfully emerged from bankruptcy in December 1994 upon the
acquisition of approximately 91% of its Common Stock by Engineering and
Technical Services, Inc., then a major customer. On August 12, 1996, ETS was
acquired by Singapore Technologies Pte Ltd through its indirect wholly owned
subsidiary, Stetsys US, Inc. As a result, approximately 91% of Radyne
Comstream's Common Stock is now held by ST.
In 1995, Radyne Corp. installed a new management team, which moved Radyne
Comstream's operations from New York to Phoenix, Arizona. As part of this
management change, we hired an almost all new staff of engineering, sales and
support personnel.
Consistent with our new growth strategy, Radyne Corp. recently acquired
Comstream Holdings, Inc. from Spar Aerospace Limited, a Canadian advanced
technology company. Comstream is an international provider of digital
transmission solutions for voice, data, audio and video applications with
offices in the United States, Singapore, Indonesia, China and the United
Kingdom. Revenues of Comstream for 1998 were approximately $37 million. We
acquired Comstream in an effort to expand our core business, supplement our
product lines and take advantage of Comstream's trademarks and distribution
channels, and based on our belief that the combined companies could compete more
effectively and realize certain synergies. We believe that Radyne's acquisition
of Comstream will have a number of positive effects, including the following:
1. The combined annual revenues of Radyne Comstream should be in the
$50 million range versus Radyne's stand-alone revenues of $16 million. This
dramatic difference in size should provide us with better control over prices
and margins and enable us to compete in larger markets. It should also
increase the likelihood that our Common Stock can be qualified for trading on
Nasdaq.
2. We also anticipate the combination to produce a synergistic effect in
light of Radyne's newer product lines and Comstream's superior worldwide sales
channels. We expect the introduction of newer and more numerous products into
the Comstream distribution channels to register positive effects commencing in
the current calendar quarter. We also expect
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positive results from the Comstream employee sales force as compared to Radyne's
historic reliance on independent sales representatives.
3. While we viewed Comstream's gross margins as excellent, its
profitability had suffered from extremely high expense levels. Since closing the
acquisition in October, we have reduced Comstream's recurring expenses by almost
$1,000,000 per month. We expect continued efficiencies and product
rationalization to result in still more cost savings.
The new Radyne Comstream has an expanded product line and a worldwide
sales and service organization with international offices in Beijing, Singapore,
London, Moscow, Jakarta, Rio de Janeiro and Amsterdam.
Radyne Comstream is currently addressing four markets/businesses as
follows:
- Satellite Modems and Earth Stations, including Intelsat equipment
- Data, Audio, and Video Broadcast Equipment
- Digital Video and High Speed Modems
- Military and Government Data Modems
OPERATING STRATEGY
Radyne Comstream's operating strategy is to:
- continue to build on the experience, skills and customer access of
its management team;
- maintain a strong international position in the earth station
business and capitalize on its dominant position of supplying
satellite broadcast receivers, including entering the Internet
provider business with a new personal computer receiver card;
- continue to find new niche military and government markets;
- complete the integration and rationalization of Comstream and Radyne
Corp. so as to maximize cost savings and the benefits of Comstream's
product lines and sales channels; and
- expand into new market segments, such as Internet communications,
rural telephone, private networks, government networks and
compressed television transmission. See "Target Markets" below.
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Radyne Comstream's engineering staff and support facilities are dedicated
to:
- maintaining the state-of-the-art status of Radyne Comstream's
traditional products for the satellite ground equipment segment of
the market;
- designing and enhancing products for emerging markets, such as
Internet communications rural telephony for developing areas,
high-speed satellite communications, government data equipment and
the growing private network market; and
- providing special configurations to satisfy customers' individual
needs.
Radyne Comstream has already shipped commercial volumes of its products
for rural telephony and private network applications and has shipped units to
one government data equipment customer. Radyne Comstream has a contract with one
of the world's largest telephone and data service providers to develop a new
line of satellite modems with a higher frequency (L-Band) interface which will
be used to replace aging equipment in existing earth stations. This equipment
will be designed to substantially reduce the space and power requirements in
these earth stations, as well as improve reliability and permit lower cost of
maintenance. It is believed this equipment will be the future standard for major
earth stations.
Radyne Comstream believes we are one of the largest suppliers of satellite
broadcast receivers for data and audio, with an installed base of more than
75,000 receivers. Broadcast receivers are used to receive financial data, audio
and video. We have also supplied more than 1,000,000 set-top television
receivers on an original equipment manufacturer (OEM) basis. We also have a line
of satellite receivers used in PCs to receive Internet information and private
network data. Radyne Comstream has an agreement with Panasonic for the
development of the next generation set-top box that can be used for satellite
reception or for cable reception.
Radyne Comstream's modems cover a large range of data rates from 2.4
kilobytes per second to 155 megabytes per second. The range of uses include data
and audio to telephony and High Definition TV. Our frequency converters handle
most of the frequency bands used in satellite communications. We believe that
most of our current line of modems and converters are smaller and lower priced
than the previous generation of products, enabling large system installation in
significantly less rack space than the products of Radyne Comstream's
competitors. We also market redundancy switches which operate in conjunction
with satellite modems and converters and provide automatic fault monitoring. In
the event of a failure, the standby equipment takes over.
Radyne Comstream's line of frequency converter products can be used in
many types of earth stations to convert intermediate frequencies into microwave
frequencies for satellite transmission. These converters are competitively
priced, small in size and accommodate either single or dual bands used in the
satellite industry.
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Radyne Comstream manufactures a line of small earth stations that are used
worldwide for private phone and data systems. The earth stations operate in both
C-Band and Ku-Band, the most widely used frequencies for satellite transmission.
We have recently begun shipping a new lower cost earth station using an L-Band
interface.
Radyne Comstream's newer products include a low cost modem with expanded
features and small size, making it attractive for use in both private networks
and rural telephone systems offered in China, Indonesia and India. Radyne
Comstream also manufactures a line of satellite frequency translators presently
used for testing in satellite earth stations.
The development of digital compression technology has allowed the
transmission of television in a small bandwidth, which has made TV transmission
by satellite more economical than ever before. Video compression allows many
times more channels on a satellite than was previously the case, thus producing
a new market of major interest. This compression technology is used for
transmission of TV to network facilities and homes, distribution of cable TV to
cable companies, high definition TV distribution and video teleconferencing.
Radyne Comstream has developed a modulator and demodulator product to be used in
conjunction with compression equipment and has been shipping this product for
the past two and one-half years.
Radyne Comstream has developed a line of modems used in government and
defense systems. This equipment is interoperable with certain existing
equipment. The equipment being replaced is expensive and/or no longer being
manufactured. We have received two major orders for this equipment in the past 6
months.
Notwithstanding the foregoing, investors should be aware that Radyne
Comstream's future plans are subject to a number of variables outside of its
control, and there can be no assurance that Radyne Comstream will be able to
implement any or all of such plans or that such plans, when and if implemented,
will be successful. See "Risk Factors."
INDUSTRY OVERVIEW
There are more than 190 major commercial communications satellites in
orbit today, almost 60 of which were launched in the past two years . Over 65
more of these expensive geosynchronous earth orbiting satellites (GEO's) are on
order. (Source: VIA SATELLITE , July 1998). The ways in which satellites are
used continue to shift over time. The principal uses today are for television
distribution, international telephone service, data and audio broadcasting,
Internet service and private networks. As more fiber cables are laid under the
oceans, the use of satellites for international telephony is slowing. However,
satellites represent a sizable investment and a unique communications medium
which will continue to be used in other ways. For example, the use of this
satellite resource is already shifting towards domestic telephony in countries,
such as China and India, which are seriously lacking in infrastructure. In
addition, technological advances, such as voice compression, have made it
economical for third world countries to have more telephone service. Moreover,
television distribution is going
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through a technology revolution in which ten times as many programs can be
transmitted through satellites than was possible 5 years ago. A typical
satellite can deliver 250 or more channels today compared to 24 channels before.
This technological and economical breakthrough has created many new markets. For
example, it is now cost-effective for many relatively small market segments to
have their own TV networks (such as we are now seeing with regional college
sports). Satellites are an ideal medium to distribute High Definition TV (HDTV).
Finally, the lowering of international barriers and privatization are allowing
the expansion of more private networks.
Almost anyone who uses a satellite as a transmission path has the need for
equipment of the sort produced by Radyne Comstream. Radyne Comstream expects to
continue operating within the satellite ground equipment segment of the market
for the next several years, while continuing to expand into various new markets.
For example, additional needs for Internet service, new data broadcast
requirements, and communications directly to computers are new areas of
interest. Although the telecommunications industry is rapidly changing, becoming
more complex and requiring new technology, we do not expect the transformation
and evolution of the industry to cause satellite data equipment to become
obsolete, at least within the near future.
INDUSTRY TRENDS
Several major trends in the telecommunications industry should provide
opportunities for Radyne Comstream.
- Telecommunications needs in the Pacific Rim, South America, and the
Eastern European countries and an increase in the number of
satellites orbiting over the Pacific and Indian Oceans will produce
a substantial need for satellite data communications equipment.
- The requirement for increased dissemination of financial data
increases the requirements for broadcast receivers.
- If the United States defense budget continues to shrink, more NDIs
(non-developmental items) and COTS (commercial off-the-shelf
products) may be purchased from suppliers, such as Radyne Comstream,
who can offer these products for much less than the government would
pay to develop or produce the products. Radyne Comstream anticipates
being able to and has already begun to supply commercial versions of
military equipment.
- As digital television and HDTV (high-definition television) becomes
available, the need for satellite equipment for distribution to
cable companies and homes will increase.
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SATELLITE MODEMS AND EARTH STATIONS
Satellite communication has been established as a key element in the
growth of the telecommunications industry. Although the emergence of fiber
cable, which is preferred for certain applications, has created competition
for satellite communications, satellite communications enjoy advantages in
many markets for several reasons. First, it is not cost-effective to utilize
fiber cable in all areas of the world, especially emerging countries where
telecommunications capabilities are just beginning to develop. Second,
although fiber cable has performance advantages, it has a tendency to break,
resulting in the need for satellite capabilities as a back-up. Third, fiber
cable is utilized mainly for point-to-point communications. Satellite
transmission, on the other hand, is superior for distribution communications,
for example, distribution of financial market information or video
broadcasting on major television networks. Thus, although fiber cable can be
viewed as a competitor of satellite communications, it has not historically
reduced, nor is it anticipated to reduce, the need for satellite modem
equipment. Moreover, there should be "niche" requirements that can be
satisfied only with satellite communications for a long time to come.
(Source: SATELLITE COMMUNICATIONS, September 1996). For example, it is not
cost effective to lay fiber cable in mountainous terrain or in nations
composed of many islands, a geographical feature which is relatively common
in the Pacific. Sparsely populated areas are generally not suited to fiber
cable on a cost-effective basis. Moreover fiber cable is not suitable for
portable communications, such as PCS (personal communications systems), news
gathering, emergency services and other mobile communication requirements.
Rural telephony and private network DAMA (Demand Assigned and Multiple
Access) products require special communications equipment which is efficient
for low traffic volume at many different locations. DAMA products allow many
users to access the same channel on demand. Radyne Comstream serves the DAMA
products segment of the market with its DMD-2401 modem. he DMD-2401 can be
utilized in both rural telephony and private network systems. Rural telephony
can be described as an intra-country telecommunications network linking many
small villages or islands in a country like the Philippines, for example,
ultimately allowing the villages to communicate with each other and with the
world. A private network can be described as a network in the commercial
world. For example, banks and other financial institutions, airlines, and
large and multi-unit corporations all have the need for satellite
communications and may be linked via private networks.
Radyne Comstream has developed the new DMD-2401 VSAT/SCPC Modem, which
has enhanced features, to compliment the DMD-2401 products and to address
other user requirements. Radyne Comstream sells its DAMA/VSAT compatible
products to system integrators (customers who make a business of supplying
turnkey earth station operations for their customers), domestically and
abroad, as components of systems that they have designed, as well as directly
to end users. Radyne Comstream offers these products for sale on a global
basis and believes their use to be global.
The RCS-10 represents the newest generation system used in major earth
stations which combines modems and redundancy switching in a single unit. Up
to 30 modems can be
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combined in a single rack and each redundancy switch can control up to 10
modems. The compact design which eliminates more than 1500 parts and cables from
prior systems, offers improved reliability and rapid installation. In addition
to an expanded data rate range (9.6 Kbps to 8.448 Mbps) the RCS-10 offers an
improved display and menu structure and more options. The newest version, being
developed under contract from a major international communications supplier, is
the RCS-1OL. The RCS-10L is a version with an L-Band interface, allowing
substantially lower power consumption. In addition the L-Band interface has a
500MHz bandwidth instead of the usual 36 MHZ bandwidth, requiring over 60% fewer
earth station frequency converters.
The CM7O1 modem has been the workhorse of the industry for 8 years. The
CM-701 is used in Intelsat applications, digital video and small earth station
applications. It has a unique multi-slot modular bus architecture that supports
a wide range of configurations, including full duplex, simplex and combination
operations. In its basic mode of a full duplex system, the CM701 supports three
data rate ranges with multiple forward error correction rates, which reduces the
power required from the satellite. At each of these different rates, either
Intelsat, digital video broadcast ("DVB") or proprietary operational modes are
supported.
Additional options for the CM701 family include a 70 MHZ single-card
modem, an L-Band single-card modem, an L-Band demodulator, a satellite control
channel, Intelsat framer for intermediate data rate and Intelsat business
services operation, burst modulation operation, doppler buffer, special
modulator FEC rates and multiple input/output modules.
The DMD-2401, DMD-2401L, and DMD-2401VME are the latest modems satisfying
the requirements of the Intelsat, private networks, and VSAT DAMA requirements.
The DMD-2401 line of equipment is the latest design featuring small size and low
cost. The DMD-2401 line allow the use of the latest and best forward error
correction and can support all interfaces necessary to work in any system today.
Radyne Comstream offers 3 different earth stations. The DT-7000 is
primarily used for C-Band applications. The DMD-2401 LB/ST is a low cost version
that can be used in either the C-Band or Ku-Band applications. The newest
version, the DT-8000, is used in Ku-Band applications. The DT-8000 has an
optional feature to provide signal leveling to meet the latest market
requirements. Radyne Comstream's earth stations provide a high performance
solution for data, voice, facsimile and video conferencing applications.
Radyne Comstream also has a complete line of synthesized frequency up
converters and down converters. Radyne Comstream also offers a full line of loop
test translators, including C-Band, Ku-Band, X-Band and Tri-Band models. These
are self contained frequency converters which perform transmit to receive
loopback testing of earth station equipment.
Augmenting these product offerings is the Star Network Management System
("SNMS"). SNMS is a graphical user interface based network management platform,
which provides for the monitoring and control of an entire network of modems,
earth stations, and ancillary equipment from a single location. It provides
local and remote modem management,
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control of the equipment connected to the modems and earth stations (such as
multiplexers), collection of network status and alarm information, remote
channel monitoring and dial-up control.
DATA, AUDIO AND VIDEO BROADCAST PRODUCTS
Radyne Comstream is one of the world's largest suppliers of satellite
broadcast receivers and associated equipment for data and audio, having
manufactured more than 75,000 units. Satellites are an ideal transmission medium
for broadcast services with a single satellite having the ability to communicate
with ground locations spread across one-third of the surface of the earth. We
have long-term agreements with major users such as Reuters News Service. The
equipment is used to provide music and other audio services as well as the
distribution of financial data and other digital services. The new DBR-202
receiver is a low cost platform handling audio, data, Internet Protocol (IP)
data, and MPEG video and audio.
There is an emerging market to provide data and video directly to the
personal computer. Towards that end, Radyne Comstream has developed a very low
cost receiver card for use in the PC. The card has successfully passed trials in
a private network, resulting in an order for 2,000 cards and further orders
expected.
Our data broadcast networks consist of a single data uplink (full-size or
mini-hub), multiple receivers and the Network Management System for security,
monitoring and control. The receivers can be configured for C-band and Ku-band
transmissions and can be located anywhere within the footprint of a satellite.
The variable rate commercial data receiver (DBR4O1VR) provides a low-cost
alternative for transmitting data across a wide range of data rates. Our DBR8O1
high speed receiver is an ideal solution for high speed transmission of digital
audio, video or data.
Radyne Comstream is currently designing a new fourth generation set-top
box for Panasonic, which will feature open TV requirements and new conditional
access requirements. Conditional access is the name for the security system
which only allows subscribers to access the service. The new design will be
usable for direct to home TV service or as a cable converter box. Revenue is
expected to be realized through an agreement on royalties.
DIGITAL VIDEO AND HIGH SPEED MODEMS
Compressed digital video is the latest frontier in satellite
communications technology. Several aspects of this market are of particular
interest to Radyne Comstream:
- Television broadcasters have requirements for efficient and economic
distribution.
- Compressed video encoding and decoding are available for the less
demanding business video teleconferencing and distance learning
markets.
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- Expanding Internet usage should produce demand for high speed
satellite transmission for connecting to the Internet. International
connections are relayed to the United States by satellite. The
economics of the new compressed video allow the use of satellite
transmission for long-distance teaching applications.
- There is an emerging application for digital cinema distribution. As
movie theaters get smaller and thereby proliferate, the costs of
making and distributing copies of films becomes proportionally
greater. Using satellite distribution, movies can be distributed
directly to thousands of theaters simultaneously. We expect the
digital cinema market to become substantial over the next five
years.
Radyne Comstream has entered the high-speed satellite communications
market with various products that have been designed to incorporate the most
advanced technologies available. Communications equipment in this segment
possesses higher data rate capabilities of approximately 12-155 megabits per
second, allowing much more data to be transmitted.
The DD-45 and DM-45 is a multi-purpose solution for digital video
broadcast and high speed data transmission for use in, among other things, cable
system backup/restoral-over-satellite and high data rate links.
Radyne Comstream's newest high-speed entrants are the DM-160 and MM-160
that offer an excellent solution for high data rate requirements, such as High
Definition Television and to increase the number of television channels that can
be transmitted by satellite. Also, our new MM-155 Microwave Modem is ideal for
microwave links in news gathering requirements.
The DVB-3030 Digital Video Broadcast (DVB) modulators are flexible and
programmable, offering full compatibility with digital video standards. Their
principal applications are for digital video hub uplinks, mobile satellite news
gathering, video distribution and one-way data distribution. They are also high
speed and frequency agile and, thus, ideal for use in digital video hub uplinks,
flyaway and mobile satellite news gathering applications.
GOVERNMENT AND MILITARY MODEMS
Additionally, the United States Government has provided a significant
market opportunity for Radyne Comstream as the defense budget shrinks and it
becomes cost prohibitive for the government to develop its own products. Because
of the expected growth in commercial off-the-shelf (COTS) and non-developmental
item (NDI) procurement, Radyne Comstream has targeted the US Government as an
important revenue source. Radyne Comstream has an agreement with a major
government supplier and has recently been awarded a contract to provide a modem
for use in the Special Forces Terminal for the US Army. Additionally, we have
also been awarded a contract from Datapath to provide modems that interoperate
with other Army modems.
Radyne Comstream is currently supplying two different modems and is
working on a third requirement. The DMD-15G/FM is a universal modem used in the
US Army Special
-34-
<PAGE>
Forces Terminal used in support of military operations. This modem interoperates
with military equipment that can no longer be procured by the military because
of price and age. A second modem is the DMD-15G which interoperates with
thousands of military modems that are deployed throughout the world and operate
within the defense communication system (DCS), perhaps the largest phone system
in the world.
MANUFACTURING
Radyne Comstream's products are to a certain extent assembled and tested
at its Phoenix, Arizona and San Diego, California facilities using subsystems
and circuit boards supplied by subcontractors. Some products are completely
assembled and tested at subcontractors, including subcontractors in Thailand and
in Wales, UK. Although Radyne Comstream believes that it maintains adequate
stock to reduce the procurement lead time for certain components, Radyne
Comstream's products use a number of specialized chips and customized components
or subassemblies produced by a limited number of suppliers. In the event that
such suppliers were to be unable or unwilling to fulfill Radyne Comstream's
requirements, Radyne Comstream could experience an interruption in production
until an alternative source of supply was developed. Radyne Comstream maintains
an inventory of certain chips and components and subassemblies to limit the
potential for such an interruption. Radyne Comstream believes that there are a
number of companies capable of providing replacements for the types of unique
chips and customized components and subassemblies used in its products.
SALES AND MARKETING
Radyne Comstream sells its products through an international sales force
with sales and/or service offices in San Diego, Phoenix, Boca Raton, Beijing,
Singapore, London and Jakarta. Additionally, international representatives,
distributors and systems integrators sell our products supported by Radyne
Comstream's sales and marketing personnel.
Radyne Comstream's direct sales force is comprised of 14 individuals
supported by systems and applications engineers. Direct sales activities are
focused on expanding Radyne Comstream's international sales by identifying
emerging markets and establishing new customer accounts. Additionally, Radyne
Comstream directly targets certain major accounts which may provide entry into
new markets or lead to subsequent distribution arrangements. Such major accounts
tend to be telecommunications agencies and major corporations in new
international markets. Radyne Comstream has a customer service and support
group, which primarily supports customers and distributors and is responsible
for after-sale support and installation supervision. In certain instances Radyne
Comstream uses third party companies for installation and maintenance.
-35-
<PAGE>
On a pro forma basis, Reuters News Service accounted for 9% of Radyne
Comstream's sales for the year ended December 31, 1997 and 10% for the nine
months ended September 30, 1998. No other customer represented more than 10% of
Radyne Comstream's sales for those periods.
Radyne Comstream's sales in its principal foreign markets for the periods
indicated consisted of the following percentages of total sales.
<TABLE>
<CAPTION>
REGION NINE MONTHS YEAR ENDED
- ------ ENDED 9-30-98 12-31-97
------------- --------
<S> <C> <C>
Asia 20% 30%
Latin America 13% 11%
Europe, Africa and
Middle East 29% 23%
</TABLE>
On a pro forma basis, export sales, as a percentage of total net sales,
were approximately 62% for the nine months ended September 30, 1998 and
approximately 64% for the fiscal year ended December 31, 1997. Radyne
Comstream believes that this figure may rise in subsequent periods. Radyne
Comstream considers its ability to continue to make sales in developing
markets to be important to its growth potential. However, Radyne Comstream
may not succeed in its efforts to cultivate such markets.
RESEARCH AND DEVELOPMENT
Radyne Comstream's research and development efforts to date have been
devoted to the design and development of new products for the satellite
communications and telecommunications industries. Radyne Comstream's future
growth depends on increasing the market shares of its new products, adaptation
of its existing satellite communications products to new applications, and the
introduction of new communications products that will find market acceptance and
benefit from Radyne Comstream's established international distribution channels.
Accordingly, Radyne Comstream is actively applying its communications expertise
to design and develop new hardware and software products and enhance existing
products. However, there is no assurance that Radyne Comstream will continue to
have access to sufficient capital to fund the necessary research and development
or that such efforts, even if adequately funded, will prove successful.
Research and development expenses, on a proforma basis, amounted to
$9,172,000 in the nine months ended September 30, 1998 and $10,529,000 in the
year ended December 31, 1997. During this period a number of new products were
either launched or reached an advanced stage of development.
-36-
<PAGE>
In connection with the acquisition of Comstream, the Company expects to
record a one-time charge of approximately $4.2 million, which represents the
value assigned to purchased in-process research and development.
COMPETITION
The Satellite Industry Association estimates the global market for
satellite ground communications equipment to be in excess of $11 billion per
annum. Radyne Comstream estimates that its addressable markets are in excess of
$350 million.
Radyne Comstream has a number of major competitors in the satellite
communications field. These include large companies, such as Hughes Network
Systems, NEC and the EFData division of California Microwave, which have
significantly larger and more diversified operations and greater financial,
marketing, human and other resources than Radyne Comstream. Radyne Comstream
estimates that the major competitors in the main markets in which it operates
have the following market shares as compared to Radyne Comstream's share:
<TABLE>
<CAPTION>
SATELLITE
MODEMS & DATA & AUDIO DIGITAL VIDEO & GOV'T & MILITARY
COMPETITOR EARTH STATIONS BROADCAST HIGH SPEED MODEMS
- ---------- -------------- --------- ---------- ------
<S> <C> <C> <C> <C>
California
Microwave/EF Data 33% 25% 15%
Hughes Network
Systems 10%
SSE Telecom 5% 10%
NEC 20%
Wegener 15%
IDC 15%
Radyne Comstream 15% 30% 20% 15%
</TABLE>
We do not believe that any other single competitor has a greater than 10%
market share for any of these product classes. However, the foregoing market
share figures represent estimates based on the limited information available to
us, and there can be no assurance of precision.
We believe that we have been able to compete by concentrating our sales
efforts in the international market, utilizing the resources of local
distributors, and by emphasizing product features. However, most of Radyne
Comstream's competitors offer products which have one or more features or
functions similar to those offered by Radyne Comstream. Radyne Comstream
believes that the quality, performance and capabilities of its products, its
ability to customize certain network functions and the relatively lower overall
cost of its products, as compared to the costs generally offered by Radyne
Comstream's major competitors, have contributed to Radyne Comstream's ability to
compete successfully. However, Radyne Comstream's major competitors have the
resources available to develop products with features and functions competitive
with those offered by Radyne Comstream. There can be no assurance that such
-37-
<PAGE>
competitors will not successfully develop such products or that Radyne Comstream
will be able to maintain a lower cost advantage for its products. Moreover,
there can be no assurance that Radyne Comstream will not experience increased
competition in the future from these or other competitors currently unknown.
EMPLOYEES
As of December 15, 1998, Radyne Comstream had 205 full time employees,
including 7 executive officers, 180 in engineering, manufacturing and marketing
operations, and 18 in administration. None of Radyne Comstream's employees are
represented by a union or governed by a collective bargaining agreement, and
Radyne Comstream believes that its relationships with its employees are
satisfactory.
TECHNOLOGY
In general, Radyne Comstream believes that improvement of existing
products, reliance upon trade secrets, copyrights and unpatented proprietary
know-how and the development of new products are generally as important as
patent protection in establishing and maintaining a competitive advantage.
Because patents often provide only narrow protection which may not provide a
competitive advantage in areas of rapid technological change and because patent
applications require public disclosure of information which may otherwise be
subject to trade secret protection, Radyne Comstream has been cautious in
obtaining patents on existing products. Radyne Comstream has a number of
patents, copyrights, and other intellectual property rights in the form of
software and integrated circuit designs. However, Radyne Comstream's technology
could be found to infringe upon the intellectual property of others. If Radyne
Comstream's technology should be found to impermissibly utilize the intellectual
property of others, our ability to utilize the technology could be materially
restricted or prohibited. In such event, Radyne Comstream might be required to
obtain licenses from third parties to utilize the patents or proprietary rights
of others. Any licenses required may not be obtainable on terms acceptable to
Radyne Comstream or at all. In addition, in such event, Radyne Comstream could
incur substantial costs in defending itself against infringement claims made by
third parties or in enforcing its own intellectual property rights.
FACILITIES
Radyne Comstream's primary facilities consist of a leased 76,000 square
foot lab, office and manufacturing facility in Phoenix, Arizona and a leased
66,400 square foot lab, office and manufacturing facility in San Diego,
California. The Company's plans include subleasing a certain amount of space in
both of these facilities until such time as the space is required for internal
use. These leases expire in September, 2008 and February, 2005 respectively, and
both leases provide options for renewal. The Company believes that these
facilities will provide for expected growth for the foreseeable future.
-38-
<PAGE>
Radyne Comstream also has regional sales offices in the U.K. Singapore,
Boca Raton, Florida, China and Indonesia and customer service centers in China,
the U.K. and Indonesia. All such facilities are leased.
LEGAL PROCEEDINGS
Radyne Comstream is a party to a lawsuit initiated by a former employee
seeking compensatory and punitive damages sustained as a result of his
termination by Radyne Comstream. The lawsuit alleges fraud, labor law
violations, breach of contract and breach of a covenant of good faith and fair
dealing. Radyne Comstream believes these claims to be without merit and plans to
defend against this lawsuit to the fullest extent of the law.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The following summary description of the Common Stock is qualified in its
entirety by reference to Radyne Comstream's Certificate of Incorporation.
Radyne Comstream is authorized to issue up to 20,000,000 shares of Common
Stock, par value $.002 per share, of which 5,931,346 shares are outstanding as
of the date hereof. Holders of Common Stock are entitled to one vote for each
share held of record on each matter submitted to a vote of stockholders. There
is no cumulative voting for election of directors. Holders of Common Stock are
entitled to receive dividends ratably when, as and if declared by the Board of
Directors out of funds legally available therefor and, upon the liquidation,
dissolution or winding up of Radyne Comstream, are entitled to share ratably in
all assets remaining after payment of liabilities. Holders of Common Stock have
no preemptive rights and have no rights to convert their Common Stock into any
other securities. The outstanding Common Stock is validly authorized and issued,
fully paid and nonassessable.
TRANSFER AGENT
Radyne Comstream has appointed Continental Stock Transfer & Trust Company
as transfer agent for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The sale, or availability for sale, of a substantial number of shares of
Common Stock in the public market subsequent to this offering pursuant to Rule
144 under the Securities Act ("Rule 144") or otherwise could materially
adversely affect the market price of the Common Stock and could impair Radyne
Comstream's ability to raise additional capital through the sale of its equity
securities or debt financing. Upon completion of the Rights Offering, if all
Rights are fully exercised, there would be approximately 10,676,422 shares of
Common Stock issued and outstanding. Of these shares, Radyne Comstream believes
that approximately 999,622
-39-
<PAGE>
would be freely transferable immediately. The remaining approximately 9,676,800
shares would be held by ST and would be eligible for resale, subject to the
volume and manner of sale limitations of Rule 144 under the Securities Act.
Up to an aggregate of 1,178,957 shares of Common Stock may be purchased by
the holders of options outstanding under the Plan. All of the shares issuable
upon exercise of such options are covered by a currently effective registration
statement on Form S-8. Of these options, 799,082 are presently exercisable and
the remaining 379,875 will become exercisable over the next three years. In
addition, up to 1,876,695 shares may be issued upon conversion of the note held
by Spar. If such shares are issued, Spar is entitled to certain registration
rights which would require Radyne Comstream to file a registration statement for
such shares. If all of the shares underlying the Spar note are registered by
Radyne Comstream and all of the shares issuable upon exercise of options under
the Plan are so issued, an additional 3,055,652 shares will be freely tradeable.
Prior to this offering, there has been no established public market for
Radyne Corp's securities as trading in the Common Stock has been infrequent.
Following this offering, Radyne Comstream cannot predict the effect, if any,
that sales of shares of Common Stock pursuant to Rule 144 or otherwise, or the
availability of such shares for sale, will have on the market price from time to
time. Nevertheless, sales by the current stockholders of a substantial number of
shares of Common Stock in the public market could materially adversely affect
market prices for the Common Stock. In addition, the availability for sale of a
substantial number of shares of Common Stock acquired through the exercise of
Rights or outstanding options under the Plan could materially adversely affect
market prices for the Common Stock.
LEGAL MATTERS
Certain legal matters will be passed upon for Radyne Comstream by Dorsey &
Whitney LLP, New York, New York.
EXPERTS
The annual financial statements of Radyne Corp. incorporated by reference
into this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing. In addition, the annual financial statements of
Comstream included in this prospectus were audited by Ernst & Young LLP,
independent auditors, and have been so included in reliance upon the report of
such firm given their authority as experts in accounting and auditing.
-40-
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the Prospectus Summary and under the captions "Risk
Factors," "Purpose of the Rights Offering and Use of Proceeds", "Business" and
elsewhere in this Prospectus constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements of Radyne Comstream, or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following general economic and business conditions: the loss of, or the
failure to replace, any significant customers; changes in business strategy or
development plans; the timing and success of new product introductions; the
quality of management; the availability, terms and deployment of capital; the
business abilities and judgments of personnel; the availability of qualified
personnel; and other factors referenced in this Prospectus. These
forward-looking statements speak only as of the date of this Prospectus. Radyne
Comstream expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained herein to
reflect any change in Radyne Comstream's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
-41-
<PAGE>
GLOSSARY
ACQUISITION
The process of a satellite demodulator synchronizing and properly decoding
a received satellite signal.
ALGORITHM
Formula used in digital signal processing.
ATM
Asynchronous Transfer Mode-Standard for asynchronous
transmission/reception of high speed digital signals on an asynchronous basis.
C-BAND
Standard satellite communications channel at 4 and 6 GHz (GigaHertz).
COMPRESSED DIGITAL VIDEO
The digitization and bandwidth reduction of a video signal.
DAMA
Demand Assigned Multiple Access-A control protocol and access method used
in satellite communications.
DATA RATE
The rate at which digital information is transmitted or received.
EARTH STATION
The facility containing all the necessary equipment for the transmission
and reception of satellite signals.
FREQUENCY CONVERTER
Converts an intermediate frequency signal to the high frequency signal
used by the satellite, and vice versa.
-42-
<PAGE>
FREQUENCY TRANSLATOR
Translates or converts one satellite frequency to another.
IBS
International Business Services-A standard specification for the
transmission of digital information at data rates below 2.048 Mbps.
IDR
Intermediate Data Rate-A standard specification for transmission of
digital information over the satellite at data rates above 1.544 Mbps.
KU-BAND
Standard satellite communications channels at 11 and 14 GHz.
MODEM
Modulator and demodulator-A device that converts signals produced by one
type of device (such as a satellite transponder) to a form compatible with
another (such as a computer).
MUX
Multiplexer-Digitally combines multiple digital data streams.
OPEN NETWORK
Satellite networks where all equipment meets the IBS or IDR
specifications. Allows use of equipment from any supplier, guaranteeing that all
equipment will be interoperable.
SCPC
Single channel per carrier.
VOICE COMPRESSION
Digitization and bandwidth reduction of a voice signal.
VSAT
Very small aperture terminal.
-43-
<PAGE>
ComStream Holdings, Inc.
Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995
Contents
<TABLE>
<S> <C>
Report of Independent Auditors..................................................F-1
Consolidated Financial Statements
Consolidated Balance Sheets.....................................................F-2
Consolidated Statements of Operations...........................................F-3
Consolidated Statements of Stockholder's Equity (Deficit).......................F-4
Consolidated Statements of Cash Flows...........................................F-5
Notes to Consolidated Financial Statements......................................F-6
</TABLE>
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Stockholder
ComStream Holdings, Inc.
We have audited the accompanying consolidated balance sheets of ComStream
Holdings, Inc., a wholly-owned subsidiary of Spar Aerospace Limited, as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholder's equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ComStream
Holdings, Inc., at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
San Diego, California
February 16, 1998,
except for Note 11, as to which the date is
April 16, 1998
F-1
<PAGE>
ComStream Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Assets
Current assets:
Cash $ 729 $ 2,377
Accounts receivable, net 9,558 7,021
Inventories 6,162 8,351
Due from affiliated companies 1,249 1,750
Prepaid expenses and other current assets 2,143 1,472
Net assets of discontinued operations -- 26,099
-------- --------
Total current assets 19,841 47,070
Property and equipment 13,129 13,101
Accumulated depreciation (6,192) (3,340)
-------- --------
6,937 9,761
-------- --------
Intangible assets, net 4,561 5,485
Other assets 504 714
-------- --------
-------- --------
Total assets $ 31,843 $ 63,030
-------- --------
-------- --------
Liabilities and stockholder's deficit
Current liabilities:
Accounts payable $ 4,429 $ 4,568
Accrued liabilities 6,466 4,694
Due to affiliated companies 4,337 4,775
Income taxes payable 574 998
Customer advances 602 728
Other current liabilities -- 225
Net liabilities of discontinued operations 15,266 --
-------- --------
Total current liabilities 31,674 15,988
Revolving line of credit from bank 12,000 --
Revolving line of credit from parent company 27,183 60,697
Other liabilities 283 233
-------- --------
Total long-term liabilities 39,466 60,930
Commitments and contingencies
Stockholder's deficit
Preferred stock, $0.001 par value; 8,000,000 shares authorized; 100
shares issued and outstanding in 1997 and 1996 -- --
Common stock, $0.001 par value; 100,000,000 shares authorized;
20,000,000 shares issued and outstanding in 1997 and 1996 20 20
Additional capital 52,608 49,380
Accumulated deficit (91,925) (63,023)
Translation adjustment -- (265)
-------- --------
Total stockholder's deficit (39,297) (13,888)
-------- --------
-------- --------
Total liabilities and stockholder's deficit $ 31,843 $ 63,030
-------- --------
-------- --------
</TABLE>
See accompanying notes.
F-2
<PAGE>
ComStream Holdings, Inc.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue $ 55,923 $ 60,528 $ 70,214
Cost of revenue 32,624 41,086 44,264
-------- -------- --------
Gross profit 23,299 19,442 25,950
Operating expenses:
Selling and marketing 7,133 8,761 9,596
Research and development 8,267 7,054 4,767
General and administrative 7,487 6,081 8,961
Amortization of intangible assets 836 858 5,502
Restructuring costs 3,500 -- --
-------- -------- --------
Total operating expenses 27,223 22,754 28,826
Operating loss (3,924) (3,312) (2,876)
Interest expense (primarily with parent company) 3,632 3,815 5,020
Other (income) expense, net 98 (346) (144)
-------- -------- --------
Loss from continuing operations before income taxes
(7,654) (6,781) (7,752)
Provision for income taxes 80 9 3
-------- -------- --------
Loss from continuing operations (7,734) (6,790) (7,755)
Discontinued operations:
(Loss) income from operations of Components
division, net of income taxes of $0 in 1997 and
1996 and $150 in 1995 (6,811) (5,988) 9,811
Gain on disposal of Components division, net of
income taxes of $0 28,956 -- --
Loss from operations of Satellite Global Access
division, net of income taxes of $0 in 1997,
1996 and 1995 (29,013) (5,584) (6,224)
Loss on disposal of Satellite Global Access
division, net of income taxes of $0 (14,300) -- --
-------- -------- --------
Net loss $(28,902) $(18,362) $ (4,168)
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ComStream Holdings, Inc.
Consolidated Statements of Stockholder's Equity (Deficit)
(In thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ----------------- Additional Accumulated Translation
Shares Amount Shares Amount Capital Deficit Adjustment Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 100 $ -- 20,000,000 $ 20 $ 24,594 $ (40,493) $ (275) $ (16,154)
Notes payable to parent contributed to
capital -- -- -- -- 25,000 -- -- 25,000
Exercise of stock options -- -- 80,730 -- 392 -- -- 392
Repurchase of common stock -- -- (80,730) -- (436) -- -- (436)
Net loss -- -- -- -- -- (4,168) -- (4,168)
Currency translation adjustments -- -- -- -- -- -- (1) (1)
-------------------------------------------------------------------------------------
Balance at December 31, 1995 100 -- 20,000,000 20 49,550 (44,661) (276) 4,633
Exercise of stock options -- -- 308,788 -- 1,497 -- -- 1,497
Repurchase of common stock -- -- (308,788) -- (1,667) -- -- (1,667)
Net loss -- -- -- -- -- (18,362) -- (18,362)
Currency translation adjustments -- -- -- -- -- -- 11 11
-------------------------------------------------------------------------------------
Balance at December 31, 1996 100 -- 20,000,000 20 49,380 (63,023) (265) (13,888)
Exercise of stock options -- -- 980,106 1 4,755 -- -- 4,756
Repurchase of common stock -- -- (980,106) (1) (4,755) -- -- (4,756)
Sale of ComStream Canada to parent -- -- -- -- 3,228 -- -- 3,228
Net loss -- -- -- -- -- (28,902) -- (28,902)
Currency translation adjustments -- -- -- -- -- -- 265 265
-------------------------------------------------------------------------------------
Balance at December 31, 1997 100 $ -- 20,000,000 $ 20 $ 52,608 $ (91,925) $ -- $ (39,297)
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
ComStream Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Operating activities
Net loss $ (28,902) $ (18,362) $ (4,168)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss (income) from discontinued operations 35,824 11,572 (3,587)
Gain on disposal of discontinued operations, net (14,656) -- --
Restructuring costs 3,500 -- --
Depreciation and amortization 3,222 2,663 1,949
Amortization of intangible assets 836 858 5,502
Provision for doubtful accounts 577 528 (403)
Increase (decrease) in cash resulting from changes in:
Accounts receivable (3,114) 1,215 1,367
Inventories 2,189 (1,808) 4,418
Due from affiliate companies 501 (808) (382)
Prepaid expenses and other current assets (671) 180 (687)
Accounts payable and accrued liabilities (1,215) 559 (9,338)
Due to affiliated companies (438) 1,768 1,416
Income taxes payable (424) 671 (958)
Customer advances (126) 320 30
Other current liabilities (226) (153) (720)
---------- --------- ----------
Net cash used in continuing operations (3,123) (797) (5,561)
Net cash provided by (used in) discontinued operations (12,320) (9,686) 2,690
---------- --------- ----------
Net cash used by operating activities (15,443) (10,483) (2,871)
---------- --------- ----------
Investing activities
Proceeds from the sale of discontinued operations 37,672 -- --
Acquisition of property and equipment (1,121) (2,183) (2,765)
Capital expenditures of discontinued operations (5,179) (1,998) (3,979)
Other 370 (234) (558)
---------- --------- ----------
Net cash provided by (used in) investing activities 31,742 (4,415) (7,302)
Financing activities
Repayments of revolving line of credit from parent
company (166,734) (71,504) (123,024)
Proceeds from revolving line of credit from parent 136,448 88,684 133,704
company
Repayments of bank indebtedness (27,000) -- --
Proceeds from bank indebtedness 39,000 -- --
Proceeds from exercise of stock options 4,756 1,497 392
Repurchase of common stock (4,756) (1,667) (436)
Other 339 161 (311)
---------- --------- ----------
Net cash provided by (used in) financing activities (17,947) 17,171 10,325
Increase (decrease) in cash (1,648) 2,273 152
Cash at beginning of year 2,377 104 (48)
---------- --------- ----------
Cash at end of year $ 729 $ 2,377 $ 104
---------- --------- ----------
---------- --------- ----------
Supplemental disclosures:
Taxes paid $ 129 $ 2 $ 722
---------- --------- ----------
---------- --------- ----------
Interest paid (primarily to parent company) $ 6,482 $ 1,020 $ 4,250
---------- --------- ----------
---------- --------- ----------
Debt forgiven by parent company $ 3,228 $ -- $ --
---------- --------- ----------
---------- --------- ----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
1. Organization and Significant Accounting Policies
Formation and Basis of Presentation
ComStream Holdings, Inc. (the Company), a wholly-owned subsidiary of Spar
Aerospace Limited (Spar), which is a publicly-held Canadian company, was
incorporated in the state of Delaware in the United States in 1996. The
Company's principal operating subsidiary is ComStream Corporation. In December
1992, Commercial Telecommunications Corporation (Comtel), a wholly-owned US
subsidiary of Spar, purchased ComStream Corporation, a privately-owned
California manufacturer of telecommunications equipment. ComStream Corporation
and Comtel were merged in 1994 and continued operating as ComStream Corporation.
In 1994, Spar also incorporated the net assets of its Canadian
telecommunications division and contributed the stock of the new subsidiary
(ComStream Canada Inc.) and the stock of ComStream Corporation to ComStream
Inc., a newly formed Canadian holding company; as part of this reorganization
Spar also forgave certain intercompany debt and assumed certain liabilities of
its former Canadian telecommunications division aggregating $2,005,000. During
1996 and 1997, Spar implemented a reorganization of the ComStream companies in
which ComStream Inc. adopted a plan of liquidation and the shares of ComStream
Canada Inc. and ComStream Corporation were transferred to Spar and subsequently
contributed by Spar to ComStream Holdings, Inc. The combination of the Spar
businesses were accounted for in a manner similar to the pooling of interests
during the periods presented.
On September 30,1997, ComStream Corporation purchased certain long-term
contracts from ComStream Canada Inc. All the shares of ComStream Canada Inc.
were then acquired by Spar. As part of this transaction, Spar forgave
intercompany debt of $3,228,000 which has been reflected as a capital
contribution in the accompanying consolidated financial statements.
The Company has incurred significant losses from operations and has a
stockholder's deficit of $39.3 million at December 31, 1997. These matters raise
doubt about the Company's ability to continue as a going concern. However, the
Company has taken the following actions, partially mitigating these matters. In
May 1997, the Components division, which incurred significant operating losses
in 1996 and 1997, was divested for cash of $37.7 million. During the fourth
quarter of 1997, the Company implemented a corporate restructuring and cost
cutting initiative whereby 80 technical, sales and administrative positions were
eliminated and certain facilities were consolidated. Also in the fourth quarter
of 1997, the Company decided to divest or otherwise discontinue its
F-6
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Satellite Global Access (SGA) division which had been negatively impacted by
unfavorable economic conditions in its key market areas and had incurred
operating losses since its inception in 1994. On April 16, 1998, the Company
completed a definitive agreement to sell the SGA business to NSI Network
Sciences International Ltd. for cash proceeds of $3,050,000 subject to certain
adjustments. This transaction is expected to close in June 1998 (Note 11). These
restructuring and divestiture actions were taken to position the remaining
business segments to achieve a profitable level of operations. However, no
assurances can be provided that the Company will be able to achieve profitable
operating results. The Company's cash requirements, not internally funded by
operations, have been funded by a revolving line of credit arrangement with its
parent company, Spar. Spar has expressed its intent to continue funding the
Company's results of operations through at least December 31, 1998. Therefore,
the accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern and as a wholly-owned
subsidiary of Spar.
The Company now operates primarily in North America (the United States and
Canada) in two business segments in the satellite communications industry. The
Satellite Products Division (SPD) designs, markets and manufactures
satellite-based interactive modems and earth stations. In addition, SPD offers a
family of products which provide one-way broadcast transmission of data, audio
and video. The Broadband Products Division (BPD) manufactures and markets
full-transponder satellite digital audio receivers for music providers and has
designed and developed a PC broadband satellite receiver card which is an
Internet and high-speed data networking product, which is expected to be
marketed and manufactured beginning in 1998.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant intercompany
accounts and transactions.
Revenue Recognition
Revenue from product sales is generally recognized when products are shipped.
Revenue related to the performance of nonrecurring engineering services is
recognized as costs are incurred, consistent with the performance requirements
of the related agreements.
F-7
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of
credit risks consist primarily of trade receivables. The Company sells its
products and services to a diverse group of customers throughout the world,
primarily in the satellite communications industry. At December 31, 1997, no
customer accounted for greater than 10% of trade accounts receivable. To reduce
risk, the Company performs ongoing evaluations of its customers' credit
worthiness and may require guarantees under letters of credit.
Major Customers
Two SPD customers each accounted for 11% of 1997 revenues, no customers
represented greater than 10% of 1996 revenues and two SPD customers accounted
for 19% and 12%, respectively, of 1995 revenues.
Export Revenues
Export revenues from North America as a percentage of total revenues follow:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------
<S> <C> <C> <C>
Asia 29% 42% 24%
Europe 27 26 30
Latin and South America 11 4 7
-----------------
67% 72% 61%
-----------------
-----------------
</TABLE>
Inventories
Inventories are stated at the lower of standard cost (which approximates actual
cost), or market, using the first-in, first-out method.
F-8
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Warranty Costs
The Company provides limited warranties on certain of its products and systems
for periods generally not exceeding two years. The Company accrues estimated
warranty costs for potential product liability and warranty claims based on the
Company's claim experience. Such costs are accrued as cost of sales at the time
revenue is recognized.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided on the
straight-line basis over the estimated useful lives of the property, ranging
from three to ten years. Leasehold improvements are amortized on a straight-line
basis over the shorter of the life of the lease or the life of the improvements.
Intangible Assets
Intangible assets include costs of technology and goodwill arising from the 1992
purchase of ComStream Corporation and costs of acquired patents and licenses.
Purchased technology and patents and licenses are amortized over the estimated
useful lives of the related products, ranging from three to seven years;
goodwill is amortized over 15 years.
Asset Impairment
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (SFAS 121), which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. SFAS 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. There was no effect on the consolidated financial statements from the
adoption of SFAS 121.
Employee Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations in
accounting for its employee stock options and to adopt the "disclosure only"
alternative
F-9
<PAGE>
1. Organization and Significant Accounting Policies (continued)
treatment under Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123). SFAS 123 requires the use of fair value
option valuation models that were not developed for use in valuing employee
stock options. Under SFAS No. 123, deferred compensation is recorded for the
excess of the fair value of the stock on the date of the option grant, over the
exercise price of the option. The deferred compensation is amortized over the
vesting period of the option.
Stock Split
In June 1997, the Company issued a 2-for-1 stock split. All shares and per share
data in the accompanying consolidated financial statements have been adjusted to
reflect the stock split.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. The industry in which the
Company operates is characterized by rapid technological change and short
product life cycles. As a result, estimates are required to provide for product
obsolescence and warranty returns as well as other matters. Historically, actual
amounts incurred for these matters have not varied significantly from estimated
amounts.
Foreign Currency Translation
Financial statements of international subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and a weighted average exchange rate for each period for revenues,
expenses, gains and losses. Where the local currency is the functional currency,
translation adjustments are recorded as a separate component of stockholder's
equity (deficit). Where the U.S. dollar is the functional currency, translation
adjustments are recorded in income.
Reclassification
Certain prior year amounts have been reclassified to conform with the current
year presentation.
F-10
<PAGE>
1. Organization and Significant Accounting Policies (continued)
New Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS 130,
Reporting Comprehensive Income, effective for fiscal years beginning after
December 15, 1997. SFAS 130 requires that all components of comprehensive
income, including net income, be reported in the financial statements in the
period in which they are recognized. The Company's comprehensive loss will not
be materially different than net loss as reported.
In June 1997, the FASB issued SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 establishes standards for the way
in which publicly held companies report financial and descriptive information
about its operating segments in the financial statements for both interim and
annual periods. The statement also requires additional disclosures with respect
to products and services, geographic areas of operation and major customers.
SFAS 131 is effective for fiscal years beginning after December 15, 1997. The
Company's adoption of SFAS 131 will have no impact on the Company's consolidated
results of operations, cash flows or financial position but may increase the
level of disclosure of segment information.
Impact of Year 2000 (Unaudited)
The "Year 2000 Issue" addresses the problems created by the fact that most
computer software programs have been written using two digits, rather that four,
to represent a specific year (e.g., "97" would represent 1997). Such
date-sensitive software programs may recognize a date using "00" as the year
1900 rather than the year 2000, which might result in system failures or
miscalculations causing a disruption in operations, including among others,
temporary inability to process normal accounting transactions, send invoices or
engage in similar normal business activities. In addition, to the extent a
company distributes products containing date-sensitive computer programs, a
company may incur substantial costs and time creating or modifying existing
software programs, inventory and returned products.
The Company completed an assessment of the impact of the Year 2000 Issue on its
internal and external operations, and determined that it may be required to
upgrade certain software programs it employs in the normal course of business
and further may need to provide upgrades to products previously distributed to
customers. The total cost of the Year 2000 Issue project is estimated to be less
than $1.5 million, which includes items to be charged to operating expenses and
items to be capitalized and amortized, and is estimated to be completed in 1999.
The Company believes that the Year 2000 Issue will not have a material adverse
effect on its operations or business.
F-11
<PAGE>
1. Organization and Significant Accounting Policies (continued)
The cost of the Year 2000 Issue project and the date on which the Company
believes it will complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
2. Composition of Certain Balance Sheet Accounts
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------------
(in thousands)
<S> <C> <C>
Accounts receivable:
Trade accounts receivable $ 10,440 $ 7,326
Less allowance for doubtful accounts (882) (305)
--------------------
$ 9,558 $ 7,021
--------------------
--------------------
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------------
(in thousands)
<S> <C> <C>
Inventories:
Purchased parts and components $ 3,044 $ 3,099
Work-in-process 2,757 4,125
Finished goods 361 1,127
$ 6,162 $ 8,351
--------------------
--------------------
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------------
(in thousands)
<S> <C> <C>
Property and equipment:
Machinery and equipment $ 11,039 $ 10,710
Furniture and fixtures 724 1,338
Leasehold improvements 1,366 1,053
--------------------
13,129 13,101
Less accumulated depreciation and amortization (6,192) (3,340)
--------------------
$ 6,937 $ 9,761
--------------------
--------------------
</TABLE>
F-12
<PAGE>
2. Composition of Certain Balance Sheet Accounts (continued)
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------------
(in thousands)
<S> <C> <C>
Intangible assets:
Purchased technology $ 17,439 $ 17,439
Goodwill 5,076 5,076
Patents and licenses 116 204
--------------------
22,631 22,719
Less accumulated amortization (18,070) (17,234)
--------------------
$ 4,561 $ 5,485
--------------------
--------------------
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------
(in thousands)
<S> <C> <C>
Accounts payable and accrued liabilities:
Accounts payable $ 4,429 $ 4,568
Accrued compensation 3,718 3,145
Accrued warranty 390 500
Accrued other 2,358 1,049
-------------------
$10,895 $ 9,262
-------------------
-------------------
</TABLE>
3. Income Taxes
The provision for income taxes from continuing operations is based on income
(loss) from continuing operations before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------
<S> <C> <C> <C>
U.S. $(8,483) $(3,612) $(6,687)
Foreign 829 (3,169) (1,065)
------------------------------
$(7,654) $(6,781) $(7,752)
------------------------------
------------------------------
</TABLE>
F-13
<PAGE>
3. Income Taxes (continued)
Components of the provision for income taxes from continuing operations are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------------------
<S> <C> <C> <C>
Current provision:
State $80 $ 2 $--
Foreign -- 7 3
----------------------
Total provision for income taxes from continuing
operations $80 $ 9 $ 3
----------------------
----------------------
</TABLE>
The following is a reconciliation from the expected statutory federal income tax
provision (benefit) to the Company's actual income tax provision (benefit) (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
US Federal corporate statutory rate 35% 35% 35%
--------------------------------
--------------------------------
Continuing operations:
Expected tax benefit $(2,679) $(2,373) $(2,713)
State taxes, net of federal benefit (372) (84) (280)
Increase in valuation allowance on deferred tax
assets 3,537 2,518 2,373
Other (406) (52) 623
--------------------------------
Actual tax provision $ 80 $ 9 $ 3
--------------------------------
--------------------------------
Effective income tax rate (1)% 0% 0%
--------------------------------
--------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Discontinued operations:
Expected tax provision (benefit) $(7,409) $(4,050) $ 1,255
State taxes, net of federal benefit (1,029) (154) 119
Increase in valuation allowance on deferred tax
assets 9,783 4,253 (1,480)
Other (1,345) (49) 256
-------------------------------
Actual tax provision (benefit) -- -- $ 150
-------------------------------
-------------------------------
Effective income tax rate 0% 0% 5%
-------------------------------
-------------------------------
</TABLE>
F-14
<PAGE>
3. Income Taxes (continued)
The components of the Company's total deferred taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 7,927 $ 5,492
Reserves 18,731 7,120
Accrued expenses and other 556 2,436
--------------------
Total deferred tax assets 27,214 15,048
Valuation allowance (26,345) (13,816)
--------------------
Net deferred tax assets 869 1,232
Deferred tax liabilities:
Depreciation and other (443) (609)
Acquired intangibles (426) (623)
--------------------
Total deferred tax liabilities (869) (1,232)
--------------------
--------------------
Net deferred taxes $ -- $ --
--------------------
--------------------
</TABLE>
At December 31, 1997, the Company had federal and California net operating loss
(NOL) carryforwards in the amount of $22.3 million and $2.2 million,
respectively, which may be used to offset future taxable income. Federal and
California NOLs will begin to expire in 2004 and 2001, respectively, unless
previously utilized. The Company also had credit carryforwards available to
offset federal tax liabilities in the amount of $317,000. These credits will
begin to expire in 2000 unless previously utilized. The use of such losses and
credits is currently subject to certain limitations. Additional annual
limitations may be applicable in the event of certain future stock ownership
changes.
4. Employee Stock Option Plans
1994 Non-Qualified Share Option Plan
In December 1994, the Board of Directors of ComStream Inc. adopted the 1994
Non-Qualified Share Option Plan (1994 Option Plan). Under the 1994 Option Plan,
the Board of Directors was authorized to grant options to officers and key
employees to purchase up to 5,000,000 shares of ComStream Inc. common stock, at
a price equal to the fair market value of the stock at the date of grant.
Generally, options vest at 25% annually and are exercisable for up to ten years
from the grant date. In 1995, the Board granted options for 993,000 shares at
prices ranging from $4.85 to $5.40 per share. No options were granted in 1996 or
1997. Certain of the option agreements provide for the acceleration of vesting
in the event of a change of control of the Company, as defined in the option
F-15
<PAGE>
4. Employee Stock Option Plans (continued)
agreement. As a result of such provisions, an additional 101,250 of the options
outstanding at December 31, 1997 would become exercisable in the event of a
change of control of the Company. In March 1997, all outstanding options granted
under the 1994 Option Plan were exchanged for options to purchase common stock
of ComStream Holdings, Inc. No further grants will be made under the 1994 Option
Plan. In December 1997, all options outstanding under the Plan were canceled and
reissued at $3.75 per share. At December 31, 1997, 540,876 options were
outstanding, of which 355,662 were exercisable.
1995 Equity Incentive Plan
Under the terms of the 1995 Equity Incentive Plan (1995 Equity Plan) adopted by
the Board of Directors of ComStream Corporation in October 1995, the Board was
authorized to grant stock awards to employees, directors or consultants to
purchase up to 2,000,000 shares of common stock of ComStream Corporation. The
stock awards could be in the form of incentive stock options, nonstatutory stock
options, stock bonuses or rights to purchase restricted stock or stock
appreciation rights. The grants could be at a price not less than the fair
market value of the stock at the date of grant for incentive stock options and
not less than 85% of the fair market value at the date of grant for nonstatutory
stock options. Generally, options vest at 25% per year (in no event less than
20% per year) and are exercisable for up to ten years from the grant date. In
1995 and 1996, the Board granted non-qualified options for 1,153,130 and 226,000
shares, respectively, at a price of $5.40 per share. In March 1997, all
outstanding options granted under the 1995 Equity Plan were exchanged for
options to purchase common stock of ComStream Holdings, Inc. There were no new
grants made under the Plan during 1997. No further grants will be made under the
1995 Equity Plan. In December 1997, all options outstanding under the Plan were
canceled and reissued at $3.75 per share. At December 31, 1997, 390,126 options
were outstanding, of which 187,062 were exercisable.
1996 Equity Incentive Plan
In January 1996, the Board of Directors of ComStream Holdings, Inc. adopted the
1996 Equity Incentive Plan. Stock awards may be granted to employees, directors
or consultants of the Company in the form of incentive stock options,
nonstatutory stock options, stock bonuses, rights to purchase restricted stock,
and stock appreciation rights.
F-16
<PAGE>
4. Employee Stock Option Plans (continued)
The awards may be granted at prices not less than 85% of the fair market value
of the stock at the time of the grant, except awards of incentive stock options
which must be granted at 100% of fair market value. Options vest in periodic
installments, but in no event less than 20% per year. All options are
exercisable up to ten years from the date of grant. The Board granted
non-qualified options for 1,350,818 and 191,650 shares in 1997 and 1996,
respectively, at a price of $5.40 per share. In December 1997, all options
outstanding under the Plan were canceled and reissued at $3.75 per share. At
December 31, 1997, 1,264,818 options were outstanding, of which, 131,121 options
were exercisable.
1996 Non-Qualified Stock Option Plan
In October 1996, the Board of Directors of ComStream Holdings, Inc. adopted the
1996 Non-Qualified Stock Option Plan. The Board may grant options to officers
and key employees of the Company at the fair market value of the stock on the
date of grant. Generally options vest at 25% per year and are exercisable up to
ten years from the date of grant. The Board granted options for 400,000 and
750,000 shares in 1997 and 1996, respectively, at a price of $5.40 per share.
The terms of the options granted under the 1996 Non-Qualified Plan provide for
the acceleration of vesting in the event of a change of control of the Company,
as defined in the option agreement. As a result of such provisions, all of the
280,000 options outstanding at December 31, 1997 would become exercisable in the
event of a change in control of the Company. In December 1997, all options
outstanding under the Plan were canceled and reissued at $3.75 per share. At
December 31, 1997, 280,000 options were outstanding, of which, 5,000 were
exercisable.
F-17
<PAGE>
4. Employee Stock Option Plans (continued)
A summary of stock option activity under all the plans follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
Options Outstanding
----------------------
Options
Available for Number of Average
Grant Shares Price Per
Share
--------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 2,475 2,525 $ 4.85
Additional reserved 2,000 -- --
Granted (2,146) 2,146 $ 5.31
Canceled 439 (439) $ 4.85
Exercised -- (81) $ 4.85
--------------------------------------
Balance at December 31, 1995 2,768 4,151 $ 5.09
Additional reserved 4,500 -- --
Granted (1,366) 1,366 $ 5.40
Canceled 779 (779) $ 5.20
Exercised -- (309) $ 4.85
-------------------------------------
Balance at December 31, 1996 6,681 4,429 $ 5.18
Granted* (4,308) 4,308 $ 4.44
Canceled* 5,281 (5,281) $ 5.34
Exercised -- (980) $ 4.85
--------------------------------------
Balance at December 31, 1997 7,654 2,476 $ 3.75
--------------------------------------
--------------------------------------
</TABLE>
- ----------
* options granted and canceled in 1997 include 2,507 options originally
granted at prices ranging from $4.85 to $5.40 per share which were reissued
at $3.75 per share.
At December 31, 1997, there were 10,130,000 shares of common stock reserved for
future issuance pursuant to the terms of the various stock option plans. Under
the various stock option plans, the Company, in circumstances as defined, has
the right of first refusal to repurchase the options granted and the right to
repurchase any shares issued pursuant to the options. In connection with the
foregoing, during 1997, 1996 and 1995 the Company repurchased 980,106, 308,788
and 80,730 shares, respectively, of common stock of the Company from certain
former employees.
The weighted average remaining contractual life of the options outstanding was
9.1 years at December 31, 1997.
F-18
<PAGE>
4. Employee Stock Option Plans (continued)
Stock-Based Compensation
As permitted under FASB Statement No. 123, Accounting for Stock-Based
Compensation (SFAS 123), the Company has elected to follow Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) in
accounting for stock-based awards to employees. Under APB 25, the Company
generally recognizes no compensation expense with respect to such awards.
Pro forma information regarding net income and earnings per share is required by
SFAS 123 for awards granted after December 31, 1994 as if the Company had
accounted for its stock-based awards to employees under the fair value method of
SFAS 123. The fair value of the Company's stock-based awards to employees was
estimated using a minimum value option pricing model. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------
<S> <C> <C> <C>
Expected life (years) 5.0 5.0 5.0
Risk-free interest rate 6.0% 6.0% 6.0%
Annual dividend yield -- -- --
</TABLE>
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized over the options' vesting period. The Company's
pro forma information follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------
<S> <C> <C> <C> <C>
Net loss As reported $(28,902) $(18,362) $(4,168)
Pro forma $(30,318) $(19,265) $(4,302)
</TABLE>
Because SFAS 123 is applicable only to awards granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until approximately 1999.
The weighted-average fair value of options granted during 1997, 1996 and 1995
was $.97, $1.43 and $1.31 per share, respectively.
F-19
<PAGE>
4. Employee Stock Option Plans (continued)
Incentive Phantom Stock Plan
Under the Incentive Phantom Stock Plan (Phantom Plan), which was adopted by the
Board of Directors of ComStream Inc. in December 1994, the Board of Directors
was authorized to grant up to 5,000,000 Phantom Stock Rights (PSRS) to key
employees. Each PSR entitles employees to receive cash compensation in an amount
equivalent to the excess of the market value of the stock at a future date over
the grant price, subject to certain limits. In the event of an initial public
offering (IPO), (i) the market value used to compute the increase in value from
the grant date cannot exceed the IPO price; and (ii) vested amounts will become
payable. The PSRs generally vest at 25% annually and become exercisable at the
earlier of the completion of an IPO of the Company's common stock, the sixth
anniversary of the grant date or termination of employment. In 1995, the Board
granted 153,200 PSRs, respectively, at a price of $4.85 each. No PSRs were
granted in 1996 and 1997. ComStream Holdings, Inc. has assumed the obligations
of ComStream Inc. with respect to the Phantom Plan. No further grants will be
made under the Phantom Plan. At December 31, 1997, 123,250 PSRs were
outstanding, of which 83,436 were exercisable.
ComStream Shares to Appreciate and Reward Plan
The Company also has the Shares to Appreciate and Reward Plan (STAR), a stock
appreciation rights plan for non-officer employees with at least three months of
service who have not been granted options under any of the option plans or the
Phantom Plan described above. New grants are made on January 2 and July 1 of
each year. Each eligible employee receives 1,000 Phantom Stock Units (PSUs);
each PSU gives the employee the right to receive cash compensation in an amount
equivalent to the excess of the market value of the stock at a future date over
the grant date. Such compensation is limited to one month of the employee's
salary at the grant date. The PSUs vest at 25% annually and become exercisable
at the earlier of the completion of an IPO of the Company's common stock, the
sixth anniversary of the grant date or termination of employment. At December
31, 1997, a total of 217,500 PSUs were outstanding at price of $3.75 per share
of which 88,000 were exercisable. The Company intends to terminate the STAR plan
in the event of an IPO, although all rights granted prior to such date would
continue.
Compensation expense which may accrue to employees under the Phantom Plan and
the STAR Plan is initially measured at the grant date based on the fair value of
the common stock, with adjustments made quarterly for fair value fluctuations.
In 1997, 1996 and 1995 compensation expense of $0, $28,000 and $215,000,
respectively, was recorded in the accompanying consolidated financial statements
related to these plans.
F-20
<PAGE>
5. Employee Savings and Profit Sharing Plans
The 401(k) Savings Plan for ComStream Employees (Savings Plan) covers all
full-time employees with 30 days of continuous service. Participating employees
can contribute up to 15% of their compensation, subject to legal limits. The
Company matches 35% of the participants' contributions, up to the first 7% of
compensation. Employer matching contributions vest to the participants beginning
in the second year at 40% and 20% per year thereafter.
Total matching contributions made under the plans were $388,000, $368,000 and
$351,000 during 1997, 1996 and 1995, respectively.
6. Transactions with Parent Company and Affiliated Companies
Spar provides the Company with various financial and administrative functions
and services, including cash management, treasury, legal, tax, insurance, and
general management services. The Company is charged associated direct costs and
expenses for such functions. In addition, the Company, along with other
companies affiliated with Spar, receives an allocation of certain management
fees and indirect administrative costs. Management fees and indirect
administrative costs charged to the Company by Spar totaled $570,000, $707,000
and $615,000 in 1997, 1996 and 1995, respectively. Such amounts are included in
general and administrative expenses in the accompanying statement of operations.
Also included in general and administrative expenses are certain costs allocated
to the Company by Spar, primarily insurance, in the amounts of $260,000,
$315,000 and $428,000 in 1997, 1996 and 1995, respectively.
On September 30,1997, ComStream Corporation purchased certain long-term
contracts from ComStream Canada, Inc. All the shares of ComStream Canada Inc.
were then acquired by Spar. As part of this transaction, Spar forgave
intercompany debts of $3,228,000 which amounts have been reflected as a capital
contribution in the accompanying consolidated financial statements.
In December 1993, Comtel declared and recorded a $25 million dividend payable to
Spar. Notes payable to Spar were issued as payment of the dividend; the
principal was due and payable December 31, 1995, with interest payable quarterly
at prime plus 2%. Interest expense on the notes totaled $2,649,000 and
$2,314,000 in 1995 and 1994, respectively. In December 1995, the notes payable
to Spar were contributed to the Company's equity.
From time to time, the Company contracts with various companies affiliated with
Spar on terms comparable to those with third parties.
F-21
<PAGE>
7. Credit Agreements
The Company's cash needs, not internally funded by operations, have been funded
by a revolving line of credit arrangement from Spar. Outstanding advances bear
interest at LIBOR plus 7/8% (7.3% at December 31, 1997); interest is due
quarterly. Because the borrowings under this revolving loan with Spar have no
defined maturity terms, the balance is classified as a long-term liability in
the accompanying consolidated balance sheets. Interest expense on the revolving
loan from Spar was $3,173,000, $3,705,000 and $2,167,000 in 1997, 1996 and 1995,
respectively.
In April 1997, Spar finalized a three-year term credit facility with a syndicate
of Canadian chartered banks ("the Syndicate"), which was amended in early 1998,
for borrowings up to $52.5 million with the Company as a co-borrower under this
facility. This credit facility is subject to compliance with certain financial
covenants by Spar. Borrowings under the facility are available at U.S. base
rates and U.S. LIBOR rates plus the applicable grid pricing percentage (6.3% at
December 31, 1997). In addition, through the Syndicate, the Company and Spar
have a $28 million facility available for letters of credit or letters of
guarantee. Borrowings under the credit facilities are secured by substantially
all of the assets of the Company and Spar. As of December 31, 1997, the Company
had borrowed $12 million under this facility. The proceeds were used to reduce
the borrowings outstanding under the revolving line of credit with Spar. In
connection with this term credit facility, certain financing fees amounting to
$930,000 were allocated by Spar to the Company of which $287,000 has been
charged to interest expense as of December 31, 1997.
8. Commitments and Contingencies
Lease Obligations
The Company leases its facilities and certain equipment under noncancelable
operating leases. Rent expense is recognized on a straight-line basis over the
life of the related leases and totaled $1,955,000, $1,625,000 and $1,365,000 for
1997, 1996 and 1995, respectively. In April 1997, the Company signed a
build-to-suit lease for new corporate headquarters for occupancy in early 1998.
The minimum payments pursuant to this seven year operating lease are included
below. The Company has the option to extend the new lease beyond the initial
seven-year term.
F-22
<PAGE>
8. Commitments and Contingencies (continued)
Following is a schedule of future minimum payments under non-cancelable
operating leases as of December 31, 1997 (in thousands):
<TABLE>
<S> <C>
1998 $ 2,508
1999 3,883
2000 2,945
2001 2,773
2002 2,912
Thereafter 6,545
--------
$21,566
--------
--------
</TABLE>
The Company is attempting to secure sublease arrangements for facilities
representing approximately $7.0 million of the noncancelable operating lease
commitments identified in the table above. No assurance can be provided that the
Company will be able to consummate such sublease arrangements.
Litigation
In August 1997, subsequent to the resolution of a dispute pursuant to which a
customer of the Company's discontinued SGA Division signed a final acceptance
certificate and a general release of all claims against the Company, such
customer filed a civil lawsuit against the Company claiming damages in excess of
$5 million. The Company believes that this case has no merit, intends to
vigorously defend the action, and believes that the ultimate resolution of this
matter will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
The Company is also party to various legal proceedings arising in the normal
course of business. In management's opinion, the outcome of these proceedings
will not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
The Company has entered into several agreements which may require payment of
certain royalties and/or license fees on revenues from the future use or sale of
the technology developed under such agreements.
F-23
<PAGE>
8. Commitments and Contingencies (continued)
Purchase Obligations
The Company generally has commitments with certain suppliers and subcontract
manufacturers to purchase certain components and estimates its non-cancelable
obligations to be approximately $5.0 to $8.0 million at any given time.
In addition, the Company was committed to capital expenditures of approximately
$2.2 million as of December 31, 1997 in connection with plans to relocate to new
corporate headquarters.
Letters of Credit
The Company is contingently liable under letters of credit in the amount of
approximately $2.5 million to guarantee liabilities accrued in the accounts.
9. Business Segment Information
The Company's continuing operations have been classified into two business
segments previously described in Note 1: the Satellite Products Division
(satellite modems and earth stations), and the Broadband Products Division
(broadband products).
F-24
<PAGE>
9. Business Segment Information (continued)
Summarized financial information by business segment is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
Revenue:
SPD $50,124 $49,449 $64,356
BPD 5,799 11,079 5,858
----------------------------------------------------
$55,923 $60,528 $70,214
----------------------------------------------------
----------------------------------------------------
Operating income (loss):
SPD $ 6,633 $ 2,653 $ (3,692)
BPD (7,057) (5,965) 816
Restructuring costs (3,500) -- --
----------------------------------------------------
$ (3,924) $ (3,312) $ (2,876)
----------------------------------------------------
----------------------------------------------------
Depreciation and amortization:
SPD $ 3,658 $ 3,276 $ 7,428
BPD 400 245 23
----------------------------------------------------
$ 4,058 $ 3,521 $ 7,451
----------------------------------------------------
----------------------------------------------------
Capital expenditures:
SPD $ 753 $ 1,637 2,091
BPD 368 546 674
----------------------------------------------------
$ 1,121 $ 2,183 $ 2,765
----------------------------------------------------
----------------------------------------------------
Total assets:
SPD $19,907 $21,146 $21,728
BPD 2,699 3,616 3,519
Net assets of discontinued operations -- 26,099 28,140
Corporate 9,237 12,169 7,671
----------------------------------------------------
$31,843 $63,030 $61,058
----------------------------------------------------
----------------------------------------------------
</TABLE>
Certain corporate administrative expenses are allocated to segments based upon
the nature of the expense.
F-25
<PAGE>
10. Restructuring Costs (continued)
In November 1997, the Company announced a corporate restructuring and cost
cutting initiative, and provided a restructuring charge of $3,500,000. Included
in this restructuring charge was approximately $2,454,000 in termination
benefits for 80 individuals in the technical, sales and administrative staff.
The remaining balance of the charge was comprised of the remaining lease
commitment of $625,000 and equipment to be disposed of with a net book value of
$421,000. As of December 31, 1997, the remaining balance in the restructure
accrual approximates $2,486,000 which comprises remaining termination benefits,
lease commitments and equipment to be disposed of.
11. Discontinued Operations
Components Division
On May 23, 1997, the Company completed the sale of certain assets and
liabilities of its broadband components ("Components") business for cash
proceeds of $37.7 million and contingent proceeds of $11.5 million to be based
upon the fiscal 1998 and 1999 revenue of the business sold. The Company sold
certain inventory, equipment and intellectual property and the purchaser assumed
certain employee related liabilities and warranty commitments. The net book
value of assets transferred to the purchaser was approximately $4.3 million. The
results of the Components business have been classified as discontinued
operations in the accompanying financial statements. Components revenue
accounted for $6.8 million, $37.9 million and $90.2 million in 1997, 1996 and
1995, respectively. Operating expenses of the discontinued operations include
specifically identifiable research and development and sales and marketing
expenses and certain allocated general and administrative expenses, including a
portion of management salaries and related costs, which are not expected to be
incurred subsequent to the discontinuance. Such allocated general and
administrative expenses aggregated approximately $172,000, $1,700,000 and
$2,000,000 in 1997, 1996 and 1995, respectively.
The proceeds received in connection with this transaction were used to reduce
$36.4 million of the revolving line of credit from the parent company.
SGA Division
In December 1997, the Company's Board of Directors approved a strategic plan
which included the divestiture of the SGA division. The results of the SGA
division have been classified as discontinued operations in the accompanying
financial statements. SGA revenue accounted for $29.8, $47.4 million and $23.6
million in 1997, 1996 and 1995, respectively. Operating expenses of the
discontinued operations include specifically identifiable research and
development and sales and marketing expenses and certain
F-26
<PAGE>
11. Discontinued Operations (continued)
allocated general and administrative expenses, including a portion of management
salaries and related costs, which are not expected to be incurred subsequent to
discontinuance. Such allocated general and administrative expenses aggregated
approximately $4,461,000, $3,282,000 and $1,384,000 in 1997, 1996 and 1995,
respectively.
On April 16, 1998, the Company completed a definitive agreement to sell the SGA
business to NSI Network Sciences International Ltd. (NSI) for cash proceeds of
$3,050,000, subject to certain adjustments. This agreement provides that the
effective date of the transaction is to be April 1, 1998 and is expected to
close in June 1998. NSI will acquire substantially all of the assets,
principally trade accounts receivable, inventory and equipment, and certain
liabilities of the SGA business. The carrying amount of the net assets to be
acquired by NSI as of March 31, 1998 approximates $4.8 million (unaudited). The
loss on disposal of the SGA division is comprised principally of three
components: (i) obligations of the SGA division not assumed by NSI aggregating
approximately $8.0 million; (ii) operating losses of the SGA division for the
period from the measurement date to the estimated date of closing aggregating
approximately $5.0 million; and (iii) the estimated difference between the net
proceeds of the sale and the carrying value of the SGA division assets as of the
closing date of the sale. It is at least reasonably possible that the NSI
transaction may not ultimately be consummated and, in that event, the Company
may incur additional costs up to $2.0 million with respect to the discontinuance
of the SGA division.
The net assets and liabilities related to discontinued operations consist of:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------------------
<S> <C> <C>
Accounts receivable, net $ 3,618 $30,016
Inventory 5,121 11,244
Property and equipment, net 445 3,439
Other assets 338 786
Accounts payable and accrued liabilities (10,488) (19,386)
Loss on disposal of the SGA division (14,300) --
----------------------------------
Total $(15,266) $26,099
----------------------------------
----------------------------------
</TABLE>
F-27
<PAGE>
ComStream Holdings, Inc.
Unaudited Condensed Interim Consolidated Financial Statements
Nine-month periods ended September 30, 1998 and 1997
Contents
<TABLE>
<CAPTION>
<S> <C>
Unaudited Condensed Interim Consolidated Financial Statements
Consolidated Balance Sheet....................................................................................F-29
Consolidated Statements of Operations.........................................................................F-30
Consolidated Statements of Cash Flows.........................................................................F-31
Notes to Unaudited Condensed Interim Consolidated Financial Statements........................................F-32
</TABLE>
F-28
<PAGE>
ComStream Holdings, Inc.
Condensed Consolidated Balance Sheet
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
Current Assets:
Cash & cash equivalents....................................... $ 344
Accounts receivable, net...................................... 5,336
Inventories................................................... 5,926
Prepaids and other current assets............................. 565
------------
Total current assets....................................... 12,171
------------
Property and equipment--net..................................... 6,493
Other Assets:
Goodwill...................................................... 3,701
Other assets.................................................. 416
------------
Total other assets......................................... 4,117
------------
Total assets............................................... $ 22,781
------------
------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable--trade....................................... $ 4,141
Accrued liabilities........................................... 4,868
Net liabilities and discontinued operations................... 1,275
Taxes payable................................................. 546
------------
Total current liabilities................................. 10,830
------------
Obligations under capital leases-LT Portion..................... 83
------------
Total liabilities......................................... 10,913
------------
Stockholders' Equity:
Common stock and additional capital........................... 115,737
Accumulated deficit........................................... (103,869)
------------
Total stockholders' equity................................ 11,868
------------
Total liabilities and stockholders' equity................ $ 22,781
------------
------------
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
interim consolidated financial statements.
F-29
<PAGE>
ComStream Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, September 30,
1998 1997
------------------ -----------------
<S> <C> <C>
Revenue .............................................. $ 29,851 $ 41,196
Cost of revenue ...................................... 21,382 24,487
------------------ -----------------
Gross Profit ......................................... 8,469 16,709
Operating Expenses:
Selling and marketing .............................. 5,350 5,055
Research and development ........................... 7,227 6,054
General and administrative ......................... 3,877 5,437
Amortization of intangible assets .................. 645 642
------------------ -----------------
Total Operating Expenses ............................. 17,099 17,188
------------------ -----------------
Operating loss ....................................... (8,630) (479)
Interest expense (primarily with parent company) ..... 3,240 2,805
------------------ -----------------
Loss from continuing operations before income taxes .. (11,870) (3,284)
Provision for income taxes ........................... (76) (66)
------------------ -----------------
Loss from continuing operations ...................... (11,946) (3,350)
------------------ -----------------
Discontinued operations:
Loss from operations of Components division, net
of income taxes of $0 .......................... (6,811)
Gain on disposal of Components division, net of
income taxes of $0 ............................. 28,956
Loss from operations of Satellite Global Access
division, net of income taxes of $0 ............ (7,459)
------------------ -----------------
-- 14,686
------------------ -----------------
Net income (loss)..................................... $(11,946) $ 11,336
------------------ -----------------
------------------ -----------------
</TABLE>
The accompanying notes are an integral part of these unaudited condensed interim
consolidated financial statements.
F-30
<PAGE>
ComStream Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, September 30,
1998 1997
-------------------- ------------------
<S> <C> <C>
Operating activities
Net income (loss)........................................... $ (11,946) $ 11,336
Adjustments to reconcile net income to net cash
used in operating activities:
Discontinued operations .............................. -- (14,686)
Depreciation and amortization ........................ 2,309 2,416
Amortization of intangible assets .................... 645 642
Increase (decrease) in cash resulting from changes in:
Accounts receivable .............................. 4,222 (3,373)
Inventories ...................................... 236 2,654
Due from affiliate companies ..................... 1,249 585
Prepaid expenses and other current assets ........ 1,578 (1,415)
Accounts payable and accrued liabilities ......... (2,488) (696)
Due to affiliate companies ....................... (4,337) (554)
Income taxes payable ............................. (28) (59)
-------------------- ------------------
Net cash used in continuing operations ..................... (8,560) (3,150)
Net cash used in discontinued operations ................... (17,041) (3,163)
-------------------- ------------------
Net cash used in operating activities ...................... (25,601) (6,313)
-------------------- ------------------
Investing activities
Proceeds from the sale of discontinued operations .......... 3,050 37,672
Acquisition of property and equipment ...................... (1,615) (841)
Capital expenditures of discontinued operations ............ (250) (3,884)
Other ...................................................... 105 375
-------------------- ------------------
Net cash provided by investing activties ................... 1,290 33,322
-------------------- ------------------
Financing activties
Proceeds from revolving line of credit from parent company . 80,319 125,050
Repayment of revolving line of credit from parent company .. (64,393) (151,138)
Proceeds from bank indebtedness ............................ -- 27,000
Repayment of bank indebtedness ............................. (12,000) (27,000)
Contribution of additional capital from parent company ..... 20,000 --
-------------------- ------------------
Net cash provided by (used in) financing activties ......... 23,926 (26,088)
-------------------- ------------------
-------------------- ------------------
Increase (decrease) in cash ................................ (385) 921
Cash at beginning of period ................................ 729 2,377
-------------------- ------------------
-------------------- ------------------
Cash at end of period ...................................... $ 344 $ 3,298
-------------------- ------------------
-------------------- ------------------
</TABLE>
The accompanying notes are an integral part of these unaudited condensed interim
consolidated financial statements.
F-31
<PAGE>
ComStream Holdings, Inc.
Notes To Unaudited Condensed Interim Consolidated Financial Statements
1. Basis of Presentation
The unaudited condensed interim consolidated financial statements of ComStream
Holdings, Inc. ("Comstream" or the "Company") should be read in conjunction with
the Company's audited financial statements as of December 31, 1997 and 1996 and
the related consolidated statements of operations, stockholder's equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1997. Comstream was a wholly owned subsidiary of Spar Aerospace
Limited ("Spar").
2. Discontinued Operations
[a] Components Division
On May 23, 1997, the Company completed the sale of certain assets and
liabilities of its broadband components ("Components") business for cash
proceeds of $37.7 million and contingent proceeds of $11.5 million to be
based upon the fiscal 1998 and 1999 revenue of the business sold. The Company
sold certain inventory, equipment and intellectual property and the purchaser
assumed certain employee related liabilities and warranty commitments. The
results of the Components business have been classified as discontinued
operations in the accompanying consolidated financial statements. The
proceeds received in connection with this transaction were used to reduce
$36.4 million of the revolving line of credit from Spar.
[b] SGA Division
On June 26, 1998 the Company completed a definitive agreement to sell the
Satellite Global Access ("SGA") business to NSI Network Sciences
International Ltd. (NSI) for cash proceeds of $3,050,000, subject to certain
adjustments. NSI acquired substantially all of the assets, principally trade
accounts receivable, inventory and equipment, and the purchaser assumed
certain liabilities of the SGA business. The results of the SGA division have
been classified as discontinued operations in the accompanying consolidated
financial statements
3. Contribution of Additional Capital
In August 1998, Spar contributed $20.0 million of additional capital to the
Company. The Company used these funds to repay bank indebtedness and to
repay, in part, advances from Spar under a revolving line of credit
arrangement. Approximately $43.1 million of the revolving line of credit from
Spar could not be repaid and this amount has been forgiven by Spar. The
extinguishment of debt with Spar has been reflected as a contribution of
additional capital in these interim consolidated financial statements.
4. Subsequent Event
On October 15, 1998, Radyne Corp. completed the acquisition of all of the
outstanding shares of common stock of Comstream from Spar for an aggregate
purchase price of $17.0 million consisting of $10.0 million in cash and a $7.0
million convertible promissory note.
F-32
<PAGE>
Radyne Corp.
Pro Forma Condensed Combined Financial Statements (Unaudited)
The attached unaudited pro forma condensed combined balance sheet for
the nine months ended September 30, 1998 and statement of operations for the
nine months ended September 30, 1998 and year ended December 31, 1997 give
effect to the purchase by the Company of all of the outstanding shares of
common stock of Comstream as of the beginning of the periods presented, for
an aggregate purchase price of $17,000,000, of which $10 million was paid in
cash at the closing, using funds borrowed from the Company's controlling
shareholder, and $7 million will be payable up to nine months thereafter
pursuant to a note which is convertible into the Company's Common Stock,
under certain circumstances. Accordingly, the acquired assets and liabilities
were recorded at their estimated fair market value at the date of
acquisition. The pro forma condensed combined statements of operations
assume that the acquisition took place at the beginning of each period
presented and combine the Company's and Comstream's results of operations for
the year ended December 31, 1997 and the nine months ended September 30,
1998. The unaudited pro forma condensed combined balance sheet combines the
Company's balance sheet as of September 30, 1998 with Comstream's balance
sheet as of September 30, 1998, giving effect to the Acquisition as if it had
occurred on September 30, 1998.
Contents
<TABLE>
<S> <C>
Pro Forma Condensed Combined Balance Sheet as of September 30, 1998............................................F-34
Pro Forma Condensed Combined Statement of Operations for the Nine Month Period Ended September 30, 1998........F-35
Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1997......................F-36
Notes to Pro Forma Condensed Combined Financial Statements.....................................................F-37
</TABLE>
F-33
<PAGE>
Radyne Corp.
Pro Forma Condensed Combined Balance Sheet
September 30, 1998 (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Radyne Comstream Pro Forma
Unaudited Unaudited Adjustments Notes Combined
--------- --------- ----------- ----- ----------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash & Cash Equivalents $ 776 $ 344 $ -- $ 1,120
Restricted Cash 10,000 -- (10,000) a --
Accounts Receivable, net 2,198 5,336 7,534
Inventories 4,269 5,926 10,195
Prepaids and Other Current Assets 453 565 1,018
-----------------------------------------------------------------------
Total Current Assets 17,696 12,171 (10,000) 19,867
-----------------------------------------------------------------------
Property and Equipment - Net 1,488 6,493 (1,150) b 6,831
Other Assets:
Goodwill 3,701 (3,701) b 2,508
2,508 b
Purchased Technology 2,500 b 2,500
Other Assets 351 416 767
-----------------------------------------------------------------------
Total Other Assets 351 4,117 1,307 5,775
-----------------------------------------------------------------------
Total Assets $ 19,535 $ 22,781 $ (9,843) $ 32,473
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Liabilities and Stockholders'
Capital Deficiency
Current liabilities:
Notes payable under lines of credit $ 5,500 $ -- $ -- $ 5,500
Notes payable to affiliates-Current 15,618 15,618
Convertible promissory note payable to 7,000 a 7,000
Spar
Obligations under capital
leases-Current Portion 78 78
Accounts Payable - trade 1,022 4,141 300 b 5,463
Accrued Liabilities 1,124 4,868 (1,400) a 6,192
1,600 b --
Net liabilities of discontinued operations 1,275 (1,275) a --
Taxes payable 54 546 600
-----------------------------------------------------------------------
Total Current Liabilities 23,396 10,830 6,225 40,451
-----------------------------------------------------------------------
Obligations under capital leases-LT 38 83 121
-----------------------------------------------------------------------
Portion
Total Liabilities 23,434 10,913 6,225 40,572
-----------------------------------------------------------------------
Stockholders' Capital Deficiency:
Common Stock & Additional Paid-In 5,706 115,737 (115,737) a 5,706
Capital
Accumulated Deficit (9,605) (103,869) 103,869 a (13,805)
(4,200) c
-----------------------------------------------------------------------
Total Stockholders' Capital Deficiency (3,899) 11,868 (16,068) (8,099)
-----------------------------------------------------------------------
Total Liabilities and Stockholders' $ 19,535 $ 22,781 $ (9,843) $ 32,473
Capital Deficiency -----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
F-34
<PAGE>
RADYNE CORPORATION
PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the nine month period ended September 30, 1998 (Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Radyne Comstream Adjustments Notes Combined
------ --------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
Sales $ 9,974 $ 29,851 $ -- $ 39,825
Cost of sales 7,705 21,382 29,087
Gross Profit 2,269 8,469 -- 10,738
Operating Expenses:
Selling, general and administrative 2,373 9,227 11,600
Research and development 1,945 7,227 9,172
Amortization of intangible assets 171 645 (645) d 572
401 d
------------- ------------- ------------- -------------
Total Operating Expenses 4,489 17,099 (244) 21,344
------------- ------------- ------------- -------------
Operating income (loss) (2,220) (8,630) 244 (10,606)
Interest expense 569 3,240 (3,240) e 1,580
1,011 e
------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes $ (2,789) $ (11,870) $ 2,473 $ (12,186)
------------- ---------- ----------- -------------
------------- ---------- ----------- -------------
Loss per share $ (0.47) $ (2.05)
------------- -------------
------------- -------------
Weighted average number of common shares 5,931,346 5,931,346
outstanding ------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
F-35
<PAGE>
RADYNE CORP.
PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 1997 (Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Radyne Comstream Adjustments Notes Combined
------ --------- ----------- ----- ---------
Audited Audited
------ -------
<S> <C> <C> <C> <C> <C>
Sales $ 13,446 $ 55,923 $ -- $ 69,369
Cost of sales 8,022 32,624 40,646
Gross Profit 5,424 23,299 -- 28,723
Operating Expenses:
Selling, general & administrative 4,242 14,620 18,862
Research and development 2,262 8,267 10,529
Amortization of intangible assets 836 (836) d --
535 d 535
Restructuring costs 3,500 3,500
------------- ------------ ------------ -------------
Total Operating Expenses 6,504 27,223 (301) 33,426
------------- ------------ ------------ -------------
Operating income (loss) (1,080) (3,924) 301 (4,703)
Interest expense 677 3,632 (3,632) e 2,025
1,348 e
Other Expense 98 98
------------- ------------ ------------ -------------
Income (loss) from continuing operations
before income taxes $ (1,757) $ (7,654) $ 2,585 $ (6,826)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Loss per share $ (0.35) $ (1.36)
------------- -------------
------------- -------------
Weighted average number of common shares
outstanding 5,012,664 5,012,664
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
F-36
<PAGE>
Radyne Corp.
Notes To Unaudited Pro Forma Condensed Combined Financial Statements
(1) Basis of Accounting
On October 15, 1998, Radyne Corp. ("Radyne") completed the acquisition of all of
the outstanding shares of common stock of ComStream Holdings, Inc. ("Comstream")
from Spar Aerospace Limited ("Spar") for an aggregate purchase price of $17.0
million consisting of $10.0 million in cash and a $7.0 million convertible
promissory note.
The pro forma unaudited condensed combined balance sheet gives effect to the
acquisition as if the transaction had taken place on September 30, 1998 and
combines Radyne unaudited September 30, 1998 balance sheet amounts with
Comstream September 30, 1998 unaudited consolidated balance sheet amounts.
The pro forma unaudited condensed combined statement of operations for the year
ended December 31, 1997 is presented using the Radyne audited statement of
operations for the year ended December 31, 1997 combined with the Comstream
audited year ended December 31, 1997 consolidated statement of operations, as if
the transaction had taken place on January 1, 1997.
The pro forma unaudited condensed combined statement of operations for the nine
months ended September 30, 1998 is presented using the Radyne unaudited
statement of operations for the nine months ended September 30, 1998 combined
with the Comstream unaudited consolidated statement of operations for the nine
months ended September 30, 1998, as if the transaction had taken place on
January 1, 1998.
The pro forma condensed combined financial statements should be read in
conjunction with the audited financial statements and notes thereto of Radyne
and with the audited consolidated financial statements and notes thereto of
Comstream.
The pro forma combined statements of operations are not necessarily indicative
of the future results of operations of Radyne or the results of operations which
would have resulted had Radyne and Comstream been combined during the periods
presented. In addition, the pro forma results are not intended to be a
projection of future results.
(2) Pro Forma Condensed Combined Balance Sheet and Pro Forma Condensed
Combined Statement of Operations
The accompanying pro forma adjustments reflect adjustments for the following
items:
a) Reduction of Radyne's Restricted Cash balance of $10,000,000 for the
cash remitted to Spar and recognition of the $7,000,000 convertible
promissory note. This note is convertible to common shares of the
Company at the rate of $3.73 per common share. Accrued liabilities and
net liabilities of discontinued operations were reduced by $1,400,000
and $1,275,000 respectively as Spar has provided Radyne with an
indemnity related to certain liabilities previously recorded in the
accounts of Comstream. The common stock and additional paid-in capital
and retained earnings of Comstream were eliminated in their entirety
as a result of using the "purchase method" of accounting.
b) Radyne Corp. paid a total of $17,000,000 for assets with a fair value
of $14,492,000 resulting in an excess of the purchase price over the
fair value of the net assets acquired (goodwill) of $2,508,000. The
fair value of the purchased technology and the in-process research and
development has been determined through an independent valuation
utilizing the Discounted
F-37
<PAGE>
Cash Flow method within the Income approach. This valuation considered
the commercial profits and growth prospects of the existing product
lines of Comstream and of the products in development for which
technological feasibility had not been attained as of the transaction
date. A summary of the allocation of fair values is as follows:
<TABLE>
<CAPTION>
Description Fair Value
----------- ----------
<S> <C>
Cash $ 344,000
---------------------------------------------------------------------------------
Accounts receivable 5,336,000
---------------------------------------------------------------------------------
Inventory 5,926,000
---------------------------------------------------------------------------------
Prepaids and other current assets 565,000
---------------------------------------------------------------------------------
Property and equipment 5,343,000
---------------------------------------------------------------------------------
Other assets 416,000
---------------------------------------------------------------------------------
Purchased technology 2,500,000
---------------------------------------------------------------------------------
In-process research and development 4,200,000
---------------------------------------------------------------------------------
Assumed liabilities (8,538,000)
---------------------------------------------------------------------------------
Accrued severance costs (1,600,000)
--------------
---------------------------------------------------------------------------------
Total fair value 14,492,000
---------------------------------------------------------------------------------
Consideration exchanged 17,000,000
--------------
---------------------------------------------------------------------------------
Excess of purchase price over fair value of assets $ 2,508,000
acquired --------------
--------------
---------------------------------------------------------------------------------
</TABLE>
c) The fair value of acquired in-process research and development of
$4,200,000 is expected to be expensed in the period in which the
acquisition is completed. This amount is shown as an increase in the
accumulated deficit in the accompanying pro forma condensed combined
balance sheet. It has not been shown as an expense in the
accompanying pro forma condensed combined statements of operations.
d) Amortization expense related to goodwill on Comstream's balance sheet
has been eliminated. Amortization of purchased technology and goodwill
related to the Comstream acquisition has been recorded based on
estimated useful lives of 6.25 years and 15 years, respectively.
e) Interest expense incurred by Comstream, primarily related to
borrowings pursuant to a revolving line of credit arrangement with
Spar has been eliminated. Interest expense has been recorded as if the
companies had been combined during the same periods after giving
effect to the $7,000,000, 8% convertible promissory note due to Spar
and the $10,000,000, 6.375% note payable to Stetsys US, Inc. Interest
expense has also been adjusted to reflect the 1.0% facility fee
payable to Citibank, N.A. in connection with the increase in the
uncommitted line of credit facility with Citibank, N.A. credit from
$5,500,000 to $20,500,000.
F-38
<PAGE>
No dealer, salesman, or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with this offering. If given or made, you should not rely upon such
information or representation as having been authorized by Radyne Corp. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any of the securities offered hereby in any jurisdiction to any person
to whom it is unlawful to make such an offer or solicitation in such
jurisdiction. You should not assume based on the delivery of this Prospectus or
the execution of sales under this Prospectus that the information in this
document remains current.
---------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Where You Can Find More Information ............................. i
Summary of the Rights Offering .................................. 3
Risk Factors .................................................... 6
Purpose of the Rights Offering and Use of Proceeds .............. 14
Dilution ........................................................ 15
The Rights Offering ............................................. 17
Certain Federal Income Tax Consequences ......................... 23
Price Range of Common Stock ..................................... 25
Dividend Policy ................................................. 25
Business ........................................................ 26
Description of Capital Stock .................................... 39
Shares Eligible for Future Sales ................................ 39
Legal Matters ................................................... 40
Experts ......................................................... 40
Special Note Regarding Forward-Looking Statements ............... 41
Glossary ........................................................ 42
</TABLE>
4,745,076 Shares
RADYNE CORP.
Common Stock
---------------------
PROSPECTUS
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by Radyne Corp. in connection
with the issuance and distribution of the securities being offered hereby (items
marked with an asterisk (*) represent estimated expenses):
<TABLE>
<S> <C>
SEC Registration Fee .........................................
Legal Fees and Expenses ...................................... 150,000*
Blue Sky Fees (including counsel fees) ....................... 20,000*
Accounting Fees and Expenses ................................. 55,000*
Transfer Agent and Registrar Fees ............................ 7,500*
Printing and Engraving Expenses .............................. 50,000*
Miscellaneous ................................................ 12,579*
Total ........................................................ 300,000
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
New York Business Corporation Law, Article 7, enables a corporation in its
original certificate of incorporation, or an amendment thereto validly approved
by stockholders, to eliminate or limit personal liability of members of its
Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been bad
faith, intentional misconduct or a knowing violation of law, the payment of a
dividend or approval of a stock repurchase which is deemed illegal, any other
violation of Section 719 of the New York Business Corporation Law, or a
financial profit or other advantage to which the director was not legally
entitled. Radyne Corp's Certificate of Incorporation includes the following
language:
"SEVENTH: A director of the Corporation shall not be personally
liable to the Corporation or its shareholders for damages for any
breach of duty as a director; provided that, except as hereinafter
provided, this Article SEVENTH shall neither eliminate nor limit
liability: (a) if a judgment or final adjudication adverse to the
director establishes that (i) the director's acts or omissions were
in bad faith or involved intentional misconduct or a knowing
violation of law, (ii) the director personally gained in fact a
financial profit or other advantage to which the director was not
legally entitled, or (iii) the director's acts violated Section 719
of the New York Business Corporation Law; or (b) for any act or
omission prior to the effectiveness of this Article SEVENTH. If the
Corporation hereafter may by law be permitted to further eliminate
or limit the personal liability of directors, then pursuant hereto
the liability of a director of the Corporation shall, at such time,
automatically be further eliminated or limited to
II-1
<PAGE>
the fullest extent permitted by law. Any repeal of or modification
to the provisions of this Article SEVENTH shall not adversely affect
any right or protection of a director of the Corporation existing
pursuant to this Article SEVENTH immediately prior to such repeal or
modification.
EIGHTH: The Corporation may, to the fullest extent permitted by
Section 721 through 726 of the Business Corporation Law of New York,
indemnify any and all directors and officers whom it shall have
power to indemnify under the said sections from and against any and
all of the expenses, liabilities or other matters referred to in or
covered by such section of the Business Corporation Law, and the
indemnification provided for herein shall not be deemed exclusive of
any other rights to which the persons so indemnified may be entitled
under any By-Law, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in his/her official
capacity and as to action in another capacity by holding such
office, and shall continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs,
executors and administrators of such a person."
ITEM 16. EXHIBITS
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C>
2.1* Stock Purchase Agreement dated August 28, 1998 between Spar
Aerospace Limited and Radyne Corp.
5.1 Opinion of Dorsey & Whitney LLP
8.1 Opinion of Dorsey & Whitney LLP
10.1** 1996 Incentive Stock Option Plan
10.2*** Employment Agreement with Robert C. Fitting (Radyne
Termsheet)
10.3 Lease between ADI Communication Partners, L.P. and Comstream
dated April 23, 1997
10.4 First Amendment to lease between ADI Communication Partners
L.P. and Comstream dated July 16, 1997
10.5 Second Amendment to Lease between Kilroy Realty, L.P. and
Comstream dated November 18, 1998.
10.6 Indemnity Agreement between Pacific Bell Corporation and
Comstream dated November 18, 1998.
10.7**** Lease for facility in Phoenix, Arizona
10.8***** Amendment to 1996 Incentive Stock Option Plan
10.9 Letter Agreement between Spar and Radyne Corp. dated
November 18, 1998
13.1 Annual Report to Security Holders on Form 10-K for the year
ended December 31, 1997
13.2 Quarterly Report on Form 10-Q for the quarter ended March
31, 1998
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
13.3 Quarterly Report on Form 10-Q for the quarter ended June 30,
1998
13.4 Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Dorsey & Whitney LLP (contained in the opinion
filed as Exhibit 5.1)
23.4 Consent of Dorsey & Whitney LLP (contained in the opinion
filed as Exhibit 8.1)
24.1 Power of Attorney (set forth on the signature page hereof)
</TABLE>
- ----------
* Incorporated by reference from Registrant's Form 8-K filed
on August 28, 1998.
** Incorporated by reference from Registrant's Registration
Statement on Form S-8, dated and declared effective on March
12, 1997.
*** Incorporated by reference from Registrant's amended
Registrant Statement on Form S-1, dated May 8, 1997 and
declared effective on May 12, 1997.
**** Incorporated by reference from Registrant's Annual Report on
Form 10-K for the year Ended December 31, 1997.
***** Incorporated by reference from Registrant's Registration
Statement on Form S-8, dated and declared effective on
November 18, 1998.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers of sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(30) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no
II-3
<PAGE>
more than 20 percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;"
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the registration statement is on Form S-3, Form S-8 or Form F-3, and
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished
to the Commission by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statements.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by Rule 3-19 of this chapter at the start of
any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(3) of the Act
need not be furnished, PROVIDED, that the registrant includes in the
prospectus, by means of a post effective amendment, financial statements
required pursuant to this paragraph (a)(4) and other information necessary
to ensure that all other information in the prospectus is at least as
current as the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form F-3, a post
effective amendment need not be filed to include financial statements and
information required by Section 10(a)(3) of the Act or Rule 3-19 of this
chapter if such financial Statements and information are contained in
periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Form F-3.
(5) The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set
forth the results of the subscription offer and the terms of any
subsequent reoffering thereof.
(6) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is
sent or given, the latest annual report, to security holders that is
incorporated by reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and, where interim financial information required to
be presented by Article 3 of Regulation S-X is not set forth in the
prospectus, to deliver, or cause to be delivered to each person to whom
the prospectus is sent or given, the latest
II-4
<PAGE>
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
(7) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Phoenix,
Arizona on January 6,1999.
RADYNE CORP.
By: /s/ Robert C. Fitting
--------------------------------------
Robert C. Fitting, President and
Chief Executive Officer
II-5
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert C. Fitting and Lim Ming Seong
or any one of them, his true lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him and in his name, place, and
stead, in any and all capacities, to sign any and all pre- or post-effective
amendments to this Registration Statement, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert C. Fitting
- ---------------------
Robert C. Fitting Chief Executive Officer, President January 6,1999
/s/ Garry D. Kline
- ------------------
Garry D. Kline Vice President-Finance, Chief January 6,1999
Financial Officer
/s/ Robert A. Grimes
- --------------------
Robert A. Grimes Director January 6,1999
/s/ Lim Ming Seong
- ------------------
Lim Ming Seong Chairman of the Board of Directors January 6,1999
/s/ Lee Yip Loi
- -----------------
Lee Yip Loi Director January 6,1999
- -----------------
Chan Wee Piak Director January 6,1999
/s/ Dennis Elliott
- ------------------
Dennis Elliott Director January 6,1999
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C>
5.1 Opinion of Dorsey & Whitney LLP
8.1 Opinion of Dorsey & Whitney LLP
10.3 Lease between ADI Communication Partners, L.P. and Comstream dated
April 23, 1997
10.4 First Amendment to Lease between ADI Communication Partners, L.P.
and Comstream dated July 16, 1997
10.5 Second Amendment to Lease between Kilroy Realty, L.P. and Comstream
dated November 18, 1998
10.6 Indemnity Agreement between Pacific Bell Corporation and Comstream
10.7 Lease for facility in Phoenix, Arizona
10.8 Amendment to 1996 Incentive Stock Option Plan
10.9 Letter Agreement between Spar and Radyne Corp. dated November
18, 1998
13.1 Annual Report to Security Holders on Form 10-K for the year ended
December 31, 1997
13.2 Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
13.3 Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
13.4 Quarterly Report on Form 10-0 for the quarter ended September 30,
1998
23.1 Consent of Deloitte & Touche LLP*
23.2 Consent of Ernst & Young LLP*
23.3 Consent of Dorsey & Whitney LLP (contained in the Opinion filed as
Exhibit 5.1)
23.4 Consent of Dorsey & Whitney LLP (contained in the Opinion filed as
Exhibit 8.1)
24.1 Power of Attorney (set forth on the signature page hereof)
* To be filed by amendment.
</TABLE>
<PAGE>
Exhibit 5.1
Radyne Corp.
5225 South 37th Street
Phoenix, AZ 85040
January 8, 1999
Ladies and Gentlemen:
We have acted as special counsel to Radyne Corp. (the "Company"), a New
York corporation, in connection with the preparation and filing of the Company's
Registration Statement on Form S-2 (the "Registration Statement") under the
Securities Act of 1933, as amended, relating to the proposed offering by the
Company of up to 4,745,076 shares of its common stock, par value $.002 per share
(the "Common Stock") issuable upon exercise of 4,745,076 rights (the "Rights")
to purchase Common Stock of the Company. We have made such investigation and
examined such documents and records (including certificates of certain public
officials and certificates furnished by officers of the Company) as we have
deemed necessary, and on that basis we are of the following opinion:
The shares of the Company's Common Stock issuable upon exercise of the
Rights which will be offered by the Company to the public pursuant to the
Registration Statement have been duly authorized and, when issued and paid for
in the manner described in the Registration Statement, will be validly issued
and fully paid and nonassessable (subject to Section 630 of the New York
Business Corporation Law).
We consent to the use of our name under the caption "Legal Matters" in the
prospectus constituting a part of the Registration Statement and to the use of
this opinion for filing as exhibit 5.1 to the Registration Statement. In giving
this consent, we do not hereby admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Dorsey & Whitney LLP
DORSEY & WHITNEY LLP
<PAGE>
Exhibit 8.1
Radyne Corp.
5225 South 37th Street
Phoenix, AZ 85040
January 8, 1999
Dear Sir or Madam:
We have acted as counsel for Radyne Corp. (the "Company") in connection
with the preparation and filing under the Securities Act of 1933, as amended
(the "Securities Act") and the rules and regulations promulgated thereunder (the
"Rules"), of a Registration Statement on Form S-2 (the "Registration
Statement"), filed with the Securities and Exchange Commission in connection
with a proposed rights offering of the Company's common stock. You have asked us
to render our opinion as to matters hereinafter set forth.
We have examined originals and copies, certified or otherwise identified to
our satisfaction, of all such agreements, certificates and other documents as we
have deemed necessary as a basis for this opinion. In such examination we have
assumed the genuineness of all signatures and the authenticity of all documents
submitted to us as originals and the conformity with the originals of all
documents submitted to us as copies. We have, when relevant facts material to
our opinion were not independently established by us, relied to the extent we
deemed such reliance proper upon written or oral statements of officers and
other representatives of the Company. Based on and subject to the foregoing, the
opinion attributed to us in the section entitled "Certain Federal Income Tax
Consequences" in the prospectus constituting Part I to the Registration
Statement (the "Prospectus") accurately states our opinion with respect to the
matters discussed.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the references to our name under the captions "Certain Federal
Income Tax Consequences" and "Legal Matters" in the Prospectus. In giving this
consent, we do not hereby admit that we come within the category of persons
whose consent is required by the Securities Act or the Rules.
Very truly yours,
/s/ Dorsey & Whitney LLP
DORSEY & WHITNEY LLP
<PAGE>
Exhibit 10.3
LEASE
(Bondable Triple Net)
ADI COMMUNICATION PARTNERS, L.P.,
a California limited partnership
Landlord
COMSTREAM CORPORATION,
a Delaware corporation
Tenant
<PAGE>
LEASE
THIS LEASE ("Lease") is made as of April 23, 1997, by and between ADI
COMMUNICATION PARTNERS, L.P., a California limited partnership ("Landlord"), and
COMSTREAM CORPORATION, a Delaware corporation ("Tenant").
RECITALS AND DEFINITIONS
"Land" means an approximately 9.85 acre-sized portion of a 10.28 acre
parcel of land situated in the City of San Diego, County of San Diego, State of
California as described in more detail in the legal description attached to this
Lease as EXHIBIT "A", and made a part hereof.
"Buildings" means the two (2) two-story, concrete tilt-up commercial
and industrial buildings which shall be constructed on the Land by Landlord in
accordance with the Plans and Specifications, as that term is defined in Section
2.2 below.
"Improvements' means the Buildings and all improvements, machinery,
equipment, fixtures and other property, real, personal or mixed (except Tenant's
trade fixtures, machinery and equipment) installed or constructed on the Land or
in the Buildings by Landlord (including, without limitation, the parking
facility and other site improvements and landscaping), together with all
additions, alterations and replacements thereof. Improvements shall include all
Shell Improvements and Tenant Improvements as those terms are described
elsewhere in this Lease. The Improvements shall include approximately 750
individual parking spaces (3.75 spaces per square foot) for the initial Demised
Premises (e.g. before exercise of the Expansion Option) and approximately 965
individual parking spaces (3.7 spaces per square foot) (e.g. after exercise of
the Expansion Option). It is anticipated, and acknowledged, that no more than
45% of the total overall parking shall be designed for *Compact" vehicles.
"Demised Premises" means the Land and the Improvements.
Landlord, for and in consideration of the rents, covenants and
agreements hereinafter reserved, mentioned and contained on the part of Tenant,
its successors and assigns, to be paid, kept, observed and performed under this
Lease, hereby leases, rents, lots and demises to Tenant, and upon and subject to
the conditions and limitations expressed in this Lease, Tenant takes and hires
from Landlord, the Demised Premises.
ARTICLE I
TERM OF LEASE
1.1 INITIAL TERM. This Lease shall be effective and binding upon the
parties hereto upon mutual execution hereof (the "EFFECTIVE DATE"). The term of
this Lease (the "INITIAL TERM")
1
<PAGE>
shall commence upon March 2, 1998 and shall end eighty-four (84) months after
March 2, 1998 (as defined below), subject to extension pursuant to Section 1.2,
below. The "COMMENCEMENT DATE" (as that term is used in this Lease) shall mean
the date upon which Substantial Completion (as defined in Section 2.3 below) of
the Improvements occurs. Substantial Completion of the Improvements and March 2,
1998 are currently anticipated to be February 28, 1998 (the "Target Commencement
Date"). Under no circumstances shall March 2, 1998 occur before February 14,
1998. In the event March 2, 1998 is February 28, 1998, the Initial Term of this
Lease will end on February 27, 2005. Within ten (10) business days following the
completion of the Improvements (including the correction of all items which
appear on the Punchlist (as defined in Section 2.3(d) hereof), Tenant and
Landlord shall mutually execute a written document acknowledging (i) the
completion of the Improvements, (ii) the actual Commencement Date and end of the
Initial Term, (iii) the date by which the first Extension Option must be
exercised, (iv) any adjustments in Base Rent pursuant to Section 2.9 hereof, and
(v) the monthly Base Rent (the "Lease Commencement Memorandum").
1.2 OPTION TO EXTEND. Tenant shall have two (2) option(s) to extend
(the "Extension Options") the Initial Term for (a) consecutive five (5) year
period(s) (the foregoing option term(s) shall be referred to hereinafter
sometimes as the "EXTENSION TERM(S)"), by delivering a binding written notice of
exercise to Landlord ("Extension Notice"), so that Landlord receives the
Extension Notice with respect to the Extension Term at least three hundred sixty
(360) days prior to the end of the Term. Tenant may exercise the Extension
Option(s) only if this Lease is in full force and effect and there is no uncured
Event of Default or any breach of Tenant's obligations under this Lease which,
with the passage of time and giving of notice, or both, would constitute an
Event of Default if not cured within any applicable cure period (an "Incipient
Default"), at the time of exercise of the right of renewal or at the time of the
commencement of the Extension Term, but Landlord shall have the right at its
sole discretion to waive the non-default conditions herein; provided, however,
that if an Event of Default or Incipient Default exists at the time Tenant
exercises the Extension Option and Landlord does not elect to waive such Event
of Default or Incipient Default, Landlord shall provide written notice to Tenant
of the existence and nature of such Event of Default and Tenant shall be allowed
an amount of time to cure such Event of Default as is otherwise provided for
curing defaults of that type under this Lease, and, if timely cured, Tenant's
exercise of the Extension Option shall be reinstated effective as of the time of
exercise.
1.3 TERM. As used in this Lease, "Term" shall mean the Initial Term,
together with any Extension Term.
ARTICLE II
CONSTRUCTION OF THE IMPROVEMENTS
2.1 THE IMPROVEMENT Landlord agrees to furnish all of the material,
labor and equipment as may be reasonably necessary for the construction of the
Improvements in a good and workmanlike manner in substantial conformance with
the Plans and Specifications (as defined in
2
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Section 2.2(a)) and in substantial compliance with all covenants, conditions and
restrictions to which the Land is subject and all applicable building laws,
ordinances, orders, rules, regulations and requirements of all federal, state
and municipal governments with jurisdictional authority over the development of
the Land and the construction of the Improvements (the "APPLICABLE LAND USE LAWS
AND RESTRICTIONS").
2.2 PREPARATION OF PLANS AND SPECIFICATIONS. The Plans and
Specifications for the development of the Property and the construction of the
Improvements shall be developed by Landlord and Tenant in a collaborative effort
conducted as follows:
(a) As used in this Lease, the term *Plans and Specifications" shall
mean collectively the "Preliminary Plans and Specifications,* the "Schematic
Design Drawings," the "Design Development Drawings", the "Construction Drawings"
(all as defined herein), and all related plans, drawings, specifications and
notes developed or prepared in connection therewith.
(b) Landlord and Tenant have agreed on a set of preliminary plans and
specifications for the Improvements dated as of April 9, 1997, which (i)
describe and depict the site plan and interior floor plan configuration for the
Buildings and certain preliminary exterior elevations Improvements, and 00
outline the specifications for the interior and exterior -components of the
Buildings. These preliminary plans and specifications (the "PRELIMINARY PLANS
AND SPECIFICATIONS") are attached to this Lease as Exhibit "B" and Landlord and
Tenant intend that they shall serve as the basis upon which the Plans and
Specifications will be prepared and finalized, in accordance with the provisions
of this Section 2.2.
(c) Prior to the execution of this Lease, Landlord and Tenant have
agreed on schematic design drawings for the Improvements for the Improvements
("SCHEMATIC DESIGN DRAWINGS").
(d) As soon as is reasonably possible following execution of this
Lease, but in no event later than May 2, 1997, Landlord shall submit to Tenant
reasonably detailed preliminary construction drawings for the Improvements
("Design Development Drawings") which have been prepared in substantial
conformance with the Schematic Design Drawings. Within ton (10) business days
after Tenant receives the Design Development Drawings, Tenant shall deliver to
Landlord written notice of Tenant's approval or disapproval of the Design
Development Drawings. Tenant shall not unreasonably withhold its approval of the
Design Development Drawings. If Tenant disapproves any portion of the Design
Development Drawings, then Tenant shall specifically and in writing (a) approve
those portions which are acceptable to Tenant and (b) disapprove those portions
which are not acceptable to Tenant, specifying the reasons for such disapproval
and describing in detail the change Tenant requests for each item disapproved.
The failure of Tenant to disapprove the Design Development Drawings within the
specified time shall be deemed approval thereof. In the event the Design
Development Drawings have-not been fully approved by Tenant, and Tenant and
Landlord are unable to resolve the basis for Tenant's disapproval after good
faith efforts to do so over a period of five (5) business days after delivery of
Tenant's notice disapproving
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the Design Development Drawings, Landlord shall have the right to terminate this
Lease by giving Tenant written notice of its election to do so.
(e) As soon as is reasonably possible following approval of the Design
Development Drawings, but in no event later than June 13, 1997 (as extended by
any number of days more than ten (10) business days following Landlord's
delivery of the Design Development Drawings to Tenant when the Design
Development Drawings are approved by Tenant), Landlord shall submit to Tenant
1/8 or 1/16 scale construction drawings for the Improvements ("Construction
Drawings") which have been prepared in substantial conformance with the approved
Design Development Drawings. These Construction Drawings shall include all
information reasonably necessary to construct the Improvements. Within ten (10)
business days after Tenant receives the Construction Drawings, Tenant shall
deliver to Landlord written notice of Tenant's approval or disapproval of the
Construction Drawings. Tenant shall not unreasonably withhold its approval of
the Construction Drawings. If Tenant disapproves any portion of the Construction
Drawings, then Tenant shall specifically and in writing (a) approve those
portions which are acceptable to Tenant and (b) disapprove those portions which
are not acceptable to Tenant, specifying the reasons for such disapproval and
describing in detail the change Tenant requests for each item disapproved. The
failure of Tenant to disapprove the Construction Drawings within the specified
time shall be deemed approval thereof. In the event the Construction Drawings
have not been fully approved by Tenant, and Tenant and Landlord are unable to
resolve the basis for Tenant's disapproval after good faith efforts to do so
over a period of five (5) business days after delivery of Tenant's notice
disapproving the Construction Drawings, Landlord shall have the right to
terminate this Lease by giving Tenant written notice of its election to do so.
(f) Upon approval of the Construction Drawings, the Plans and
Specifications shall be deemed approved by Landlord and Tenant and shall,
thereafter, be the Plans and Specifications for the construction of the
Improvements. Any delay in Landlord obtaining the Building Permit beyond August
6, 1997, which results from a delay in Tenant's approval of the Plans and
Specifications (other than because of Landlord's failure to meet its obligations
under Section 2.2(d) and (e)) shall be a Tenant-Caused Delay.
(g) In the event Landlord and Tenant are unable to resolve Tenant's
disapproval of a phase of the development of the Plans and Specifications under
subsections (d) or (e), above (a "DESIGN DISPUTE"), they shall resolve those
differences through the binding arbitration of a neutral third-party in
accordance with the following procedure: Landlord and Tenant shall immediately
meet to make a good faith attempt to mutually appoint a single party who shall
be a licensed architect ("ARBITRATING ARCHITECT"), with not less than ten (10)
years experience in commercial and industrial architecture and who is not
employed or otherwise previously affiliated with either party, to arbitrate
their differences and resolve the Design Dispute. If Landlord and Tenant are
unable to agree upon a single Arbitrating Architect, then each shall, within two
(2) business days after the meeting, select an architect that meets the
foregoing qualifications. The two (2) architects so appointed shall, within two
(2) business days after their appointment, appoint a third architect meeting the
foregoing qualifications who shall serve as the Arbitrating Architect. If the
two (2) architects so selected
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cannot agree on the selection of the Arbitrating Architect within the time above
specified, then either party, on behalf of both parties, may request the
appointment of the Arbitrating Architect to the Presiding Judge of the San Diego
County Superior Court. The procedures for arbitrating and resolving the Design
Dispute shall be established by the Arbitrating Architect, provided, however,
that the parties agree to the use of the rules of the American Arbitration
Association regarding resolution of commercial disputes. The determination of
the Arbitrating Architect shall be limited solely to the issue of the Design
Dispute and shall be made within ten (10) business days of its submission by the
parties for arbitration. The decision of the Arbitrating Architect shall be
binding on both parties. The costs of the arbitration, including, without
limitation, attorneys' fees and costs, witness fees, expert witness fees, and
costs of the arbitration proceeding shall be awarded as determined to be
reasonable by the Arbitrating Architect. In the event of any judicial
enforcement or confirmation proceeding relating to an arbitration award, the
prevailing party shall be entitled to recover from the other party all related
costs, including attorneys' fees and costs.
2.3 SUBSTANTIAL COMPLETION OF THE IMPROVEMENTS.
(a) "SUBSTANTIAL COMPLETION" of the Improvements shall be deemed to
have occurred on the earlier to occur of when M (A) the Improvements have been
completed in substantial conformance with the Plans and Specifications, subject
to the completion of "punch-list" items (the "PUNCHLIST") identified by Landlord
and Tenant as described in Section 2.3(c) below, ("punch-list items" being
defined to mean minor items needing correction or repair which do not or will
not materially interfere with the permitted use of the Demised Premises as
described in Section 4.1 hereof, (B) all major systems of the Buildings the
installation of which are Landlord's responsibility are in reasonably good
working order, and (C) Tenant can physically and legally occupy the Demised
Premises (e.g., a permanent certificate of occupancy or temporary certificate of
occupancy which is subsequently converted into or replaced without any lapse by
a permanent certificate of occupancy, or such alternate certificate, license,
permit or other document which is issued by the appropriate agency with legal
authority over the occupancy of commercial or industrial structures in the
jurisdiction in which the Demised Premises are located ("CERTIFICATE OF
OCCUPANCY") has been issued for the Demised Premises, or (ii) the Improvements
would have been so completed and Tenant legally entitled to occupy the Demised
Premises but for any Tenant-Caused Delays.
(b) "TENANT CHANGE ORDER" shall be defined as any change to the Plans
and Specifications which is requested by Tenant, including changes which are
requested by Tenant during the finalization of the Plans and Specifications
which increase the scope of the Improvements from those described in the
Preliminary Plans and Specifications, or changes requested by Tenant in the
Plans and Specifications after their completion, including during construction
of the Improvements.
(c) "TENANT-CAUSED DELAY" shall be defined as a delay resulting
directly from (i) the failure of Tenant, its officers, directors, partners,
agents, employees, or contractors to (A) perform some act or pay some amount
within the time provided in this Lease, or (B) reasonably approve or disapprove
any draft of the Plans and Specifications within the time period specified in
Section 2.2,
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above, or (ii) any other act or omission by Tenant, its officers, directors,
partners, agents, employees, or contractors to the extent it causes a delay in
Substantial Completion or in the issuance of the Certificate of Occupancy,
including, without limitation, a delay caused by (A) delay in finalization of
the Plans and Specifications caused by Tenant, or (B) a Tenant Change Order.
(d) WALK-THROUGH AND PUNCHLIST. On or immediately before March 2, 1998,
Landlord and Tenant shall conduct a walk-through inspection of the Demised
Premises and shall jointly prepare the Punchlist which shall be a list of items
which have not been completed in substantial conformance with the Plans and
Specifications that need to be corrected. Subject to the last sentence of this
subsection (d), Landlord shall cause the Punchlist items to be corrected within
thirty (30) days thereafter. Approximately thirty (30) days -following March 2,
1998, Landlord and Tenant shall again conduct a walk-through inspection to
determine if any remaining Punchlist items require correction, and Landlord
shall cause all such corrective work to be undertaken and completed promptly
thereafter. If by the nature of such Punchlist item, more than thirty (30) days
was required to effect such correction, Landlord shall not be in default
hereunder if such correction has been commenced within thirty (30) days after
the item was identified on the Punchlist and is diligently pursued to
completion; provided that if any item on the Punchlist has not been corrected
within sixty (60) days after such item is identified on the Punchlist, Tenant
may cause such item to be corrected and offset the cost of such correction
against Tenant's Base Rent next due, provided Tenant has given Landlord written
notice of Tenant's intention to do so and Landlord has not corrected such item
within five (5) business days following such notice.
(e) NO RELIEF FROM PAYMENT OF RENT. The failure of Tenant to take
possession of or to occupy the Demised Premises on or after March 2, 1998 shall
not serve to relieve Tenant of its obligations or delay Tenant's obligation to
pay Rent, Additional Rent, or any other amount to be paid by Tenant to Landlord
under this Lease.
2.4 DELAY IN SUBSTANTIAL COMPLETION OR LEASE EXECUTION. Landlord shall
diligently proceed with the construction of the Improvements with the intent of
completing and delivering the same to Tenant on or before the Target
Commencement Date, provided, however, to the extent 0) a Tenant-Caused Delay (as
defined in Section 2.3(b) hereof), or (ii) a Force Majeure (as defined below),
results in a delay in Substantial Completion of the Improvements, the Target
Commencement Date shall be extended for the amount of time the Substantial
Completion of the Improvements is delayed thereby. "FORCE MAJEURE" shall be
defined as any factor or condition which is outside the control of either Tenant
or Landlord and for which neither could have reasonably been anticipated or
expected to plan, including, without limitation, (i) unusually inclement
weather, or inclement weather which occurs at unusual times, (ii) other acts of
God, (iii) labor disputes, (iv) casualties, (v) embargo, (vi) governmental
restrictions, (vii) shortages of fuel, labor, or building materials, (viii)
civil unrest, (ix) action or non-action of public utilities, or of local, state
or federal governments which delay the Substantial Completion of the Demised
Premises, and (x) action or non-action of local, state or federal governments
which prevent, prohibit or stop construction of the Demised Promises. If
Landlord fails to tender possession of the Demised Premises with the
Improvements Substantially Completed within ninety (90) days following the
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Target Commencement Date (as extended by Tenant-Caused Delays and Force-Majeure
Delays), Landlord and Tenant agree Tenant will suffer damages which would be
difficult to ascertain but a reasonable estimate of which would be Two Thousand
Dollars ($2,000.00) per day for each day of delay thereafter. Therefore, in the
event of such delay, and as Tenant's sole and exclusive remedy for such delay,
Landlord agrees to pay Tenant liquidated damages of Two Thousand Dollars
($2,000.00) per day commencing on the Target Commencement Date (as that date may
be extended by Tenant-Caused Delays and Force-Majeure) and continuing on each
day thereafter until March 2, 1998. If March 2, 1998 has not occurred (or been
deemed to have occurred) within ninety (90) days following the Target
Commencement Date (as that date may be extended by Tenant-Caused Delays and
Force-Majeure) Tenant may terminate this Lease.
2.5 BUILDING PERMIT FOR THE IMPROVEMENTS. Landlord shall be responsible
for obtaining from any relevant and jurisdictional governmental authority
necessary (generally an *Authority ), all governmental approvals necessary for
the construction of the Improvements, including a building permit ("Building
Permit"). The cost, including fees and other charges levied by the Authority,
associated with approvals and permits related to the Shell Improvements shall be
Shell Improvements Costs and the responsibility of Landlord. If a change to the
Plans and Specifications is required by the Authority as a condition to
obtaining the Building Permit, such change shall be made to the Plans and
Specifications, subject to Tenant's approval, and the cost associated with any
such change shall be added, as appropriate, to Shell Improvements Costs and
Tenant Improvements Costs. Tenant shall not unreasonably withhold or delay its
consent to any such requested change, provided that Tenant may terminate this
Lease if any such requested change would materially and adversely alter the
utility or functionality of the Demised Premises for Tenant's intended use,
provided that Tenant will not seek to terminate this Lease on that basis without
giving Landlord thirty (30) days written notice of such intention during which
time Landlord may seek to avoid or modify the need for the requested change.
Tenant shall cooperate with Landlord as may be reasonably necessary to obtain
the Building Permit and any and all other permits required to complete the
Improvements.
2.6 CONSTRUCTION WARRANTIES. Landlord shall obtain the manufacturer's
warranties for the elements or systems which are part of the Demised Premises
and which are customarily given by such manufacturers without additional cost to
Landlord and warranties and guaranties from the contractors and subcontractors
with respect to the Improvements and which are customarily given by such
contractors and subcontractors without additional cost to Landlord. Landlord
shall assign to Tenant for the Term of the Lease (or, should Tenant not be
legally capable of doing so itself, at Tenant's expense, prosecute on Tenant's
behalf), on a non-exclusive basis, all statutory and contractual warranties and
guaranties to which Landlord is entitled in connection with the Demised
Premises, express or implied, including, without limitation the warranties
arising under any construction contract between Landlord and Landlord's
contractors and/or subcontractors involved in the construction of the Demised
Premises. Other than the assignment to Tenant of such warranties, or as
otherwise specifically provided in this Lease, Landlord shall have no obligation
or responsibility to Tenant, or its successors, with respect to any condition of
the Improvements. Landlord, at no cost or expense to Landlord, shall cooperate
with Tenant in the enforcement by
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Tenant, at Tenant's sole cost and expense, of any such warranties or guaranties.
2.7 CONDITION OF DEMISED PREMISES: LIMITED WARRANTY. Except as
specifically provided in this Section 2.7, Landlord makes no warranties or
representations with regard to the Demised Promises, or any portion thereof, and
Tenant shall accept the Demised Premises in the condition in which they are
delivered on March 2, 1998, provided that (i) the Demised Promises shall be
constructed in substantial conformance with (A) the Plans and Specifications,
and (B) all Applicable Land Use Laws and Restrictions then in effect and (ii) in
addition to Landlord's responsibility to correct items identified through the
walk-through and Punchlist process established in Section 2.3(d) hereof, the
Improvements shall be free of defects in design and construction which could not
reasonably be discovered and identified by Tenant during that process (i.e. free
of defects in design or construction which remained "latent* as of the
completion of the repairs identified on the Punchlist and the final completion
of the Improvements), and Landlord shall be responsible, at Landlord's sole cost
and expense, for the prompt and diligent repair of any such 'latent" defects
which later manifest themselves during the Term.
2.8 TENANT IMPROVEMENTS ALLOWANCES TENANT RESPONSIBILITY.
(a) Landlord shall be responsible for constructing, entirely at its
expense, subject to the provisions of Section 3.3 of this Lease, the Shell
Improvements (as that term is defined below). The Shell Improvements shall
consist of, and the term "SHELL IMPROVEMENT" shall be used in this Lease to
mean, those components of the Demised Premises which are identified in the
Preliminary Plans and Specifications, which are attached to this Lease, as
elements of the basic Buildings shall or specifically as "SHELL IMPROVEMENTS,"
land, land preparation and landscaping, or as otherwise mutually identified by
Landlord and Tenant, in writing, concurrent with or subsequent to the execution
of this Lease, including all utilities stubbed to the Buildings. The Base Rent
specified in this Lease includes Landlord's obligation to complete and deliver
to Tenant the Shell Improvements in accordance with this Lease. The cost of
constructing the Shell Improvements are referred to in this Lease as the "Shell
Improvements-C-9-U." Shell Improvements Cost shall include a developer fee,
payable to Landlord, or an affiliate of Landlord (with no direct obligation to
Tenant to pay such fee).
(b) Landlord shall be responsible for constructing, subject to the
provisions of this Section 2.8 and 2.9 below, the Tenant Improvements (as that
term is defined below). The Tenant Improvements shall consist of, and the term
"TENANT IMPROVEMENTS" shall be used in this Lease to mean, those portions of the
Demised Premises which are not identified in the Plans and Specifications as
part of the Shell Improvements, or as otherwise mutually identified by Landlord
and Tenant, in writing, concurrent with or subsequent to the execution of this
Lease.
(c) Landlord shall provide an allowance to be applied by Landlord
towards paying the costs of designing and constructing the Tenant Improvements
(the "TENANT IMPROVEMENTS COST"), which shall be comprised of fees and
reimbursables for project programming, design, architecture and engineering,
reimbursables, and the direct construction cost (excluding any overhead or
profit
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to Landlord or any affiliate) of the Tenant Improvements paid to the Contractor
(as defined below) or others performing such work. The allowance shall be in the
amount of Seven Million Dollars ($7,000,000.00) (the "TENANT IMPROVEMENTS
ALLOWANCE"). Shell Improvements shall not include the costs of building signage,
security systems, specialized cabling or Tenant's moving expenses, such items
being Tenant's sole financial responsibility; provided, however, that up to (and
no more than) Three Hundred Thousand Dollars ($300,000) of the Tenant
Improvements Allowance may be utilized to pay the costs of Tenant's (i)
specialized cabling needs, (ii) moving expenses, and (iii) furniture, fixtures
and equipment.
(d) In the event that the Tenant Improvements Allowance is insufficient
in amount to pay the Tenant Improvements Cost, Tenant shall pay such excess to
Landlord pursuant to the procedure set forth in Section 2.9 below.
(e) Attached to this Lease as EXHIBIT "D" is an estimate of the Tenant
Improvements Cost which, based on the Preliminary Plans and Specifications and
the Schematic Design Drawings as of the date of this Lease, Landlord and Tenant
expect to be incurred in connection with the construction of the Demised
Premises (the "TENANT IMPROVEMENTS BUDGET ESTIMATE"). Upon approval of the Plans
and Specifications by both parties, Landlord shall provide Tenant with a final
estimate of the Tenant Improvements Cost. Within fifteen (115) days prior to the
commencement of construction of the Improvements, and no less than monthly
thereafter (but not more than ten (10) days after Landlord learns of a cost
change) during the course of construction of the Improvements, Landlord shall
deliver to Tenant a revised Tenant Improvements Budget Estimate, whether
reflecting an increase or a decrease, together with an explanation in reasonable
detail of the cause of such cost change and an accounting of actual costs to
date ("PERIODIC COST REGION"). Additionally, prior to any Tenant Change Order
being effective, Landlord shall provide Tenant with an estimate of the cost of
said Tenant Change Order.
2.9 RESPONSIBILITY FOR EXCESS SHELL COSTS AND EXCESS TENANT
IMPROVEMENTS COST; TENANT IMPROVEMENTS COSTS SAVINGS.
(a) The Base Rent has been determined based on the assumption that (i)
the Plans and Specifications will not vary materially in scope from the
Preliminary Plans and Specifications, (ii) the Plans and Specifications and
Approved Working Drawings, once finalized and approved by Landlord and Tenant,
will not be altered as a result of Tenant Change Orders, and (iii) no Shell
Improvement Cost or Tenant Improvement Cost will be incurred in connection with
the construction of the Demised Premises resulting from Tenant-Caused Delays.
(b) Tenant shall be directly responsible, as Additional Rent, for any
increases in the cost to Landlord of the construction of the Shell Improvements
(including financing costs) ("EXCESS SHELL COSTS"), resulting from (A) Tenant
Change Orders, or (B) Tenant-Caused Delays. Tenant shall pay the Increased Shell
Costs to Landlord, as Additional Rent, UPON THE EARLIER TO OCCUR OF (i)
execution of this Lease if any Excess Shell Costs have been identified by that
date, (ii) funding of Landlord's construction loan, provided that Landlord has
notified Tenant of Excess Shell Costs
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prior thereto, which notification shall be in writing and shall include
reasonably detailed documentation supporting the calculation of such Excess
Shell Costs (an "EXCESS SHELL COST NOTICE"), taking into consideration any
amounts previously paid by Tenant to Landlord under this subsection (b), (iii)
if later, within five (5) business days after delivery of an Excess Shell Cost
Notice to Tenant by Landlord, taking into consideration any amounts previously
paid by Tenant to Landlord under this subsection (b), (iv) within five (5)
business days after the Final Cost Report, if such report includes Increased
Shell Costs which have not been previously paid to Landlord, or (v) as otherwise
required by Landlord's construction Lender (as defined in Section 3.4 hereof).
(c) Tenant shall be responsible, as Additional Rent, for any Tenant
Improvements Costs to the extent they exceed the Tenant Improvements Allowance
("EXCESS TENANT IMPROVEMENTS COSTS"). Tenant shall pay the Excess Tenant
Improvements Costs to Landlord UPON THE EARLIER TO OCCUR OF (i) execution of
this Lease if the Tenant Improvements Budget Estimate at that time reflects that
the Tenant Improvements Allowance will be insufficient to fund all the Tenant
Improvements Costs anticipated to be incurred, (ii) funding of Landlord's
construction loan if the Tenant Improvements Budget Estimate at that time
reflects that the Tenant Improvements Allowance will be insufficient to fund all
the Tenant Improvements Costs anticipated to be incurred, taking into
consideration any amounts previously paid by Tenant to Landlord under this
subsection (c), (iii) within five (5) business days after notification to Tenant
by Landlord that it has determined, in a periodic review of the Tenant
Improvements Costs during construction of the Tenant Improvements, pursuant to
subsection 2.8(e), above, that the Tenant Improvements Allowance will be
insufficient to cover all the Tenant Improvements Costs anticipated to be
incurred, taking into consideration any amounts previously paid by Tenant to
Landlord under this subsection (c), (iv) within five (5) business days after
Landlord has notified Tenant that it has made a final determination, pursuant to
subsection (a), below, that the Tenant Improvements Allowance was insufficient
to cover all the Tenant Improvements Costs which have been incurred, taking into
consideration any amounts previously paid by Tenant to Landlord under this
subsection (c), or M as otherwise required by Landlord's construction Lender.
(d) Landlord shall deposit the funds paid to it by Tenant under
subsections (b) or (c) of this Section 2.9 into a segregated account maintained
with the construction Lender ("EXCESS FUNDS ACCOUNT"), with interest paid on the
balance in the Excess Funds Account at then prevailing money market rates. The
Excess Funds Account shall be subject to a collateral pledge in favor of the
Lender to secure the availability of those funds to pay Excess Shell Costs and
Excess Tenant Improvements Costs. Funds shall be disbursed from the Excess Funds
Account to pay Shell Improvements Costs or Tenant Improvements Costs, as
applicable, only after funds which are identified for those purposes in the
construction loan have been fully disbursed or as otherwise mutually approved by
Landlord and Tenant, which approval will not be unreasonably withheld if an
alternative arrangement is required by Landlord's construction Lender. Any
interest earned on such funds while held in the Excess Funds Account shall be
paid by Landlord to Tenant as earned, but no more often than monthly.
(e) Within ninety (90) days following Substantial Completion of the
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Improvements, Landlord shall calculate, and report to Tenant, in writing, M the
final Shell Improvements Cost and the final Tenant Improvements Cost, and (ii)
the amount of any Excess Shell Costs or Excess Tenant Improvements Costs (the
"Final Cost Report"). In the event that there is an amount which has not been
paid by Tenant at the time of such final determination (e.g. Excess Shell
Improvements Costs or Excess Tenant Improvements Costs) then Tenant shall pay
such additional amount to Landlord within five (5) business days following such
final determination. Any funds deposited into the Excess Funds Account pursuant
to subsection (d), above, and which are ultimately not needed to fund Excess
Shell Costs and Excess Tenant Improvements Costs shall be repaid to Tenant at
such time as the Lender releases its security interest in that account.
(f) In the event the costs incurred by Landlord in the construction of
the Tenant Improvements is less than the Tenant Improvements Allowance as
indicated by the Final Cost Report, the monthly Base Rent shall be decreased by
an amount equal to (i) the Tenant Improvements Allowance, (ii) minus the actual
Tenant Improvements Cost, up to Four Hundred Thousand Dollars ($400,000), (iii)
multiplied by a percentage factor sufficient to amortize the Tenant Improvements
Allowance over the Initial Term at an annual interest rate of ten percent (10%),
Ov) divided by 12.
(g) All of the Periodic Cost Reports and the Final Cost Report shall
include reasonably detailed supporting explanations and documentation. Landlord
shall maintain accurate and complete books and records of all Shell Improvement
Costs and Tenant Improvements Costs. Tenant shall have the right to inspect,
audit and copy such books and records at Landlord's office in San Diego,
California.
2.10 CONTRACTOR. Reno Contracting, Inc., a California corporation
("Contractor"), shall act as the general contractor for the construction of the
Shell Improvements and the Tenant Improvements. Contractor's contract shall be
on a "cost-plus" basis, with Contractor entitled to M reimbursement for direct
insurance expenses and direct 'G&A" or "General Conditions" expenses, as
provided in the Estimated Budget and (ii) a profit of no more than five percent
(5%). Landlord shall cause the Contractor to bid each component of the
Improvements to at least three (3) qualified subcontractors and, unless Landlord
and Tenant agree otherwise, shall select the lowest qualified bidder. Tenant
shall have the right to approve the list of subcontractors to be solicited for
bids and to designate subcontractors to participate in the bidding process.
Tenant shall also have the right to select subcontractors to perform components
of the Improvements if Tenant agrees to pay any Excess Shell Costs or Excess
Tenant Improvements Costs attributable to such election, provided such
subcontractor is reasonably acceptable to Landlord and Contractor. Landlord
represents to Tenant that Contractor is not an affiliate of Landlord nor will
Landlord receive compensation from Contractor in connection with the
construction of the Improvements.
2.11 RETROFIT ALLOWANCE. Upon the commencement of each Extension Term,
if any, Landlord shall provide Tenant with an allowance of One Million Dollars
($1,000,000) (the "Retrofit Allowance") for the construction of new, remodeled
or retrofitted Tenant Improvements in the Demised Premises (the "RetroWork").
Prior to requesting portion of the Retrofit Allowance,
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Tenant shall submit to Landlord detailed plans and specifications for the
Retrofit Work for Landlord's approval. The construction of the Retrofit Work
shall be subject to the same terms, conditions and procedures as any Work (as
defined in Section 19.2 hereof) which is proposed to be performed by Tenant
pursuant to Article XIX hereof. The Retrofit Allowance shall be disbursed by
Landlord on the same or similar basis as would a customary "construction fund
control" as expenses related to such Retrofit Work are incurred and within ten
(10) days after (i) Tenant presents Landlord with (A) progress invoices for
completed Retrofit Work, (B) conditional partial or final lien releases or
waivers for such Retrofit Work, and 00 Landlord's reasonable and prompt
determination that the Retrofit Work has been completed (either partially or
completely) in accordance with the plans and specifications for such Retrofit
Work approved by Landlord pursuant to this Section 2.11.
2.12 TENANT'S ENTRY INTO THE BUILDING PRIOR TO SUBSTANTIAL COMPLETION.
Provided that Tenant and its agents, employees and contractors do not materially
interfere with the Contractor's work on the Demised Premises (any such
interference constituting a basis for a Tenant-Caused Delay), Landlord shall
allow and shall require the Contractor to allow, Tenant and Tenant's agent
employees and contractors access to the Building prior to Substantial Completion
of the Improvements so that Tenant may install its furniture, trade fixtures,
data and telecommunications wiring and equipment, photocopy equipment and other
business equipment in the Building. Prior to Tenant's entry into the Building as
permitted by the terms of this Section 2.12, Tenant shall arrange a schedule
with Landlord and the Contractor in order to coordinate the timing of Tenant's
entry with the actions of the Contractor. Prior to any such entry, Tenant or its
agents and contractors (as applicable) shall provide evidence of insurance
reasonably satisfactory to Landlord. Tenant acknowledges that Section 20.3 below
shall apply with respect to any and all claims which may arise as a result of
the entry by Tenant, its agents, employees and contractors on the Demised
Premises in accordance with this Section 2.12. Tenant's responsibilities under
Section 6.1 of this Lease shall commence upon such early occupancy as opposed to
March 2, 1998.
ARTICLE III
RENT
3.1 Base Rent. In consideration of the lease OF the Demised Premises
evidenced by this Lease, Tenant covenants to pay rent to Landlord, without
previous demand therefor and without any right OF set-off or deduction
whatsoever except as expressly provided in this Lease, at the office OF Landlord
at:
ADI Communication Partners, L.P.
c/o The Allen Group
4365 Executive Drive, Suite 850
San Diego, CA 92121-2130
Attention: Mr. Steven L. Black
or at such other place as Landlord may from time to time designate in writing, a
rental for the Initial
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Term of this Lease as hereinafter set forth, payable monthly, in advance, in
equal installments as hereinafter set forth, with the first payment due on March
2, 1998, and continuing on the first day of each month thereafter for the
succeeding months during the balance of the Term ("Base Rent"), as follows:
<TABLE>
<CAPTION>
Period Monthly Base Rent Annual Base Rent
- ------ ----------------- ----------------
<S> <C> <C>
Months 1 - 12 $218,000 $2,616,000
Months 12 - 24 $218,000 $2,616,000
Months 25 - 36 $231,080 $2,772,960
Months 37 - 48 $231,080 $2,772,960
Months 49 - 60 $244,995 $2,939,338
Months 61 - 72 $244,995 $2,939,338
Months 73 - 84 $259,641 $3,115,692
</TABLE>
In the event March 2, 1998 occurs on other than the first (1st) day of a month,
the Initial Term shall be extended by the number of days remaining in the month
in which March 2, 1998 occurs and the first payment of Base Rent due on March 2,
1998 shall be a sum equal to (i) the monthly Base Rent for the month in which
March 2, 1998 occurs, prorated based on the number of days in the month in which
March 2, 1998 occurs, plus GO the monthly Base Rent for the first full calendar
month of the Initial Term.
3.2 BASE RENT DURING EXTENSION TERM. The Base Rent during the Extension
Term ("Extension Term Base Rent") shall be an amount equal to the greater of (i)
ninety five percent (95%) of the then fair market rental value of the Demised
Promises ("Fair Market Rental Value"), as stated on a monthly basis and
determined pursuant to this Section 3.2 as of the first (1st) day of the
applicable Extension Term, or (ii) the Base Rent during the last month of the
Initial Term (or the prior Extension Term as may be applicable), plus an amount
sufficient for Tenant to fully amortize, over the Extension Term, in equal
monthly installments, the amount of the Retrofit Allowance actually used by
Tenant, plus interest on that amount at the annual rate of ten percent (10%).
Upon receipt by Landlord of Tenant's Extension Notice under Section 1.2, above,
Landlord and Tenant shall meet in an effort to negotiate, in good faith, the
Extension Term Base Rent which shall become effective as of the first day of the
Extension Term ("Extension Term Commencement Date"). The Extension Term Base
Rent shall be increased to an amount equal to 1.06 times the then applicable
Extension Term Base Rent, as may have been previously adjusted pursuant to this
Section 3.2, every twenty-four (24) months during the Extension Term. If
Landlord and Tenant have not agreed upon the Extension Term Base Rent within
thirty (30) days after the delivery of Tenant's Extension Notice, the Extension
Term Base Rent shall be determined as follows:
(a) Landlord and Tenant shall attempt to agree in good faith upon a
single appraiser not later than thirty (30) days after delivery of Tenant's
Extension Notice. If Landlord and Tenant are unable to agree upon a single
appraiser within such time period, then Landlord and Tenant shall each appoint
one appraiser not later than five (5) days after the deadline for selecting a
single appraiser. Landlord and Tenant shall each give written notice to the
other as to the name
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of the appraiser it has selected, as soon as the selection is made. Within ten
(10) days thereafter, the two appointed appraisers shall appoint a third
appraiser. All appraisers shall be independent from, and disinterested in, both
Landlord and Tenant.
(b) The only task which the appraiser(s) shall perform shall be forming
and reporting to Landlord and Tenant an opinion of the Fair Market Rental Value
of the Demised Premises for use in determining the Extension Term Base Rent.
(c) If either Landlord or Tenant fails to appoint its appraiser within
the prescribed time period, the single appraiser appointed shall determine the
Fair Market Rental Value of the Demised Premises. If both parties fail to
appoint appraisers within the prescribed time periods, then the first appraiser
thereafter selected by a party shall determine the Fair Market Rental Value of
the Demised Premises.
(d) Each party shall bear the cost of its own appraiser and the parties
shall share equally the cost of any single or third appraiser, if applicable.
All appraisers so designated herein shall have at least five (5) years'
experience in the appraisal of commercial properties similar to the Demised
Premises in the northern commercial/industrial markets of San Diego County and
shall be members of professional organizations such as MAI or its equivalent.
(e) For the purpose of such appraisal and this subsection (d), the term
"Fair Market Rental Value" shall mean the price that a ready and willing single
tenant would pay, as of the Extension Term Commencement Date, as annual rent to
a ready and willing landlord of a property comparable to the Demised Premises on
the terms of this Lease, if such property were exposed for lease on the open
market for a reasonable period of time. A "comparable property" shall mean an
industrial/commercial two-story concrete tilt-up building located in the
Sorrento Mesa sub-market of San Diego (the "Market Area"), with improvements
similar in age and character to the Demised Premises, which has been improved
with the tenant improvements comparable to those constructed in the Demised
Premises; provided, however, that the appraisal shall disregard the value of the
equipment which Tenant is entitled to remove at the expiration or termination of
the Term of this Lease or the value of the Retrofit Allowance. The appraiser
shall give appropriate consideration to all relevant factors, including, without
limitation, (i) the fact that this Lease is a "triple net" lease, (ii) rental
concessions and tenant improvement allowances generally being offered by
landlords of comparable properties, (iii) the age of the Improvements, (iv) the
condition of the Demised Premises on the assumption that Tenant has complied
with its obligations to maintain and repair the Demised Premises, (v) rental
market conditions then in existence, NO whether Landlord will or will not be
required to pay a real estate brokerage commission in connection with Tenant's
exercise of the Extension Option, and (vii) the fact that the Tenant will be
accepting the Demised Premises in an 'As-is" condition.
(f) If a single appraiser is chosen, then such appraiser shall
determine the Fair Market Rental Value of the Demised Premises. Otherwise, the
Fair Market Rental Value of the
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Demised Premises shall be the arithmetic average of the two (2) appraisals which
are closest in amount, and the third appraisal shall be disregarded.
(g) Landlord and Tenant shall instruct the appraiser(s), in writing, to
complete their written determination of the Fair Market Rental Value not later
than thirty (30) days after their selection. If the Fair Market Rental Value has
not been determined by such date, then the Fair Market Rental Value shall be
determined thereafter, and if it has not been determined by the Extension Term
Commencement Date, then Tenant shall continue to pay Landlord monthly
installments of Annual Rent in the amount applicable to the Demised Premises
immediately prior to the Extension Term Commencement Date until the Fair Market
Rental Value is determined. When the Fair Market Rental Value of the Demised
Premises is determined, Landlord shall deliver notice thereof to Tenant, and
Tenant shall pay to Landlord, within ten (10) days after receipt of such notice,
the difference between the monthly installments of Base Rent actually paid by
Tenant to Landlord subsequent to the Extension Term Commencement Date and the
new monthly installments of Base Rent which are determined to have been actually
owing during such period in accordance with this Section 3.2.
3.3 ADDITIONAL OBLIGATIONS; ADDITIONAL RENT. The Base Rent shall be
absolutely "net" to Landlord so that this Lease shall yield to Landlord the Base
Rent specified in Section 3.1 and that all Impositions, insurance premiums,
utility charges, maintenance, repair and replacement expenses, all expenses
relating to compliance with all present or future applicable governmental laws,
rules and regulations, and all other costs, fees, charges, expenses,
reimbursements and obligations of every kind and nature whatsoever relating to
the Demised Premises which may arise or become due during the term or by reason
of events occurring during the term of this Lease (all such items being
sometimes referred to as "Additional Obligations") shall be paid or discharged
by Tenant, except to the extent they are expressly the responsibility of
Landlord under this Lease. To the extent the following are the obligations of
Tenant under this Lease, Tenant hereby agrees to indemnify, defend and save
Landlord harmless from and against such Impositions, insurance premiums, utility
charges, maintenance, repair and replacement expenses, all expenses relating to
compliance with all present and future governmental laws, rules and regulations
becoming effective during the Term, and all other costs, fees, charges,
expenses, reimbursements and obligations referred to above. Any amounts referred
to in this Lease as additional rent (including, without limitation, the
Additional Obligations) are referred to collectively as "Additional Rent."
3.4 DELINQUENT RENTAL PAYMENTS. All payments of Base Rent and
Additional Rent shall be payable without previous demand therefor and without
any right of set-off or deduction whatsoever (except as expressly provided in
this Lease), and in case of nonpayment of any item of Additional Rent by Tenant
when the same is due, Landlord shall have, in addition to all its other rights
and remedies, all of the rights and remedies available to Landlord under the
provisions of this Lease or by law in the case of nonpayment of Base Rent. The
performance and observance by Tenant of all the terms, covenants, conditions and
agreements to be performed or observed by Tenant hereunder shall be performed
and observed by Tenant at Tenant's sole cost and expense. Any installment of
Base Rent or Additional Rent or any other charges payable by Tenant under the
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<PAGE>
provisions hereof which shall not be paid- within five (5) days after they are
due shall, (i) be subject to a late charge of five percent (5%) of the amount
due and not timely paid, and 00 bear interest from the date when such payment
was due at the lesser of (A) the default rate of interest under Landlord's most
senior debt obligation encumbering the Demised Premises, or (B) an annual rate
of eighteen percent (18%) per annum, but in no event in excess of the maximum
lawful rate permitted to be charged by Landlord against Tenant. Said rate of
interest is sometimes hereinafter referred to as the "Maximum Rate of Interest.
Notwithstanding the foregoing provisions of this Section 3.4, if any mortgagee
under any mortgage, beneficiary under any deed of trust, or ground lessor under
any ground lease, which encumbers the Land (a "Lender"), imposes fees, charges,
penalties or interest on Landlord for late payments under such instrument which
fees, charges, penalties or interest are less in amount than those described in
this Section 3.4, Landlord will not impose any late payment charge or interest
which is greater than the amounts charged by such Lender.
ARTICLE IV
USE OF DEMISED PREMISES
4.1 PERMITTED USE. Tenant intends to use the Demised Premises primarily
as a corporate headquarters, assembly, warehouse and distribution facility and
related lawful purposes, and they shall be used for no other purpose without
first securing the prior written consent of Landlord, which consent shall not be
unreasonably withheld. Tenant shall not use or occupy the same, or knowingly
permit them to be used or occupied, contrary to any statute, rule, order,
ordinance, requirement or regulation applicable thereto, or in any manner which
would violate any certificate of occupancy affecting the same, or which would
make void or voidable any insurance then in force with respect thereto (provided
Tenant has received a copy of the policy) or which would make it impossible to
obtain fire or other insurance thereon required to be furnished hereunder by
Tenant, or which would cause structural injury to the improvements, or which
would constitute a public or private nuisance or waste, and Tenant agrees that
it will promptly, upon discovery of any such use, take all necessary steps to
compel the discontinuance of such use.
4.2 PRESERVATION OF DEMISED PREMISES. Tenant shall not use, or permit
the Demised Premises, or any portion thereof, to be used by Tenant, any third
party or the public in such manner as might reasonably tend to impair Landlord's
title to the Demised Premises, or any portion thereof, or in such manner as
might reasonably make possible a claim or claims of adverse usage or adverse
possession by the public, as such, or third persons, or of implied dedication of
the Demised Premises, or any portion thereof. Nothing contained in this Lease,
and no action or inaction by Landlord, shall be deemed or construed to mean that
Landlord has granted to Tenant any right, power or permission to do any act or
make any agreement that may create, or give rise to or be the foundation for any
right, title, interest, lien, charge or other encumbrance upon the estate of
Landlord in the Demised Premises other than as expressly set forth in this
Lease.
4.3 HAZARDOUS SUBSTANCES.
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<PAGE>
(a) Subject to Section 4.3(f), Tenant shall at all times and in all
respects comply with all federal, state and local laws, ordinances and
regulations ("HAZARDOUS MATERIALS LAWS") relating to the industrial hygiene,
environmental protection or the use, analysis, generation, manufacture, storage,
presence, disposal or transportation of any oil, flammable explosives, asbestos,
urea formaldehyde, polychlorinated biphenyls, radioactive materials or waste, or
other hazardous, toxic, contaminated or polluting materials, substances or
wastes, including without limitation any "hazardous substances," "hazardous
wastes,"hazardous materials" or toxic substances" under any such laws,
ordinances or regulations (collectively, "Hazardous Materials") at the Demised
Premises.
(b) Subject to Section 4.3(f), Tenant shall at its own expense procure
(other than a certificate of occupancy), maintain in effect and comply with all
conditions of any and all permits, licenses and other governmental and
regulatory approvals required for Tenant's use of the Demised Premises,
including, without limitation, discharge of (appropriately treated) materials or
waste into or through any sanitary sewer system serving the Demised Premises.
Tenant shall in all respects handle, treat, deal with and manage any and all
Hazardous Materials in, on, under or about the Demised Premises in complete
conformity with all applicable Hazardous Materials Laws and prudent industry
practices regarding the management of such Hazardous Materials. Subject to
Section 4.3(f), all reporting obligations imposed by Hazardous Materials Laws
are solely the responsibility of Tenant. Upon expiration or earlier termination
of this Lease and subject to Section 4.3(f), Tenant shall cause all Hazardous
Waste Materials (as defined in 22 CCR 66261.3) to be removed from the Demised
Premises and transported for use, storage or disposal in accordance with and in
complete compliance with all applicable Hazardous Materials Laws. Tenant shall
not take any remedial action in response to the presence of any Hazardous
Materials in, on, about or under the Demised Premises or in any Improvements
situated on the Land other than in the normal course of Tenant's business
operations as now contemplated in accordance with all Hazardous Materials Laws
or as necessitated by emergency considerations in accordance with all applicable
Hazardous Materials Laws, nor enter into any settlement agreement, consent
decree or other compromise in respect to any claims relating to any Hazardous
Materials in any way connected with the Demised Premises or the Improvements on
the Land without first notifying Landlord of Tenant's intention to do so and
affording Landlord ample opportunity to appear, intervene or otherwise
appropriately assert and protect Landlord's interest with respect thereto. In
addition, at Landlord's request, at the expiration of the term of this Lease,
Tenant shall remove all tanks or fixtures which were placed on the Demised
Premises during the term of this Lease and which contain, have contained or are
contaminated with Hazardous Waste Materials.
(c) Tenant shall immediately notify Landlord in writing of (i) any
enforcement, cleanup, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any Hazardous Materials Laws;
(ii) any claim made or threatened by any person against Landlord or the Demised
Premises relating to damage, contribution, cost recovery, compensation, loss or
injury resulting from or claimed to result from any Hazardous Materials; and
(iii) any non- routine reports made to any environmental agency arising out of
or in connection with any Hazardous Materials in, on or about the Demised
Premises or with respect to any Hazardous Materials removed from the Demised
Premises, including any complaints, notices, warnings, reports or asserted
17
<PAGE>
violations in connection therewith. Tenant shall also provide to Landlord, as
promptly as possible, and in any event within five (5) business days after
Tenant first receives or sends the same, copies of all claims, reports,
complaints, notices, warnings or asserted violations from any governmental
agency of any Hazardous Materials Laws relating in any way to the Demised
Premises or Tenant's use thereof. Upon written request of Landlord (to enable
Landlord to defend itself from any claim or charge related to any Hazardous
Materials Laws), Tenant shall promptly deliver to Landlord notices of hazardous
waste manifests reflecting the legal and proper disposal of all such Hazardous
Materials removed from the Demised Premises. Subject to Section 4.3(f), all such
manifests shall list the Tenant or its agent as a responsible party and in no
way shall attribute responsibility for any such Hazardous Materials to Landlord.
(d) Subject to Section 4.3(f), Tenant shall indemnify, defend (with
counsel reasonably acceptable to Landlord), protect and hold Landlord and each
of Landlord's officers, directors, partners, shareholders, affiliates,
employees, agents, attorneys, successors and assigns free and harmless from and
against any and all claims, liabilities, damages, costs, penalties, forfeitures,
losses or expenses (including attorneys' fees) for death or injury to any person
or damage to any property whatsoever (including water tables and atmosphere) to
the extent arising or resulting in whole or in part, directly or indirectly,
from the presence or discharge of Hazardous Materials in, on, under, upon or
from the Demised Premises or the Improvements located thereon or from the
transportation or disposal of Hazardous Materials to or from the Demised
Premises, to the extent brought onto the Demised Premises by Tenant whether
knowingly or unknowingly, the standard herein being one of strict liability. For
purposes of the indemnity provided herein, any act or omission of Tenant or its
agents, employees, contractors or subcontractors (whether or not they are
negligent, intentional, willful or unlawful) shall be strictly attributable to
Tenant. Subject to Section 4.3(f), Tenant's obligations hereunder shall include,
without limitation, and whether foreseeable or unforeseeable, all costs of any
required or necessary repairs, clean-up or detoxification or decontamination of
the Demised Premises or the Improvements, and the presence and implementation of
any closure, remedial action or other required plans in connection therewith,
and shall survive the expiration of or early termination of the term of this
Lease. For purposes of the indemnity provided herein, any acts or omissions of
Tenant or its employees, agents, customers, sublessees, assignees, contractors
or subcontractors (whether or not they are negligent, intentional, willful or
unlawful) shall be strictly attributable to Tenant. Nothing in this Section 4.3
shall cause Tenant to be responsible for be for liabilities caused by Hazardous
Materials which migrate onto the Demised Premises from neighboring properties.
(e) Landlord may, at its expense, commission an environmental audit of
the Demised Premises at any time after prior written notice thereof to Tenant;
provided that such environmental audit does not unreasonably interfere with
Tenant's use of the Demised Premises, or any portion thereof, and provided
further that Landlord indemnifies, defends and holds harmless Tenant and its
officers, agents, employees and customers from and against any loss, liabilities
or damages to Tenant's machinery, equipment, fixtures and personal property, and
all liability, loss or damage arising from an injury to the property of Tenant,
or its officers, agents, employees or customers, and any death or personal
injury to any person or persons to the extent arising out of such
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<PAGE>
environmental audit except for liability, loss or damage caused by Tenant's
gross negligence or willful misconduct. However, should Tenant materially breach
any of its obligations set forth in this Section 4.3 in a manner that may expose
Landlord to material liability, then Landlord shall have the right to require
Tenant to undertake and submit to Landlord an environmental audit from an
environmental company reasonably acceptable to Landlord, which audit shall
evidence Tenant's compliance with this Section 4.3.
(f) Landlord represents and warrants that, as of the date of this
Lease, and limited to Landlord's actual knowledge, there are, and as of March 2,
1998 there will be, no Hazardous Materials located on the Demised Premises,
other than an as required for the normal operation of the Demised Premises and
in accordance with all Hazardous Materials Laws. Landlord shall indemnify,
defend (with counsel reasonably acceptable to Tenant), protect and hold Tenant
and each of Tenant's officers, directors, partners, shareholders, affiliates,
employees, agents, attorneys, successors and assigns free and harmless from and
against any and all claims, liabilities, damages, costs, penalties, forfeitures,
losses or expenses (including attorneys' fees) for death or injury to any person
or damage to any property whatsoever (including water tables and atmosphere)
arising or resulting in whole or in part, directly or indirectly, from the
presence of Hazardous Materials in, on, under, upon or from the Demised Premises
or the Improvements located thereon prior to March 2, 1998, or from the
transportation or disposal of Hazardous Materials to or from the Demised
Premises to the extent caused by Landlord whether knowingly or unknowingly, the
standard being one of strict liability.
(g) For purposes of the indemnity provided herein, any act or omission
of Landlord or its agents, employees, contractors or subcontractors (whether or
not they are negligent, intentional, willful or unlawful) shall be strictly
attributable to, Landlord. Subject to Section 4.3(f), Landlord's obligations
hereunder shall include, without limitation, and whether foreseeable or
unforeseeable, all costs of any required or necessary repairs, clean-up or
detoxification or decontamination of the Demised Promises or the Improvements,
and the presence and implementation of any closure, remedial action or other
required plans in connection therewith, and shall survive the expiration of or
early termination of the term of this Lease.
(h) The obligations of Landlord and Tenant under this Section 4.3 shall
survive the expiration or earlier termination of this Lease.
ARTICLE V
PAYMENT OF TAXES, ASSESSMENTS, ETC.
5.1 PAYMENT OF IMPOSITIONS.
(a) Except as provided to the contrary in this Section 5.1 below,
Tenant covenants and agrees to pay during the Term of this Lease, as Additional
Rent, and before any fine, penalty, interest or cost may be added thereto for
the nonpayment thereof, all real estate taxes, regular or special assessments,
water rates and charges, sewer rates and charges, including any sum or sums
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payable for present or future sewer or water capacity, (except as set forth in
Section 2.5 above) charges for public utilities, street lighting, excise levies,
licenses, permits, inspection fees, other governmental charges and all other
charges or burdens of whatsoever kind and nature (including costs, fees and
expenses of complying with any restrictive covenants or similar agreements (e.g.
CC&R's, private assessment districts or owners' associations) to which the Land
is subject as of the date of March 2, 1998), incurred in the use, occupancy,
ownership, operation, leasing or possession of the Demised Premises, without
particularizing by any known name or by whatever name hereafter called, and
whether any of the foregoing be general or special, ordinary or extraordinary,
foreseen or unforeseen (all of which are sometimes herein referred to as
"Impositions"), which at any time during the Term may have been or may be
assessed or levied on the Demised Promises or any portion thereof or any
appurtenance thereto, rents or income therefrom, and such easements or rights as
may now or hereafter be appurtenant or appertain to the use of the Demised
Premises. Tenant shall pay the current portions of all special (or similar)
assessments which during the Term of this Lease shall be laid, assessed, levied
or imposed upon or become payable or become a lien upon the Demised Premises or
any portion thereof; provided, however, that if by law any special assessment is
payable (without default) or, at the option of the owner, may be paid (without
default) in installments (whether or not interest shall accrue on the unpaid
balance of such special assessment), Tenant may (and shall only be obligated to)
pay the same, in installments as the same respectively become payable and before
any fine, penalty, interest or cost may be added thereto for the nonpayment of
any such installment and the interest thereon.
(b) Tenant shall pay all Impositions whether heretofore or hereafter
levied or assessed upon the Demised Premises or any portion thereof, which are
due and payable for periods during the Term of this Lease, including any
Extension Term. Landlord shall pay all Impositions which are payable for periods
prior to March 2, 1998 and after the termination date of the Term of this Lease.
Provisions herein to the contrary notwithstanding, Landlord shall pay that
portion of the Impositions and installments of special assessments due and
payable in respect to the Demised Premises during the year in which the Initial
Term commences and the year in which the Term ends which the number of days in
said year not within the Term of this Lease bears to 365, and Tenant shall pay
the balance of said current Impositions and current installments of special
assessments during said years.
(c) Notwithstanding the foregoing provisions of Section 5.1 (a) and
(b), Tenant shall not be responsible for (and Landlord shall pay prior to
delinquency) any increase in ad valorem property taxes which might result from
the sale of the Demised Premises during the Term of the Lease to the extent such
property taxes result from the fact that the assessed value of the Demised
Premises exceeds the total cost (including the cost of the Land, Shell
Improvements, Tenant Improvements, "soft" costs, permits, site improvements,
etc.) of the Demised Premises.
5.2 TENANT'S RIGHT TO CONTEST IMPOSITIONS. Tenant shall have the right
at its own expense to contest the amount or validity, in whole or in part, of
any Imposition by appropriate proceedings diligently conducted in good faith;
provided, however, if the payment of such Imposition is necessary to properly
appeal such Imposition, Tenant shall pay such imposition before
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delinquency; and, provided further, if there is then an uncured Event of Default
hereunder, Tenant shall have first deposited with Landlord cash or a certificate
of deposit payable to Landlord issued by a national bank or federal savings and
loan association in the amount of the Imposition so contested and unpaid,
together with all interest and penalties which may accrue in Landlord's
reasonable judgment in connection therewith, and all charges that may or might
be assessed against or become a charge on the Demised Premises or any portion
thereof during the pendency of such proceedings. If there is then in an uncured
Event of Default hereunder and if during the continuance of such proceedings,
Landlord shall, from time to time, reasonably deem the amount deposited, as
aforesaid, insufficient, Tenant shall, upon demand of Landlord, make additional
deposits of such additional sums of money or such additional certificates of
deposit as Landlord may reasonably request. If Tenant is required to make such
additional deposits hereunder and Tenant fails to make same, the amount
theretofore deposited may be applied by Landlord to the payment, removal and
discharge of such Imposition, and the interest, fines and penalties in
connection therewith, and any costs, fees (including attorneys' fees) and other
liability (including costs incurred by Landlord) accruing in any such
proceedings. Upon the termination of any such proceedings, Tenant shall pay the
amount of such Imposition or part thereof, if any, as finally determined in such
proceedings, the payment of which may have been deferred during the prosecution
of such proceedings, together with any costs, fees, including attorneys' fees,
interest, penalties, fines and other liability in connection therewith, and upon
such payment, if Landlord had previously received any amounts or certificates as
a deposit, Landlord shall return all amounts or certificates deposited with it
with respect to the contest of such Imposition, as aforesaid, or, at the written
direction of Tenant, Landlord shall make such payment out of the funds on
deposit with Landlord and the balance, if any, shall be returned to Tenant.
Tenant shall be entitled to the refund of any Imposition, penalty, fine and
interest thereon received by Landlord which has been paid by Tenant or which has
been paid by Landlord but for which Landlord has been previously reimbursed in
full by Tenant. Landlord shall not be required to join in any proceedings
referred to in this Section 5.2 unless the provisions of any law, rule or
regulation at the time in effect shall require that such proceedings be brought
by or in the name of Landlord, in which event Landlord shall join in such
proceedings or permit the same to be brought in Landlord's name upon compliance
with such conditions as Landlord may reasonably require. Landlord shall not
ultimately be subject to any liability for the payment of any fees, including
attorneys' fees, costs and expenses in connection with such proceedings. Tenant
agrees to pay all such fees (including reasonable attorneys' fees), costs and
expenses or, on demand, to make reimbursement to Landlord for such payment for
fees reasonably incurred by Landlord in connection with such proceedings as
provided above.
5.3 LEVIES AND OTHER TAXES. If, at any time during the Term of this
Lease, any method of taxation shall be such that there shall be levied, assessed
or imposed on Landlord, or on the Base Rent or Additional Rent, or on the
Demised Premises, or any portion thereof, a capital levy, gross receipts tax,
transaction privilege tax or other tax on the rents received therefrom or a
franchise tax, or an assessment, levy or charge measured by or based in whole or
in part upon such rents, Tenant covenants to pay and discharge the same, it
being the intention of the parties hereto that the rent to be paid hereunder,
shall be paid to Landlord absolutely net, without deduction or charge of any
nature whatsoever, foreseeable or unforeseeable, ordinary or extraordinary, or
of any nature, kind
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or description, except as in this Lease otherwise expressly provided. Nothing in
this Lease contained shall require Tenant to pay any municipal, state or federal
net income, franchise, or excess profits taxes assessed against Landlord, or any
municipal, state or federal capital levy, estate, succession, inheritance or
transfer taxes of Landlord, or corporation franchise taxes imposed upon any
corporate owner of the fee of the Demised Premises nor shall anything in this
Lease require Tenant to pay any income tax of Landlord or any tax in the nature
of income and/or franchise tax or in lieu of income tax.
5.4 EVIDENCE OF PAYMENT. Tenant covenants to furnish Landlord, within
thirty (30) days after Landlord requests the same, official receipts of the
appropriate taxing authority, or other appropriate proof reasonably satisfactory
to Landlord, evidencing the payment of the same. The certificate, advice or bill
of the appropriate official designated by law to make or issue the same or to
receive payment of any Imposition or other tax, assessment, levy or charge may
be relied upon by Landlord as sufficient evidence that such Imposition or other
tax, assessment, levy or charge is due and unpaid at the time of the making or
issuance of such certificate, advice or bill.
5.5 ESCROW FOR TAXES AND ASSESSMENTS. At Landlord's written demand
after any Event of Default (as hereinafter defined) and for as long as such
Event of Default is uncured, Tenant shall pay to Landlord the known or estimated
yearly real estate taxes and assessments payable with respect to the Demised
Premises in monthly payments equal to one-twelfth (11 /12) of the known or
estimated yearly real estate taxes and assessments next payable with respect to
the Demised Premises. From time to time, Landlord may re-estimate the amount of
real estate taxes and assessments, and in such event Landlord shall notify
Tenant, in writing, of such re-estimate and fix future monthly installments for
the remaining period prior to the next tax and assessment due date in an amount
sufficient to pay the re-estimated amount over the balance of such period after
giving credit for payments made by Tenant on the previous estimate. If the total
monthly payments made by Tenant pursuant to this Section 5.5 shall exceed the
amount of payments necessary for said taxes and assessments, such excess shall
be credited on subsequent monthly payments of the same nature; but if the total
of such monthly payments so made under this paragraph shall be insufficient to
pay such taxes and assessments when due, then Tenant shall pay to Landlord such
amount as may be necessary to make up the deficiency. Payment by Tenant of real
estate taxes and assessments under this Section 5.5 shall be considered as
performance of such obligation under the provisions of Section 5.1 hereof.
5.6 LANDLORD'S RIGHT TO CONTEST IMPOSITIONS. In addition to the right
of Tenant under Section 5.2 to contest the amount or validity of Impositions,
Landlord shall also have the right, but not the obligation, to contest the
amount or validity, in whole or in part, of any Impositions not contested by
Tenant, by appropriate proceedings conducted in the name of Landlord or in the
name of Landlord and Tenant. If Landlord elects to contest the amount or
validity, in whole or in part, of any Impositions, such contests by Landlord
shall be at Landlord's expense; provided, however, that if the amounts payable
by Tenant for Impositions are reduced (or if a proposed increase in such amounts
is avoided or reduced) by reason of Landlord's contest of Impositions, Tenant
shall reimburse Landlord for the costs reasonably incurred by Landlord in
contesting such Impositions,
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but such reimbursements shall not be in excess of the amount saved by Tenant.
ARTICLE VI
INSURANCE
6.1 CASUALTY INSURANCE. Tenant, at its sole cost and expense, shall
obtain and continuously maintain in full force and effect during the Term of
this Lease (including any Extension Term), commencing with March 2, 1998,
policies of insurance covering the Demised Premises, including, without
limitation, any Buildings constructed, installed or located on the Demised
Premises, naming Landlord as an additional insured, against (a) loss or damage
by fire; (b) loss or damage from such other risks or hazards now or hereafter
embraced by an "Extended Coverage Endorsement, including, but not limited to,
windstorm, hail, explosion, vandalism, riot and civil commotion, damage from
vehicles, smoke damage, water damage and debris removal; W loss for flood if the
Demised Premises are in a designated flood or flood insurance area, (d) loss or
damage caused by earthquake, subject to standard deductibles (provided, however,
that (i) Tenant shall not be required to maintain earthquake insurance if it is
not reasonably obtainable and (ii) Tenant's financial responsibility for the
premium associated with earthquake insurance shall not exceed $75,000 per year
during the Initial Term or any Option Term, with Landlord having the option of
paying any excess premium); and (e) loss or damage from such other risks or
hazards of a similar or dissimilar nature which are now or may hereafter be
customarily insured against with respect to improvements similar in
construction, design, general location, use and occupancy to the Demised
Premises or which may be required by Landlord's Lender. At all times, such
insurance coverage shall be in an amount equal to one hundred percent (100%) of
the then "Full Replacement Cost" of the Improvements. "Full Replacement Cost"
shall be interpreted to mean the cost of replacing the Improvements, without
deduction for depreciation or wear and tear, including costs attributable to
improvements or upgrades to the Improvements required by changes in laws and
regulations governing zoning, public access and accommodation, workplace
conditions, public health or safety or similar matter, and it shall include, to
the extent reasonably obtainable, a reasonable sum for architectural,
engineering, legal, administrative and supervisory fees connected with the
restoration or replacement of the Improvements in the event of damage thereto or
destruction thereof. If a sprinkler system shall be located in the Improvements,
sprinkler leakage insurance shall be procured and continuously maintained by
Tenant at Tenant's sole cost and expense. Any deductible, self- insured
retention or similar limitation on coverage shall be submitted to Landlord for
its prior written approval, which shall be granted or withheld in Landlord's
reasonable discretion.
6.2 PUBLIC LIABILITY INSURANCE. From and after March 2, 1998 and
through the entire Term (including any Extension Term), Tenant, at its sole cost
and expense, shall obtain and continuously maintain in full force and effect
comprehensive general liability insurance against any loss, liability or damage
on, about or relating to the Demised Premises, or any portion thereof, with
limits of not less than Three Million Dollars ($3,000,000) in the event of
injury to one person, Five Million Dollars ($5,000,000) in respect of any one
accident or occurrence, and One Million Dollars $1,000,000) for property damage.
Any such insurance obtained and maintained by Tenant shall
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name Landlord as an additional insured therein or shall include a "loss payee"
endorsement in favor of Landlord, and shall be obtained and maintained from and
with a reputable and financially sound insurance company authorized to issue
such insurance in the state in which the Demised Premises are located. Such
insurance shall to the extent reasonably obtainable specifically insure (by
contractual liability endorsement) Tenant's obligations under Section 20.3 of
this Lease.
6.3 OTHER INSURANCE.
(a) During the Term of this Lease, commencing with March 2, 1998,
Tenant, at its sole cost and expense, shall obtain and continuously maintain in
full force and effect boiler and pressure vessel (including, but not limited to,
pressure pipes, steam pipes and condensation return pipes) insurance, provided
the Buildings contains a boiler or other pressure vessel or pressure pipes.
Landlord shall be named as an additional insured "or loss payee in such policy
or policies of insurance.
(b) During the Term of this Lease commencing with March 2, 1998,
Tenant, at its sole cost and expense, shall obtain and continuously maintain, in
full force and effect, loss of use and business interruption or rental
interruption coverage for the payment for no less than one (1) year of (i) the
Base Rent and 00 those Impositions which will continue to be payable even during
a period when the Demised Premises are not operational.
(c) During the Term of this Lease, Tenant, at its sole cost and
expenses shall obtain and continuously maintain in full force and effect such
other insurance in such amounts against other insurable hazards which at the
time are commonly insured against in the case of promises and/or buildings or
improvements similar in construction, design, general location, use and
occupancy to the Demised Premises if required by Landlord's construction or
permanent lenders.
6.4 ADDITIONAL INSURANCE PROVISIONS. All policies of insurance required
by this Article VI shall comply with the following requirements:
(a) They shall be payable to Landlord and, if Landlord so requests
shall also be payable to any contract purchaser of the Demised Premises and/or
the holder of any mortgages now or hereafter becoming a lien on the fee of the
Demised Premises, or any portion thereof, as the interest of such purchaser or
holder appears pursuant to a standard named insured or mortgagee clause or as an
additional insured.
(b) They shall be maintained on an "occurrences" basis.
(c) They shall contain deductibles, self-insured retentions or similar
limitations on coverage only if previously submitted to Landlord for its prior
written approval, which shall be granted or withheld in Landlord's reasonable
discretion, subject at all times to the requirements of Landlord's Lender, whose
prior written approval shall also be required. In any event, such deductibles,
self-insured retentions or similar limitations on coverage shall no higher than
those
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which are customarily maintained for such insurance (casualty or liability) in
connection with facilities similar to the Demised Premises.
(d) Tenant shall not, on Tenant's own initiative or pursuant to request
or requirement of any third party, take out separate insurance concurrent in
form or contributing in the event of loss with that required in this Section,
unless the requirements of subsection (a) above are satisfied. Tenant shall
immediately notify Landlord whenever any such separate insurance is taken out
and shall deliver to Landlord original certificates evidencing the same.
(e) Each policy required under this Article VI shall have attached
thereto (a) an endorsement that such policy shall not be cancelled and that the
coverage under such policy will not be materially changed without at least
thirty (30) days prior written notice to Landlord or any mortgagee, and (b) to
the extent reasonably obtainable an endorsement to the effect that the insurance
as to the interest of Landlord or any mortgagee shall not be invalidated by any
act or neglect of Landlord or Tenant.
(f) They shall be written with companies reasonably satisfactory to
Landlord and licensed in the state in which the Demised Promises are located.
Such certificates of insurance shall be in a form reasonably acceptable to
Landlord and shall be delivered to Landlord no fewer than thirty (30) days prior
to March 2, 1998 (or such earlier date as Landlord's Lender may require) and,
prior to expiration of such policy, new certificates of insurance shall be
delivered to Landlord not less than sixty (60) days prior to the expiration of
the then current policy term.
(g) They shall be obtained from companies duly licensed to transact
business in the state of California, and maintaining during the policy term a
"General Policyholders Rating' of at least "A" and financial category rating of
"Class W in "Best's Insurance Guide.'
6.5 WAIVER OF SUBROGATION. Landlord and Tenant hereby mutually waive
any and all rights of recovery against one another for real or personal property
loss or damage occurring to the Demised Premises, or any part thereof, or any
personal property therein from perils insured against under the insurance
maintained hereunder for the benefit of the respective parties, and to the
extent the proceeds of such insurance are actually recovered, and each shall use
commercially reasonable efforts to assure that such insurance permits waiver of
liability and contains a waiver of subrogation.
6.6 TENANT'S INDEMNIFICATION OF LANDLORD. Tenant may maintain insurance
coverage upon all personal property of Tenant or the personal property of others
kept, stored or maintained on the Demised Premises against loss or damage by
fire, windstorm or other casualties or causes for such amount as Tenant may
desire. To the extent Tenant maintains such insurance, Tenant agrees that such
policies shall, to the extent obtainable, name Landlord as an "additional
insured" and contain a waiver of subrogation clause as to Landlord.
6.7 UNEARNED PREMIUMS. Upon expiration or other termination of the Term
of this
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Lease, the unearned premiums upon any insurance policies or certificates thereof
lodged with Landlord by Tenant shall, subject to the provisions of Article XIII
hereof, be payable to Tenant, provided that an Event of Default does not then
exist (or if an Event of Default does then exist, any excess over the amount
required to cure such default shall be so payable to Tenant).
6.8 BLANKET INSURANCE COVERAGE. Nothing in this Article VI shall
prevent Tenant from taking out insurance of the kind and in the amount provided
for under the preceding paragraphs of this Article VI under a blanket insurance
policy or policies (and certificates thereof reasonably satisfactory to Landlord
shall be delivered to Landlord) which may cover other properties owned, leased
or operated by Tenant as well as the Demised Premises; provided, however, that
any such policy of blanket insurance of the kind provided for shall (a) specify
therein the amounts thereof exclusively allocated to the Demised Premises (or
Tenant shall furnish Landlord and the holder of any fee mortgage with a written
statement from the insurers under such policies specifying the amounts of the
total insurance exclusively allocated to the Demised Promises), and M not
contain any clause which would result in the insured thereunder being required
to carry any insurance with respect to the property covered thereby in an amount
not less than any specific percentage of the Full Replacement Cost of such
property in order to prevent the insured therein named from becoming a
co-insurer of any loss with the insurer under such policy; and further provided,
however, that such policies of blanket insurance shall, as respects the Demised
Premises, contain the various provisions required of such an insurance policy by
the foregoing provisions of this Article VI.
ARTICLE VII
UTILITIES
7.1 PAYMENT OF UTILITIES. During the Term of this Lease, Tenant shall
pay, when due, all charges of every nature, kind or description for utilities
furnished to the Demised Premises or chargeable against the Demised Premises,
including, without limitation, all charges for water, sewage, heat, gas, light,
garbage, electricity, telephone, steam, power, or other public or private
utility services.
7.2 ADDITIONAL CHARGES. In the event that any charge or fee is required
after March 2, 1998 by the state in which the Demised Premises are located, or
by any agency, subdivision or instrumentality thereof, or by any utility company
furnishing services or utilities to the Demised Premises, or by any private
association or organization with jurisdiction over the Demised Promises, as a
condition precedent to furnishing or continuing to furnish utilities or services
to the Demised Promises, such charge or fee shall be deemed to be a utility
charge payable by Tenant. The provisions of this Section 7.2 shall include, but
not be limited to, any charges or fees for future water or sewer capacity to
serve the Demised Premises, any charges for the underground installation of gas
or other utilities or services subsequent to the installation thereof, and other
charges relating to the extension of or change in the facilities necessary to
provide the Demised Premises with adequate utility services. In the event that
Landlord has paid any such charge or fee after March 2, 1998, Tenant shall
reimburse Landlord for such utility charge.
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7.3 LANDLORD'S RESPONSIBILITY UTILITY HOOK-UP CHARGES AND FEES.
Notwithstanding anything contained in this Article VII to the contrary, (a) as
of March 2, 1998, all utilities contemplated by the Improvements shall be
hooked-up and fully operational and functional to the Demised Premises and all
capacity, hookup and similar charges shall have been paid by Landlord, except to
the extent they constitute Excess Shell Costs or Excess Tenant Improvement
Costs; and (b) if any utility or service charge or fee related to capital
improvements made during the Term of this Lease, whose tax depreciable life
extends beyond the termination date of this Lease, Tenant shall only pay the pro
rata portion of such charge or fee to the extent that such tax depreciable life
is within the Term of this Lease.
ARTICLE VIII
REPAIRS AND MAINTENANCE OF DEMISED PREMISES
8.1 TENANT'S RESPONSIBILITIES. Tenant shall, at its own expense, keep
the Demised Premises, and every part thereof, including, but not limited to, the
grounds, landscaped areas, truck parking and loading and dock areas, the roof
surface and roof membrane, drainage swales, gutters, downspouts, glass, interior
and exterior portions of the Buildings, and the plumbing, heating,
air-conditioning, wiring, elevators and other mechanical systems therein, the
facilities thereof and all sidewalks, parking areas, driveways, passageways and
alleys adjacent thereto and other appurtenances thereunto belonging, in good
order, appearance, condition and repair, free of obstructions, dirt, rubbish,
snow and debris and so as to comply fully and at all times with all present and
future applicable governmental laws, rules and regulations, and covenants,
conditions and restrictions to which the Demised Premises are subject as of
March 2, 1998, and consistent with other comparable properties in the Market
Area. Tenant agrees to make all replacements and repairs to the Demised Premises
necessary to maintain the Demised Premises in the condition described in the
preceding sentence. Tenant, at its own expense, shall also seal (paint) the
exterior of the Buildings periodically during the Term (including any Extension
Term) of this Lease in accordance with the recommendations of the manufacturer
of the material used for the exterior of said Buildings. Tenant shall maintain
regular service contracts for all of the Demised Premises' (i) mechanical
systems (including HVAC), (ii) roof surface and membrane, and (iii) elevator(s),
and shall, upon Landlord's request, provide Landlord copies of such contracts or
any other maintenance or service contracts maintained by Tenant with respect to
the Demised Premises. Any such contract shall be terminable by Tenant (or its
successors, including Landlord or a Lender) on not less than thirty (30) days
notice to the contractor or shall provide that it does not bind a Lender. All
repairs, replacements and renewals shall be at least equal in quality and class
to the original work. Because Tenant is undertaking the responsibility for most
aspects of the ongoing maintenance of the Demised Promises, and because this
Lease contains specifically negotiated "self-help" provisions which allow
Tenant, under certain circumstances, to effect repairs which are Landlord's
responsibility and offset the cost of those repairs against Bass Rent, Tenant
waives any provisions of California law with respect to Landlord's obligations
for tenantability of the Demised Premises and Tenant's right to make repairs and
deduct the expenses of such repairs from Rent. When used in this Article VIII,
"repairs" shall include all necessary replacements, renewals, alterations,
additions and betterments.
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8.2 LANDLORD'S RESPONSIBILITIES; MANAGEMENT FEE. Landlord shall, at its
own expense; maintain and keep in good order, condition and repair (i) the
structural elements of the roof, (ii) exterior and load-bearing walls (except
for painting which shall be Tenant's responsibility), (iii) the Buildings
foundations and all underground utilities in good order, condition and repair,
except to the extent of damage or failure caused by Tenant (e.g. malfunction of
utilities caused by Tenant's use). In consideration of Landlord's
responsibilities under this Section 8.2, Tenant shall pay Landlord, as
Additional Rent, a monthly management fee equal to one percent (1%) of the then
applicable monthly Base Rent, which payment shall be due with each monthly
payment of Base Rent. In the event Landlord fails to maintain and keep in good
order, condition and repair the above- referenced items, and if such failure
continues for ten (10) business days following delivery of written notice by
Tenant to Landlord (or such longer period as may be required to complete such
repair if it is diligently and continuously pursued), Tenant may cause such item
or repair or maintenance to be made and offset the cost thereof against the Base
Rent next due.
8.3 SHARING OF EXPENSES OF CAPITAL ITEMS. Certain items of ongoing
repair and maintenance which are Tenant's responsibility under Section 8.1, may,
under generally acceptable accounting principles consistently applied, be
considered to have a reasonable useful life which would extend beyond the end of
the Term (a "Capital Item"). Landlord and Tenant shall share the expenses
associated with such Capital Items, as follows:
(a) Tenant shall pay all expenses related to Capital Items.
(b) At any time Tenant intends to incur an expense related to a Capital
Item, Tenant shall notify Landlord, in writing, and Landlord shall approve or
disapprove such expenditure, which approval shall not be unreasonably withheld
or delayed. Landlord shall not be required to approve any expenditure which is
not required for the maintenance and operation of the Demised Promises.
(c) At that time, Landlord and Tenant shall also agree on the "useful"
life of the Capital Item and, shall determine a level per-year useful life
allocation (the "Useful Life Allocation") of financial responsibility for that
Capital Item. By way of example only, financial responsibility for a Capital
Item which requires the expenditure of $50,000 and which has a five-year
"useful" life would be assigned a $10,000 per year Useful Life Allocation.
(d) The Useful Life Allocation shall be applied to the item of expense
related to the Capital Item, until the full amount of such expense has been
amortized, although Tenant shall have the responsibility for paying all expenses
related to Capital Items when incurred.
(e) If, at the end of the Term of Lease, including any Extension Term,
there remains any unamortized Useful Life Allocation(s), Landlord shall, within
thirty (30) days after the end of the Term, refund to Tenant, such unamortized
Useful Life Allocations, in cash.
8.4 TENANT'S WAIVER OF CLAIMS AGAINST LANDLORD. Except as otherwise
provided
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in this Lease, Landlord shall not be required to furnish any services or
facilities or to make any repairs or alterations in, about or to the Demised
Premises or any improvements hereafter erected thereon and, subject to the same
limitations, Tenant hereby assumes the full and sole responsibility for the
condition, operation, repair, replacement, maintenance and management of the
Demised Promises and all improvements hereafter erected thereon.
8.5 PROHIBITION AGAINST WASTE. Tenant shall not do or suffer any waste,
damage, disfigurement or injury to the Demised Promises, or any improvements
hereafter erected thereon, or to the fixtures or equipment therein, or permit or
suffer any overloading of the floors or other use of the Improvements that would
place an undue stress on the same or any portion thereof beyond that for which
the same was designed.
ARTICLE IX
COMPLIANCE WITH APPLICABLE LAWS AND RESTRICTIONS
9.1 COMPLIANCE WITH APPLICABLE LAWS AND RESTRICTIONS. Throughout the
Term of this Lease, and at Tenant's sole cost and expense, Tenant shall promptly
comply or cause compliance with or remove or cure any violation caused by Tenant
of any and all present and future laws, rules and regulations applicable to the
Demised Premises and the appropriate departments, commissions, boards,
associations and officers enforcing them, and the orders, rules and regulations
of the Board of Fire Underwriters where the Demised Premises are situated, or
any other governmental body now or hereafter constituted exercising lawful or
valid authority over the Demised Premises, or any portion thereof, or exercising
authority with respect to the use or manner of use of the Demised Premises,
whether or not the compliance, curing or removal of any such violation and the
costs and expenses necessitated thereby shall have been foreseen or unforeseen,
ordinary or extraordinary, and whether or not the same shall be presently within
the contemplation of Landlord or Tenant or shall involve any change of
governmental policy or require structural or extraordinary repairs, alterations
or additions by Tenant and irrespective of the costs thereof. Tenant shall also
comply with, observe and perform all provisions and requirements of all policies
of insurance at any time in force with respect to the Demised Premises and
required to be obtained and maintained under the terms of Article VI hereof, and
Tenant shall comply with all development permits issued by governmental
authorities issued in connection with development of the Demised Premises,
copies of which shall be supplied to Tenant by Landlord promptly after issuance.
Tenant acknowledges that the Land, and thereby the Demised Premises, are or
shall be subject to the following additional covenants, restrictions and
conditions with which Tenant shall comply throughout the term of this Lease to
the same extent as provided above with the covenants, conditions, restrictions,
easements and other matters of record as of the date of this Lease. Furthermore,
Tenant acknowledges that after the execution of this Lease it is Landlord's
intention to allow the Land to be included within the Sorrento Rim Business Park
(the "Business Park") and an association of owners of nearby property which is
currently expected to be known as the "Sorrento Rim Owner's Association" (the
"Association"). Tenant has previously reviewed drafts of the Articles of
Incorporation and Bylaws of the Association and a draft of the Declaration of
Covenants,
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Conditions and Restrictions for the Business Park and hereby agrees that this
Lease shall be subject to covenants, conditions and restrictions on
substantially the same terms as the CC&R's and will execute such documents as
may be reasonably necessary to subject this Lease thereto.
9.2 TENANT'S OBLIGATIONS. Notwithstanding that it may be usual and
customary for Landlord to assume responsibility and performance of any or all of
the obligations set forth in this Article IX, and notwithstanding any order,
rule or regulation directed to Landlord to perform, Tenant hereby assumes such
obligations because, by nature of this Lease, or as expressly provided under any
other provision hereof, the rents and income derived from this Lease by Landlord
are "net" rentals not to be diminished by any expense incident to the ownership,
occupancy, use, leasing or possession of the Demised Premises or any portion
thereof (except as expressly provided in this Lease).
9.3 TENANT'S RIGHT TO CONTEST LAWS AND ORDINANCES. After prior written
notice to Landlord, Tenant, at its sole cost and expense and without cost or
expense to Landlord, shall have the right to contest the validity or application
of any Applicable Laws or Restrictions in the name of Tenant or Landlord, or
both, by appropriate legal proceedings diligently conducted but only if
compliance with the terms of any such law or ordinance pending the prosecution
of any such proceeding, may legally be delayed without incurring of any material
lien, charge or liability of any kind against the Demised Premises, or any
portion thereof, and without subjecting Landlord or Tenant to any material
liability, civil or criminal, for failure so to comply therewith until the final
determination of such proceeding; provided, however, if any lien, charge or
civil liability would be incurred by reason of any such delay, Tenant
nevertheless, on the prior written consent of Landlord, which consent shall not
be unreasonably withheld, may contest as aforesaid and delay as aforesaid,
provided that such delay would not subject Tenant or Landlord to criminal
liability and Tenant (a) furnishes Landlord security, reasonably satisfactory to
Landlord, against any loss or injury by reason of any such contest or delay, (b)
prosecutes the contest with due diligence and in good faith, and (c) agrees to
indemnify, defend and hold harmless Landlord and the Demised Premises from any
charge, liability or expense whatsoever. The security furnished to Landlord by
Tenant shall be in the form of a cash deposit or a Certificate of Deposit issued
by a national bank or federal savings and loan association payable to Landlord.
Said deposit shall be held, administered and distributed in accordance with the
provisions of Section 5.2 hereof relating to the contest of the amount or
validity of any Imposition. If necessary or proper to permit Tenant so to
contest the validity or application of any such law or ordinance, Landlord
shall, at Tenant's sole cost and expense, including reasonable attorneys' fees
incurred by Landlord, execute and deliver any appropriate papers or other
documents; provided, however, that Landlord shall not be required to execute any
document or consent to any proceeding which would result in the imposition of
any cost, charge, expense or penalty on Landlord or the Demised Premises.
ARTICLE X
MECHANIC'S LIENS AND OTHER LIENS
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10.1 MECHANIC'S LIENS.
(a) Tenant shall keep the Demised Premises free from any liens arising
out of work performed, materials furnished and obligations incurred by Tenant.
Tenant covenants and agrees that any mechanic's lien filed against the Demised
Premises for work claimed to have been done for, or materials claimed to have
been furnished to, Tenant shall be discharged by Tenant, by bond or otherwise,
within thirty (30) days after the filing thereof, at the sole cost and expense
of Tenant. This provision does not apply to any claim or lien arising out of the
original construction of the Demised Premises by Landlord pursuant to this
Lease.
(b) Tenant shall have the right to contest with due diligence the
validity or amount of any lien or claimed lien created by Tenant if Tenant shall
give to Landlord such security as Landlord may reasonably require to insure
payment thereof and prevent any sale, foreclosure or forfeiture of the Demised
Premises or any portion thereof by reason of such nonpayment. On final
determination of the lien or claim for lien, Tenant shall immediately pay any
judgment rendered with all proper costs and charges and shall have the lien
released or judgment satisfied at Tenant's own expense, and if Tenant shall fail
to do so, Landlord may at its option, pay any such final judgment and clear the
Demised Premises therefrom. If Tenant shall fail to contest with due diligence
the validity or amount of any such lien or claimed lien created by Tenant, or to
give Landlord security as hereinabove provided, Landlord may, but shall not be
required to, contest the validity or amount of any such lien or claimed lien or
settle or compromise the same without inquiring into the validity of the claim
or the reasonableness of the amount thereof. Should any lien be filed against
the Demised Premises or should any action of any character affecting the title
thereto be commenced, Tenant shall give to Landlord written notice thereof as
soon as notice of such lien or action comes to the knowledge of Tenant.
(c) Should Tenant fail to discharge any such lien, Landlord may, at
Landlord's election, pay such claim or post a bond or otherwise provide security
to eliminate the lien as a claim against title, and the cost thereof shall be
immediately due from Tenant as Additional Rent. Tenant shall not suffer or
permit any mechanic's lien or other lien to be filed against the Demised
Premises, or any portion thereof, by reason of work, labor, skill, services,
equipment or materials supplied or claimed to have been supplied to the Demised
Premises at the request of Tenant, or anyone holding the Demised Premises, or
any portion thereof, through or under Tenant.
(d) All materialmen, contractors, artisans, mechanics, laborers and any
other person now or hereafter furnishing any labor, services, materials,
supplies or equipment to Tenant with respect to the Demised Premises, or any
portion thereof, are hereby charged with notice that they must look exclusively
to Tenant to obtain payment for the same. Notice is hereby given that Landlord
shall not be liable for any labor, services, materials, supplies, skill,
machinery, fixtures or equipment furnished or to be furnished to Tenant upon
credit, and that no mechanic's lien or other lien for any such labor, services,
materials, supplies, machinery, fixtures or equipment shall attach to or affect
the estate or interest of Landlord in and to the Demised Promises or any portion
thereof.
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10.2 LANDLORD'S INDEMNIFICATION. The provisions of Section 10. 1 above
shall not apply to any mechanic's lien or other lien for labor, services,
materials, supplies, machinery, fixtures or equipment furnished to the Demised
Premises in the performance of Landlord's obligations to construct the
Improvements required by the provisions of Article 11 hereof or in the
performance of Landlord's other obligations under this Lease, and Landlord does
hereby agree to indemnify and defend Tenant against and save Tenant and the
Demised Premises and any portion thereof harmless from all losses, costs,
damages, expenses, liabilities and obligations, including, without limitation,
reasonable attorneys' fees resulting from the assertion, filing, foreclosure or
other legal proceedings with respect to any such mechanic's lien or other lien.
10.3 REMOVAL OF LIENS. Except as otherwise provided for in this Article
X, Tenant shall not create, permit or suffer, and shall promptly discharge and
satisfy of record, any other lien, encumbrance, charge, security interest or
other right or interest which shall be or become a lien, encumbrance, charge or
security interest upon the Demised Premises, or any portion thereof, or the
income therefrom, or on the interest of Landlord or Tenant in the Demised
Premises, or any portion thereof, if such lien, encumbrance, charge, security
interest or other right or interest shall result from the actions of Tenant or
others acting on the behalf of or for Tenant (other than Landlord).
ARTICLE XI
LANDLORD'S PERFORMANCE OF TENANT'S OBLIGATIONS
In the event Tenant fails to pay or discharge any Additional
Obligation, Landlord may, but shall not be obligated to, in addition to its
remedies in an Event of Default, provide a factually correct written notice of
such failure, and if Tenant still fails to cure such failure within ten (10)
days after Tenant's receipt of such notice, Landlord may pay or perform the
same, and in that event Tenant shall within ten (10) days after invoice
reimburse Landlord therefor (together with interest at the Maximum Rate of
Interest from the date Landlord made such payment), which amount shall be deemed
Additional Rent; provided, however, that Landlord shall be entitled to pay such
amount without prior notice to Tenant if Landlord reasonably believes that any
further delay would expose Landlord or the Demised Premises to (i) substantial
civil or criminal penalties, (ii) a potential default under a mortgage, deed of
trust or similar obligation, or (iii) lack of insurance coverage as required
hereunder, or is otherwise an emergency. Nothing herein contained shall be
deemed as a waiver or release of Tenant from any obligation of Tenant contained
in this Lease.
ARTICLE XII
DEFAULTS OF TENANT
12.1 EVENTS OF DEFAULT. Any one or more of the following events shall
be an event of default by Tenant ("Event of Default") under this Lease:
(a) Tenant fails to pay any Base Rent or Additional Rent or any other
sum
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required by this Lease to be paid by Tenant when the same becomes due and
payable and five (5) days has elapsed following written notice from Landlord of
such failure to pay; or
(b) Tenant fails to perform or comply with any other term hereof, and
such failure shall continue for more than ten (10) days after notice thereof
from Landlord, and Tenant shall not within such period commence with due
diligence and dispatch the curing of such default, or, having so commenced,
shall thereafter fail or neglect to prosecute or complete with due diligence and
dispatch the curing of such default; or
(c) Tenant makes a general assignment for the benefit of creditors or
admits in writing its inability to pay its debts as they become due or files a
petition in bankruptcy, or is adjudicated a bankrupt or insolvent, or files a
petition seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law, or regulation, or files an answer admitting or fails to reasonably contest
the material allegations of a petition filed against it in any such proceeding,
or seeks or consents to or acquiesce in the appointment of any trustee, receiver
or liquidator of Tenant or any material part of its properties; or
(d) Within ninety (90) days after the commencement of any proceeding
against Tenant seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, such proceeding has not been dismissed, or
if, within ninety (90) days after the appointment without the consent or
acquiescence of Tenant, of any trustee, receiver or liquidator of Tenant or of
any material part of its properties, such appointment has not been vacated; or
(e) Tenant permits the abandonment or non-occupancy of the Demised
Premises; or
(f) Tenant sublets, assigns, mortgages, pledges, transfers or otherwise
encumbers or disposes of its interest in the Demised Premises or this Lease, in
whole or in part, in violation of Section 15.1 hereof; or
(g) Any default under any Guaranty delivered to Landlord hereunder.
12.2 LANDLORD'S REMEDIES. Upon the occurrence of an Event of Default,
Landlord, at its option, without further notice or demand to Tenant, shall have,
in addition to all other rights and remedies provided in this Lease, at law or
in equity, the option to pursue any one or more of the following remedies, each
and all of which shall be cumulative and nonexclusive, without any notice or
demand whatsoever:
(a) Terminate this Lease, in which event Tenant shall immediately
surrender the Demised Promises to Landlord, and if Tenant fails to do so,
Landlord may, without prejudice to any other remedy which it may have for
possession or arrearages in Base Rent or Additional Rent, enter
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upon and take possession of the Demised Premises and expel or remove Tenant and
any other person who may be occupying the Demised Premises or any part thereof,
without being liable for prosecution or any claim or damages therefor; and
Landlord may recover from Tenant the following:
(i) The worth at the time of award of any unpaid Base Rent and
Additional Rent which has been earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by which the
unpaid Base Rent and Additional Rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided; plus
(iii) The worth at the time of award of the amount by which the
unpaid Base Rent and Additional Rent for the balance of the Lease Term after the
time of award exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided; plus
(iv) Any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom; and
(v) Such other amounts in addition to or in lieu of the foregoing
as may be permitted from time to time by applicable law.
(b) If Landlord does not elect to terminate this Lease on account of
any default by Tenant, Landlord may, from time to time, without terminating this
Lease, enforce all of its rights and remedies under this Lease, including the
right to recover all Base Rent and Additional Rent as they become due.
(c) The term "Rent" as used in this Section 12.2 shall be deemed to be
and to mean all sums of every nature required to be paid by Tenant pursuant to
the terms of this Lease, whether to Landlord or to others. As used in
subsections (i) and (ii), above, the "worth at the time of award' shall be
computed at the Maximum Rate of Interest. As used in subsection (iii), above,
the "worth at the time of award" shall be computed by discounting such amount at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
award plus one percent (1%). Nothing herein shall be deemed to relieve Landlord
of its obligation to mitigate its damages following an Event of Default.
12.3 NEW LEASE FOLLOWING TERMINATION. In the event Landlord elects to
terminate this Lease and relet the Premises, it may execute any new lease in its
own name. Tenant hereunder shall have no right or authority whatsoever to
collect any Base Rent, Additional Rent or other sums from such tenant. The
proceeds of any such reletting shall be applied as follows:
(a) First, to the payment of any indebtedness other than Base Rent or
Additional
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Rent due hereunder from Tenant to Landlord, including but not limited to storage
charges or brokerage commissions owing from Tenant to Landlord as the result of
such reletting;
(b) Second, to the payment of the costs and expenses of reletting the
Premises, including alterations and repairs which Landlord deems reasonably
necessary and advisable, and reasonable attorneys' fees incurred by Landlord in
connection with the retaking of the Demised Premises and such reletting;
(c) Third, to the payment of Base Rent, Additional Rent and other
charges due and unpaid hereunder; and
(d) Fourth, to the payment of future Base Rent, Additional Charges and
other damages payable by Tenant under this Lease.
12.4 CUMULATIVE RIGHTS; NO WAIVER. All rights, options and remedies of
Landlord contained in this Lease shall be construed and held to be non-exclusive
and cumulative. Landlord shall have the right to pursue any or all of such
remedies or any other remedy or relief which may be provided by law, whether or
not stated in this Lease. No waiver of any Event of Default of Tenant hereunder
shall be implied from the acceptance by Lender of any payments due hereunder
(except with respect to the amount so collected) or any omission by Landlord
party to take any action on account of such Event of Default if such Event of
Default persists or is repeated, and no express waiver shall affect defaults
other than as specified in said waiver.
12.5 SURRENDER OF DEMISED PREMISES. Upon any expiration or termination
of this Lease, Tenant shall quit and peaceably surrender the Demised Premises
and all portions thereof to Landlord, and Landlord may, upon or at any time
after any such expiration or termination and without further notice, enter upon
and reenter the Demised Premises and all portions thereof and possess and
repossess itself thereof by force, summary proceeding, ejectment or otherwise,
and may dispossess Tenant and remove Tenant and all other persons and property
from the Demised Premises and all portions thereof and may have, hold and enjoy
the Demised Premises and the right to receive all rental and other income of and
from the same.
12.6 INTEREST ON UNPAID AMOUNTS. If Tenant shall commit an Event of
Default, Landlord may cure the same, but shall not be required to do so, and in
exercising any such right, may employ counsel and pay necessary and incidental
costs and expenses, including reasonable attorneys' fees. All reasonable sums so
paid by Landlord, and all reasonable and necessary costs and expenses, including
reasonable attorneys' fees, in connection with the performance of any such act
by Landlord, together with interest thereon at the Maximum Rate of Interest from
the date of making such expenditure by Landlord, shall be deemed Additional Rent
hereunder and, except as is otherwise expressly provided herein, shall be
payable to Landlord within ten (10) days after written demand, and Tenant
covenants to pay any such sum or sums, with interest as aforesaid, and Landlord
shall have, in addition to any other right or remedy of Landlord, the same
rights and remedies in the event of nonpayment thereof by Tenant as in the case
of default by Tenant in the payment of monthly Base.
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Rent. Landlord shall not be limited in the proof of any damages which Landlord
may claim against Tenant arising out of or by reason of Tenant's failure to
provide and keep in force insurance as aforesaid, to the amount of the insurance
premium or premiums not paid or not incurred by Tenant, and which would have
been payable upon such insurance, but Landlord shall also be entitled to recover
as damages for such breach the uninsured amount of any loss (to the extent of
any deficiency between the dollar limits of insurance required by the provisions
of this Lease and the dollar limits of the insurance actually carried by Tenant)
and reasonable costs and expenses, including reasonable attorneys' fees,
suffered or incurred by reason thereof occurring during any period when Tenant
shall have failed or neglected to provide insurance as aforesaid.
ARTICLE XIII
DESTRUCTION AND RESTORATION
13.1 DESTRUCTION AND RESTORATION.
(a) Tenant covenants and agrees that, in case of damage to or
destruction of the Improvements during the Term, whether by fire or otherwise,
subject to the provisions of subsection (b), below, Tenant shall make sufficient
funds available to Landlord, and subject to Tenant providing such sufficient
funds, Landlord shall promptly restore, repair, replace and rebuild the same as
nearly as possible to the condition that the same were in immediately prior to
such damage or destruction with such changes or alterations as may be reasonably
acceptable to Landlord and Tenant or required by Applicable Land Use Laws and
Restrictions then in effect. Tenant shall immediately give Landlord written
notice of such damage or destruction upon Tenant's or any assignee's or
subtenant's knowledge of the occurrence thereof and specify in such notice, in
reasonable detail, the extent thereof. Such restorations, repairs, replacements,
rebuilding, changes and alterations, including the cost of temporary repairs for
the protection of the Demised Premises, or any portion thereof, pending
completion thereof are sometimes hereinafter referred to as the "Restoration."
Landlord shall be entitled to recover all "soft" costs incurred in connection
with Landlord's performance of the Restoration including a fee competitive with
others providing similar services. The Restoration shall be carried on and
completed in accordance with the provisions and conditions of Section 13.2
hereof.
(b) If the amount of the insurance proceeds recovered from the policy
or policies maintained (or required to be maintained) by Tenant, as described in
Article VI of this Lease, is reasonably deemed insufficient by a qualified
contractor, reasonably acceptable to Tenant and Landlord (or Landlord's lender,
as the case may be) to complete the Restoration of such Improvements (exclusive
of Tenant's personal property and trade fixtures which shall be restored,
repaired or rebuilt, at Tenant's discretion, out of Tenant's separate funds),
Tenant shall, upon request of Landlord (or by Landlord's lender, as the case may
be), deposit with Landlord (or Landlord's Lender or insurance carrier, if
required) a cash deposit equal to fifty percent (50%) of W the reasonable
estimate of the amount necessary to complete the Restoration of such
Improvements less (ii) the amount of such insurance proceeds available (the
"UNFUNDED RESTORATION COST"), with Landlord being responsible for the remaining
fifty percent (50%) of the Unfunded Restoration Cost;
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provided that Landlord shall have no responsibility for any Unfunded Restoration
Cost and Tenant shall be fully responsible for any Unfunded Restoration Cost to
the extent fl) it is the result of Tenant's failure to maintain the insurance
required to be maintained pursuant to Article VI hereof, (i) sufficient
insurance proceeds are not available due to an act or omission by Tenant, or
(iii) the amount of the Unfunded Restoration Cost is less than Fifty Thousand
Dollars ($50,000). Notwithstanding the foregoing, if Landlord is prohibited from
effecting the Restoration of the Demised Premises due to applicable governmental
laws, rules or regulations then in effect, Landlord shall not be required to
effect such Restoration and this Lease shall terminate. The provisions of this
Article XIII shall be subject to and superseded by the contrary requirements of
any Lender as contained in any mortgage, deed of trust, ground lease or similar
instrument of which Tenant has actual or constructive notice.
13.2 APPLICATION OF INSURANCE PROCEEDS.
(a) All moneys recovered from the insurance policy or policies
maintained (or required to be maintained) by Tenant, shall be paid directly to
Landlord (or hold by Landlord's lender, if required) on account of such damage
or destruction. Such amounts, less the reasonable costs, if any, incurred by
Landlord in recovering such funds, shall be applied to the payment of the costs
of the Restoration and shall be paid out from time-to-time as the Restoration
progresses upon the written request of Tenant, accompanied by a certificate of
the architect or a qualified professional engineer in charge of the Restoration
stating that as of the date of such certificate (a) the sum requested is justly
due to the contractors, subcontractors, materialmen, laborers, engineers,
architects, or persons, firms or corporations furnishing or supplying work,
labor, services or materials for such Restoration, and when added to all sums
previously paid out does not exceed the value of the Restoration performed to
the date of such certificate by all of said parties; M except for the amount, if
any, stated in such certificates to be due for work, labor, services or
materials, there is no outstanding indebtedness known to the person signing such
certificate, after due inquiry, which is then due for work, labor, services or
materials in connection with such Restoration, which, if unpaid, might become
the basis of a mechanic's lien or similar lien with respect to the Restoration
or a lien upon the Demised Premises, or any portion thereof; and (c) the costs,
as estimated by the person signing such certificate, of the completion of the
Restoration required to be done subsequent to the date of such certificate in
order to complete the Restoration do not exceed the sum of the remaining
insurance moneys, plus the amount deposited by the parties (as applicable) after
payment of the sum requested in such certificate.
(b) Subject to the provisions of Section 13.1 (b), hereof, if the
insurance moneys and such other sums, if any, deposited with Landlord (or with
Landlord's lender) pursuant to Section 13.1 (a) or (b) hereof, shall be
insufficient to pay the entire costs of the Restoration, Tenant agrees to pay
any deficiency promptly upon demand. Upon completion of the Restoration and
payment in full thereof by Tenant, Landlord shall, within a reasonable period of
time, turn over to Tenant all insurance moneys or other moneys then remaining
upon the parties' joint, good-faith determination that the Restoration has been
paid for in full and the damaged or destroyed Buildings and other Improvements
repaired, restored or rebuilt as nearly as possible to the condition they were
in
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immediately prior to such damage or destruction, or with such changes or
alterations as may be made in conformity with Section 13.1 and Article XIX
hereof.
13.3 CONTINUANCE OF TENANT'S OBLIGATIONS. Except as provided for in
this Section 13.3 and in Section 13.6, no destruction of or damage to the
Demised Premises, or any portion thereof, by fire, casualty or otherwise shall
permit Tenant to surrender this Lease or shall relieve Tenant from its liability
to pay to Landlord the Base Rent and Additional Rent payable under this Lease or
from any of its other obligations under this Lease, and Tenant waives any rights
now or hereafter conferred upon Tenant by present or future law or otherwise to
quit or surrender this Lease or the Demised Premises, or any portion thereof, to
Landlord or to any suspension, diminution, abatement or reduction of rent an
account of any such damage or destruction.
13.4 AVAILABILITY OF INSURANCE PROCEEDS. To the extent that any
insurance moneys which would otherwise be payable and used in the Restoration of
the damaged or destroyed Improvements are paid to any mortgagee of Landlord and
applied in payment of or reduction of the sum or sums secured by any such
mortgage or mortgages made by Landlord on the Demised Premises, Landlord shall
make available, for the purpose of Restoration of such Improvements, an amount
equal to the amount payable to its mortgagee out of such proceeds, and such sum
shall be applied in the manner provided in Section 13.2 hereof.
13.5 COMPLETION OF RESTORATION. The foregoing provisions of this
Article XIII apply only to damage or destruction of the Improvements by fire,
casualty or other cause occurring after March 2, 1998. Any such damage or
destruction occurring prior to such time shall be restored, repaired, replaced
and rebuilt by Landlord.
13.6 TERMINATION OF LEASE. If, within twelve (12) months prior to the
expiration of the term of this Lease, the Improvements shall be destroyed or
damaged to such an extent that the Restoration thereof is reasonably estimated
to take more than sixty (60) days to complete, Tenant shall compute the amount
of the net proceeds of the insurance resulting therefrom (to be collected and
held by Landlord (or Landlord's lender)), and, provided that no Event of Default
of Incipient Default is then in existence, and further provided that Tenant has
fully and properly maintained the insurance required to be maintained hereunder,
if Tenant shall be unable or unwilling to restore such damage or destruction for
occupancy by Tenant, Tenant shall, within thirty (30) days following the
occurrence of such destruction or damage, notify Landlord, in writing, of such
fact, which notice shall be accompanied by a detailed statement of the nature
and extent of such damage or destruction, detailed estimates of the total cost
of Restoration, a statement of the amount which may be required to restore such
damage or destruction, and a statement of the amount of insurance proceeds which
will be available to restore such damage or destruction. Tenant shall hive the
option, at that time, to terminate this Lease and surrender the Demised Premises
to Landlord by a notice, in writing, addressed to Landlord, specifying such
election accompanied by Tenant's payment of the balance of the Base Rent and
Additional Rent due for the remainder of the term of this Lease and other
charges hereafter specified in this Section 13.6, provided that Tenant shall be
entitled to a credit against such amount for the amount of loss of use and
business interruption insurance Tenant which
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is or will be actually paid to Landlord. Upon the giving of such notice and the
payment of such amounts (or evidence that such payment will be made), the term
of this Lease shall cease and come to an end on a day to be specified in
Tenant's notice, which date shall not be more than thirty (30) days after the
date of delivery of such notice by Tenant to Landlord. In such event Landlord
shall be entitled to the proceeds of all insurance required to be maintained by
Tenant hereunder and Tenant shall execute all documents reasonably requested by
Landlord to allow such proceeds to be paid to Landlord or as Landlord may
otherwise direct (e.g. to Landlord's lender).
ARTICLE XIV
CONDEMNATION
14.1 CONDEMNATION OF ENTIRE DEMISED PREMISES. If, during the Initial
Term of this Lease or any extension or renewal thereof, the entire Demised
Premises or the entire Buildings shall be taken as the result of the exercise of
the power of eminent domain (hereinafter referred to as the "Proceedings"), this
Lease and all right, title and interest of Tenant hereunder shall cease and come
to an end on the date of vesting of title pursuant to such Proceedings. In any
taking of the Demised Premises, or any portion thereof, whether or not this
Lease is terminated as in this Article provided, Tenant shall not be entitled to
any portion of the award for the taking of the Demised Premises or damage to the
Improvements, except as otherwise provided in Section 14.3 with respect to the
restoration of the Improvements, and Tenant hereby waives any right it now has
or may have under present or future law to receive any separate award of damages
for its interest in the Demised Promises or any portion thereof, except that
Tenant shall have, nevertheless, the limited right to prove in the Proceedings
and to receive any award which may be made for damages to or condemnation of
Tenant's movable trade fixtures and equipment or alterations to the Demised
Premises for which Tenant has directly paid (i.e. not Tenant Improvements paid
for with the Tenant Improvements Allowance), for goodwill, and for Tenant's
relocation costs in connection therewith.
14.2 PARTIAL CONDEMNATION/TERMINATION OF LEASE. If, during the Term of
this Lease, an amount of the entire Demised~ Premises is taken in a Proceeding
which is less than the entire Demised Premises but is so much that the utility
and functionality of the Demised Premises for Tenant's intended use (as
described in Section 4. 1, hereof) is materially and adversely affected
(including as a result of the taking of a portion of the area of the Demised
Premises used for vehicular parking), notwithstanding the restoration of the
Demised Premises as provided below, Tenant may, at its option, and subject to
the requirements of this Section 14.2 terminate this Lease as to the remainder
of the Demised Premises not so taken. Notwithstanding the foregoing, Tenant
shall not have the right to terminate this Lease pursuant to the preceding
sentence unless (a) the business of Tenant conducted in the portion of the
Demised Premises taken cannot reasonably be carried on with substantially the
same utility and functionality in the remainder of the Demised Promises, and (b)
Tenant (or Landlord for Tenant) cannot construct or secure on the Demised
Premises substantially similar space to the space so taken and as a
substantially integrated whole with the remaining portion of the Demised
Promises. Furthermore, Tenant may terminate this Lease following such a taking
if (i) the remainder of the Demised Premises cannot be restored as described
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in this Section 14.2 within one hundred eighty 0 80) days, or (ii) Tenant is
deprived of the use of the Demised Premises for more than ninety (90)
consecutive days, following the date of vesting of title in such Proceedings.
Such termination as to the remainder of the Demised Premises shall be effected
by notice in writing given not more than thirty (30) days after the date of
vesting of title in such Proceedings, and shall specify a date no more than
thirty (30) days after the giving of such notice as the date for such
termination. Upon the date specified in such notice, the Term of this Lease, and
all right, title and interest of Tenant hereunder, shall cease and come to an
and. If this Lease is terminated as provided in this Section 14.2, Landlord
shall be entitled to and shall receive the total award made in such Proceedings,
Tenant hereby assigning any interest in such award, damages, and compensation to
Landlord, and Tenant hereby waiving any right Tenant now has or may have under
present or future law to receive any separate award of damages for its interest
in the Demised Premises or any portion thereof or its interest in this Lease,
except as otherwise provided in Section 14.1. The right of Tenant to terminate
this Lease as provided in this Section 14.2, shall not cure or otherwise release
Tenant from any then existing breach of Tenant's performance of any of the
terms, covenants or conditions of this Lease an its part to be performed. In the
event that Tenant elects not to terminate this Lease as to the remainder of the
Demised Premises, the rights and obligations of Landlord and Tenant shall be
governed by the provisions of Section 14.3 hereof.
14.3 PARTIAL CONDEMNATION /CONTINUATION OF LEASE. If this Lease is not
terminated as provided in Section 14.2 hereof, then this Lease shall, upon
vesting of title in the Proceedings, terminate as to the parts so taken, and
Tenant shall have no claim or interest in the award, damages, consequential
damages and compensation, or any part thereof except as otherwise provided in
Section 14.1, Tenant hereby waiving any right Tenant now has or may have under
present or future law to receive any separate award of damages for its interest
in the Demised Premises or any portion thereof or its interest in this Lease,
except as otherwise provided in Section 14.1 and except that Tenant shall have
the right to apply to Landlord for reimbursement as hereinafter provided from
such funds as specified in this Section 14.3. The net amount of the award (after
deduction of all costs and expenses, including attorneys' fees) shall be held by
Landlord (or Landlord's lender) and applied as hereinafter provided. Landlord,
in such case, covenants and agrees, at Landlord's sole cost and expense promptly
to restore that portion of the Improvements on the Demised Premises not so taken
to a complete architectural and mechanical unit for the use and occupancy of
Tenant as provided in this Lease. In the event that the net amount of the award
(after deduction of all costs and expenses, including attorneys' fees) that may
be received by Landlord in any such Proceedings for physical damage to the
Improvements as a result of such taking, and held by Landlord (or Landlord's
lender) for restoration of the Demised Premises, is insufficient to pay all
costs of such restoration work, Landlord shall pay the difference. Tenant shall
not be liable for any additional sum.
14.4 CONTINUANCE OF OBLIGATIONS. In the event of any termination of
this Lease or any part thereof as a result of any such Proceedings, Tenant shall
pay to Landlord all Base Rent, all Additional Rent and other charges payable
hereunder with respect to that portion of the Demised Premises so taken in such
Proceedings with respect to which this Lease shall have terminated justly
apportioned to the date of such termination. From and after the date of vesting
of possession in such Proceedings, Tenant shall continue to pay the Base Rent,
Additional Rent and other charges payable
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hereunder as in this Lease provided to be paid by Tenant, subject to an
abatement of a just and proportionate part of the Base Rent according to the
extent and nature of such taking as provided for in Sections 14.3 and 14.5
hereof in respect to the Demised Premises remaining after such taking.
14.5 ADJUSTMENT OF RENT. In the event of a partial taking of the
Demised Premises under Sections 14.2 or 14.3 hereof in which case this Lease is
not terminated, the Base Rent for the period from and after the date of vesting
of title in such Proceedings, until the termination of this Lease, shall be
reduced to a sum equal to the product of the Base Rent provided for herein
multiplied by a fraction, the numerator of which is the total square footage of
the Buildings after such taking and after the same shall have been restored to a
complete architectural unit, and the denominator of which is the total square
footage of the Buildings prior to such taking.
ARTICLE XV
ASSIGNMENT, SUBLETTING, ETC.
15.1 RESTRICTION ON TRANSFER. Tenant shall not sublet the Demised
Premises or any portion thereof, nor assign, mortgage, pledge, transfer or
otherwise encumber or dispose of this Lease or any interest therein, or in any
manner assign, mortgage, pledge, transfer or otherwise encumber or dispose of
its interest or estate in the Demised Premises or any portion thereof (a
- -Transfer") without obtaining Landlord's prior written consent in each and every
instance. For purposes of this Lease a Transfer shall be deemed to include 0)
any sale or similar transfer of more than fifty percent (50%) of the outstanding
voting securities of Tenant, or (ii) a sale of substantially all of the assets
of Tenant. Landlord's consent to a Transfer under this Section 15. 1 shall not
be unreasonably withheld or delayed, provided the following conditions are
complied with:
(a) Any Transfer of this Lease shall transfer to the assignee all of
Tenant's right, title and interest in this Lease and all of Tenant's estate or
interest in the Demised Premises.
(b) At the time of any Transfer and at the time Tenant requests
Landlord's written consent thereto, this Lease must be in full force and effect
without any uncured Event of Default or Incipient Default thereunder on the part
of Tenant.
(c) Any such transferee shall assume, by written, recordable
instrument, in form and content satisfactory to Landlord, the due performance of
all of Tenant's obligations under this Lease from and after the time of the
effective date of the assignment, and such assumption agreement shall state that
the same is made by the transferee for the express benefit of Landlord as a
third party beneficiary thereof. A copy of the assignment and assumption
agreement, both in form and content satisfactory to Landlord, fully executed and
acknowledged by transferee, together with a certified copy of a properly
executed corporate resolution (if the transferee be a corporation) authorizing
the execution and delivery of such assumption agreement, shall be sent to
Landlord ten (10) days prior to the effective date of such assignment. No
Transfer shall relieve Tenant from any of Tenant's obligations contained in this
Lease and Tenant shall remain fully liable hereunder.
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(d) In the case of a subletting, a copy of any sublease fully executed
and acknowledged by Tenant and the sublessee shall be mailed to Landlord ten
(10) days prior to the effective date of such subletting, which sublease shall
be in form and content acceptable to Landlord. Each sublease permitted under
this Section 15.1 shall contain provisions to the effect that (i) such sublease
is only for actual use and occupancy by the sublessee; (i) such sublease is
subject and subordinate to all of the terms, covenants and conditions of this
Lease and to all of the rights of Landlord thereunder; and (iii) in the event
this Lease shall terminate before the expiration of such sublease, the sublessee
thereunder will, at Landlord's option, attorn to Landlord and waive any rights
the sublessee may have to terminate the sublease or to surrender possession
thereunder as a result of the termination of this Lease.
(e) Any and all compensation paid to Tenant, in whatever form, in
consideration of such Transfer, including any differential between Base Rent and
rent paid to Tenant by such transferee, or any assignment fee or any other
amount which can be attributed to the Transfer shall be paid directly by such
transferee to Landlord.
(f) Tenant agrees to pay on behalf of Landlord any and all reasonable
costs of Landlord, including reasonable attorneys' fees paid or payable to
outside counsel, occasioned by such assignment or subletting.
15.2 TRANSFER TO AFFILIATES; SALE OR MERGER; COLLATERAL ASSIGNMENT.
Notwithstanding the foregoing provisions of Section 15.1, Tenant shall be
permitted to assign its rights under this Lease, without prior consent, in
connection with (i) an initial public offering of Tenant's stock, (ii) the sale
or transfer of substantially all of the assets of Tenant or the merger of Tenant
into another entity, provided the buyer, transferee or merged entity has a
shareholder's equity which is, as of the date of such sale or transfer, at least
as much as is Tenant's as of the date of this Lease and has a shareholder's
equity-to-debt ratio of no less than 1:1, or (iii) the granting of a security
interest in, or a collateral assignment of, Tenant's rights under this Lease in
connection with indebtedness incurred by Tenant to a bona fide third party
lender in an arms-length transaction, provided, that in any such case Tenant
shall be required to give Landlord written notice of that assignment or
subletting within thirty (30) days thereafter, including written evidence of the
identity of the assignee or sublessee (actual or deemed) and, if applicable, its
affiliation with Tenant and the terms Of such assignment. On the foreclosure or
assignment-in-lieu of foreclosure of a collateral assignment (e.g. leasehold
deed of trust) of Tenant's interest in this Lease (as permitted above), Landlord
shall enter into a new lease ("Now Lease") with the successor to Tenant's
interest in this Lease ("Successor") on the same terms and conditions expressed
in this Lease, effective as of the date of the foreclosure or assignment-in-lieu
of foreclosure, and for the balance of the Term thereafter, provided the
Successor also executes the New Lease. No Transfer under this Section 15.2 shall
relieve Tenant from any of Tenant's obligations contained in this Lease and
Tenant shall remain fully liable hereunder.
15.3 RESTRICTION AGAINST FURTHER ASSIGNMENT. Notwithstanding anything
contained in this Lease to the contrary and notwithstanding any consent by
Landlord to any Transfer of Tenant's
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interest in the Demised Premises or any portion thereof or to any assignment of
this Lease or of Tenant's interest or estate in the Demised Premises, except as
provided in Sections 15.1 and 15.2 above, no sublessee shall assign its sublease
nor further sublease the Demised Premises or any portion thereof, and no
assignee shall further assign its interest in this Lease or its interest or
estate in the Demised Premises or any portion thereof, nor sublease the Demised
Premises or any portion thereof, without Landlord's prior written consent in
each and every instance, which consent shall be granted or withheld in
Landlord's reasonable discretion.
15.4 TENANT'S FAILURE TO COMPLY. Tenant's failure to comply with all of
the foregoing provisions and conditions of this Article XV shall, at Landlord's
option, render any purported assignment or subletting null and void and of no
force and effect.
ARTICLE XVI
SUBORDINATION, NONDISTURBANCE,
NOTICE TO MORTGAGEE AND ATTORNMENT
16.1 SUBORDINATION BY TENANT. This Lease and all rights of Tenant
therein and all interest or estate of Tenant in the Demised Premises or any
portion thereof shall be subject and subordinate to the lien of any mortgage,
dead of trust, security instrument or other document of like nature
(collectively, "Mortgage"), which at any time after the date of this Lease may
be placed upon the Demised Premises or any portion thereof, and to each and
every advance made under any such Mortgage. Tenant agrees at any time hereafter,
to execute and deliver to Landlord any instruments, releases or other documents
that may be reasonably required for the purpose of subjecting and subordinating
this Lease to the lien of any such Mortgage. It is agreed, nevertheless, that so
long as an Event of Default does not exist, that such subordination agreement or
other instrument, release or document shall not interfere with, hinder or molest
Tenant's right to quiet enjoyment under this Lease, shall not modify the terms
of this Lease, nor the right of Tenant to continue to occupy the Demised
Premises and all portions thereof, and to conduct its business thereon in
accordance with the covenants, conditions, provisions, terms and agreements of
this Lease. The lien of any such Mortgage shall not cover Tenant's trade
fixtures or other personal property located in or on the Demised Premises.
Landlord shall deliver to Tenant a commercially reasonable nondisturbance
agreement executed by all lenders having a lien on the Demised Premises on March
2, 1998 as a condition precedent in Tenant's favor, and from each future lender
as a condition to Tenant's subordination or attornment hereunder.
16.2 LANDLORD'S DEFAULT. In the event of any act or omission of
Landlord constituting a default by Landlord, other than Landlord's failure to
have the Improvements substantially completed on a timely basis as provided in
Article 11 and to make the same fully available to Tenant as therein provided,
Tenant shall not exercise any remedy until Tenant has given Landlord and any
mortgagee whose name and address have been previously provided to Tenant prior
written notice of such act or omission and until a 30-day period of time to
allow Landlord or the mortgagee to remedy such act or omission shall have
elapsed following the giving of such notice;
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provided, however, if such act or omission cannot with due diligence and in good
faith be remedied within such 30-day period, Landlord and/or mortgagee shall be
allowed such further period of time as may be reasonably necessary provided that
it shall have commenced remedying the same with due diligence and in good faith
within said 30-day period. In the event any act or omission of Landlord which
constitutes a Landlord's default hereunder results in an immediate threat of
bodily harm to Tenant's employees, agents or invitees or damage to Tenant's
property, or exposes Tenant to criminal liability, Tenant may proceed to cure
the default without prior notice to Landlord or its mortgagee and offset the
cost thereof against Base Rent next due and payable; provided, however, in that
event Tenant shall give written notice to Landlord and its mortgagee as soon as
possible after commencement of such cure. Nothing herein contained shall be
construed or interpreted as requiring any mortgagee to remedy such act or
omission.
16.3 ATTORNMENT. Subject to Section 16.1 above, if any mortgagee shall
succeed to the rights of Landlord under this Lease or to ownership of the
Demised Premises, whether through possession or foreclosure or the delivery of a
deed to the Demised Promises, then, upon the written request of such mortgagee
so succeeding to Landlord's rights hereunder, Tenant shall attorn to and
recognize such mortgagee as Tenant's landlord under this Lease, and shall
promptly execute and deliver any instrument that such mortgagee may reasonably
request to evidence such attornment (whether before or after making of the
mortgage). In the event of any other transfer of Landlord's interest hereunder,
upon the written request of the transferee and Landlord, Tenant shall attorn to
and recognize such transferee as Tenant's landlord under this Lease and shall
promptly -execute and deliver any instrument that such transferee and Landlord
may reasonably request to evidence such attornment.
ARTICLE XVII
SIGNS
Tenant shall be allowed Buildings signage during the Term of this
Lease, provided that such sign or signs (a) do not cause any structural damage
or other material damage to the Buildings; (b) comply with and do not violate
applicable governmental laws, ordinances, rules or regulations; (c) comply with
and do not violate any existing restrictions affecting the Demised Premises and
which are of a matter of record as of the date of this Lease; (d) are compatible
with the architecture of the Buildings and the landscaped area adjacent thereto,
and (e) the design, size and location of such signs have been mutually approved
by Landlord and Tenant, which approval shall not be unreasonably withheld or
delayed. The cost of such signs shall be entirely Tenant's separate expense.
ARTICLE XVIII
FINANCIAL STATEMENTS OF TENANT
From time to time, at Landlord's request, Tenant shall provide Landlord
with Tenant's
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most recent financial statements in form and content reasonably satisfactory to
Landlord and Landlord's lenders (which, if Tenant is an entity which files
periodic financial disclosures to securities regulatory authorities, shall be
those which are periodically filed with those authorities). Landlord may provide
copies of those financial statements to current and prospective lenders,
investors and buyers, identified in writing to Tenant, for examination and
review. Landlord shall keep all such financial statements strictly confidential
and may provide copies of such financial statements to such other parties only
upon receiving in return a covenant from each recipient that such recipient
shall keep the financial statements confidential except with the prior written
consent of Tenant.
ARTICLE XIX
CHANGES AND ALTERATIONS
Tenant shall not have the right to make such changes or alterations,
structural or otherwise, to the Buildings, improvements and fixtures hereafter
erected on the Demised Premises without first complying with the following
conditions:
(a) PERMITS. No change or alteration shall be undertaken until Tenant
shall have procured and paid for, so far as the same may be required from time
to time, all municipal, state and federal permits and authorizations of the
various governmental bodies and departments having jurisdiction thereof, and
Landlord agrees to join in the application for such permits or authorizations
whenever such action is necessary, all at Tenant's sole cost and expense,
provided such applications do not cause Landlord to become liable for any cost,
fees or expenses.
(b) LANDLORD APPROVAL; COMPLIANCE WITH PLANS AND SPECIFICATIONS. Before
commencing any change, alteration, restoration or construction (hereinafter
sometimes referred to as "WORK") involving in the aggregate an estimated cost of
more than Fifty Thousand and No/100ths Dollars ($50,000) or which, in Landlord's
reasonable judgment, would alter the mechanical, structural or electrical
components of the Demised Promises, Tenant shall obtain Landlord's prior written
consent, which consent shall not be unreasonably withheld; 00 furnish Landlord
with detailed plans and specifications of the proposed change or alteration,
which shall also be subject to Landlord's prior written approval, which shall
not be unreasonably withheld; (iii) obtain Landlord's prior written approval of
a licensed architect or licensed professional engineer selected and paid for by
Tenant who shall approve any such work (hereinafter referred to as "ALTERATIONS
ARCHITECT OR ENGINEER"); and (v) obtain Landlord's prior written approval (which
shall not be unreasonably withheld or delayed) of detailed plans and
specifications prepared and approved in writing by said Alterations Architect or
Engineer and of each amendment and change thereto, and (v) for any Work
involving in the aggregate an estimated cost of more than Fifty Thousand Dollars
050,000), furnish to Landlord a surety company performance bond issued by a
surety company licensed to do business in the state in which the Demised
Premises are located and reasonably acceptable to Landlord in an amount equal to
the estimated cost of such work guaranteeing the completion thereof within a
reasonable time thereafter (1) free and clear of all mechanic's liens or
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other liens, encumbrances, security interests and charges, and (2) in accordance
with the plans and specifications approved by Landlord.
(c) VALUE MAINTAINED. Any change or alteration shall, when completed,
be of such character so as not to reduce the value of the Demised Premises or
the Buildings to which such change or alteration is made below its value or
utility to Landlord immediately before such change or alteration, nor shall such
change or alteration reduce the area or cubic content of the Buildings to use
without Landlord's express written consent.
(d) COMPLIANCE WITH LAWS. All Work done in connection with any change
or alteration shall be done promptly and in a good and workmanlike manner and in
compliance with all building and zoning laws of the place in which the Demised
Premises are situated, and in compliance with all laws, ordinances, orders,
rules, regulations and requirements of all federal, state and municipal
governments and appropriate departments, commissions, boards and officers
thereof, and in accordance with the orders, rules and regulations of the Board
of Fire Underwriters where the Demised Premises are located or any other body
exercising similar functions. The cost of any such change or alteration shall be
paid in cash so that the Demised Premises and all portions thereof shall at all
times be free of liens for labor and materials supplied to the Demised Premises
or any portion thereof. The Work or any change or alteration shall be prosecuted
with reasonable dispatch, delays due to strikes, lockouts, acts of God,
inability to obtain labor or materials, governmental restrictions or similar
causes beyond the control of Tenant excepted. Tenant or Tenant's contractor or
subcontractor shall obtain and maintain at its sole cost and expense during the
performance of the Work workers' compensation insurance covering all persons
employed in connection with the Work and with respect to which death or injury
claims could be asserted against Landlord or Tenant or against the Demised
Premises or any interest therein, together with comprehensive general liability
insurance for the mutual benefit of Landlord and Tenant with limits of not less
than One Million Dollars ($1,000,000.00) in the event of injury to one person,
Three Million Dollars ($3,000,000.00) in respect to any one accident or
occurrence, and Five Hundred Thousand Dollars ($500,000.00) for property damage,
and the fire insurance with "extended coverage" endorsement required by Section
6.1 hereof shall be supplemented with "builder's risk" insurance on a completed
value form or other comparable coverage on the Work if the cost of such work
will be in excess of Fifty Thousand Dollars ($50,000.00). All such insurance
shall be in a company or companies authorized to do business in the state in
which the Demised Premises are located and reasonably satisfactory to Landlord,
and all such policies of insurance or certificates of insurance shall be
delivered to Landlord endorsed "Premium Paid' by the company or agency issuing
the same, or with other evidence of payment of the premium satisfactory to
Landlord.
(e) PROPERTY OF LANDLORD. All improvements and alterations (other than
Tenant's movable trade fixtures, furniture and equipment) made or installed by
Tenant shall, immediately upon completion or installation thereof, become the
property of Landlord without payment therefor by Landlord, and shall be
surrendered to Landlord on the expiration of the Term of this Lease unless and
to the extent Tenant removes the same upon termination or expiration of the Term
in which event they shall remain the property of Tenant. In no event shall
Tenant be obligated to remove all
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or any part of such improvements or alterations.
(f) LOCATION OF IMPROVEMENTS. No change, alteration, restoration or new
construction shall be in, or connect the Improvements with, any property,
building or other improvement located outside the boundaries of the parcel of
land described in Exhibit "A" attached hereto, nor shall the same obstruct or
interfere with any existing easement.
(g) REMOVAL OF IMPROVEMENTS. As a condition to granting approval for
any changes or alterations, Landlord may require Tenant, by written notice to
Tenant given at or prior to the time of granting such approval, to remove any
improvements, additions or installations installed by Tenant in the Demised
Premises at Tenant's sole cost and expense at the end of the term of this Lease
and repair and restore any damage caused by the installation and removal of such
improvements, additions, or installations; provided, however, the only
improvements, additions or installations which Tenant shall remove shall be
those specified in such notice and those Tenant elects to remove pursuant to
subsection 19(e) above. Tenant shall not be obligated to remove any
improvements, additions or installations installed by Tenant which did not
require Landlord's prior approval as provided for in this Section 1 9(g).
(h) NOTICE TO LANDLORD. Regardless of whether Landlord's consent is
required to any change or alteration to the Demised Premises made or to be made
by Tenant, such changes or alterations shall not be commenced until two (2)
business days notice after Landlord has received notice from Tenant stating the
date such changes or alterations are to commence so that Landlord can post and
record an appropriate notice of nonresponsibility.
ARTICLE XX
MISCELLANEOUS PROVISIONS
20.1 ENTRY BY LANDLORD. Tenant agrees to permit Landlord and authorized
representatives of Landlord to enter upon the Demised Premises at all reasonable
times during ordinary business hours upon at least one (1) business day's
advance notice to Tenant for the purpose of inspecting the same and making any
repairs required to be made thereto by Landlord under the terms of this Lease,
or as required to be made thereto by Tenant under the terms of this Lease
provided that Landlord shall have first given written notice to Tenant to make
such repairs and Tenant shall have failed to make such repairs within thirty
(30) days after notice, and provided further, that Landlord shall be allowed to
enter upon the Demised Premises during an emergency. Nothing herein contained
shall imply any duty upon the part of Landlord to do any such work which, under
any provision of this Lease, Tenant may be required to perform, and the
performance thereof by Landlord shall not constitute a waiver of Tenant's
default in failing to perform the same. Landlord may, during the progress of any
work, keep and store upon the Demised Premises all necessary materials, tools
and equipment in areas designated by Tenant. Landlord shall not in any event be
liable for inconvenience, annoyance, disturbance, loss of business or other
damage to Tenant by reason of making such repairs or the performance of any such
work in or about the
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Demised Premises or on account of bringing material, supplies and equipment
into, upon or through the Demised Premises during the course thereof, and the
obligations of Tenant under this Lease shall not be thereby affected in any
manner whatsoever; except that Landlord shall use its best efforts to not
unreasonably interfere with Tenant's use of the Demised Premises, or any portion
thereof, by reason of Landlord's making such repairs or the performance of any
such work in or about the Demised Premises or on account of bringing materials,
supplies and equipment into, upon or through the Demised Premises during the
course thereof. Tenant may accompany Landlord on any inspection or entry by
Landlord.
20.2 EXHIBITION OF DEMISED PREMISES. Landlord is hereby given the right
during usual business hours upon at least one (1) business days' advance notice
to Tenant at any time during the Term of this Lease to enter upon the Demised
Premises and to exhibit the same for the purpose of mortgaging or selling the
same. During the final year of the Term, Landlord shall be entitled (i) to
display on the Demised Promises in such manner as to not unreasonably interfere
with Tenant's business, signs reasonably approved as to design and location by
Tenant indicating that the Demised Premises are for rent and/or sale and
suitably identifying Landlord or its agent, and (ii) upon at least two (2)
business days' advance notice to Tenant, to exhibit the Demised Premises to
prospective tenants.
20.3 INDEMNIFICATION BY TENANT. To the fullest extent allowed by law,
Tenant shall at all times indemnify, defend and hold Landlord harmless against
and from any and all claims by or on behalf of any person or persons, firm or
firms, corporation or corporations, arising from the conduct or management, or
from any work or things whatsoever done in or about the Demised Premises during
the Term of this Lease, other than as a result of the sole gross negligence or
willful misconduct of Landlord or its officers, agents, employees, contractors
or subcontractors, or as a result of Landlord's breach of its obligations under
this Lease, and Tenant shall further indemnify, defend and hold Landlord
harmless against and from any and all claims arising during the Term of this
Lease from any condition of the Improvements (other than defects in construction
of the initial Improvements) or other items Landlord is required to repair or
maintain, or of any passageways or space therein, other than as a result of the
sole gross negligence or willful misconduct of Landlord or its officers,
employees, agents, contractors or subcontractors or as a result of Landlord's
breach of its obligations under this Lease, or arising from any act or
negligence of Tenant, its agents, servants, employees or licenses, or arising
from any accident, injury or damage whatsoever caused to any person, firm or
corporation occurring during the Term of this Lease in or about the Demised
Premises, other than as a result of the sole gross negligence or willful
misconduct of Landlord or its officers, employees, agents, contractors or
subcontractors, or as a result of Landlord's breach of its obligations under
this Lease, and from and against all costs, attorneys' fees, expenses and
liabilities incurred in or about any such claim or action or proceeding brought
thereon; and in case any action or proceeding be brought against Landlord by
reason of any such claim, Tenant, upon notice from Landlord, covenants to defend
such action or proceeding by counsel reasonably satisfactory to Landlord.
Tenant's obligations under this Section 20.3 shall be insured by contractual
liability endorsement on Tenant's policies of insurance required under the
provisions of Section 6.2 hereof to the extent reasonably obtainable.
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20.4 NOTICES. All notices, demands and requests which may be or are
required to be given, demanded or requested by either party to the other shall
be in writing, and shall be sent by United States registered or certified mail,
postage prepaid, by an independent overnight courier service marked for next
business day delivery, or by telephonic facsimile transmission with automatic
written time and date confirmation of delivery transmitted between the hours of
9:00 a.m. and 5:00 p.m. (time zone of recipient, but only if confirmed within
two (2) business days by receipt of a mailed or personally delivered copy), and
addressed as follows:
To Landlord:
ADI Communication Partners, L.P.
c/o The Allen Group
4365 Executive Drive, Suite 850
San Diego, California 92122-2130
Attention: Mr. Steven L. Black
Facsimile: 619-550-1935
To Tenant:
ComStream Corporation
10180 Barnes Canyon Road
San Diego, California 92121
Attention: General Counsel
Facsimile: 619-657-5702
or at such other place as a party hereto may from time to time designate by
written notice thereof to the other. Notices, demands and requests which shall
be served upon Landlord by Tenant, or upon Tenant by Landlord, in the manner
aforesaid, shall be deemed received three (3) days after delivery to United
States mail, one (1) business day after delivery to an overnight courier
service, or at the time such notice, demand or request shall be transmitted by
facsimile (if confirmed as written above).
20.5 QUIET ENJOYMENT. Landlord covenants and agrees that Tenant, upon
paying the Base Rent and Additional Rent and upon' observing and keeping the
covenants, agreements and conditions of this Lease on its part to be kept,
observed and performed, shall lawfully and quietly hold, occupy and enjoy the
Demised Promises (subject to the provisions of this Lease) during the Term of
this Lease without hindrance or molestation by Landlord or by any person or
persons claiming under Landlord.
20.6 LANDLORD'S CONTINUING OBLIGATIONS. The term "Landlord," as used in
this Lease, so far as covenants or obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner or owners at the
time in question of the fee of the Demised Promises, and in the event of any
transfer or transfers or conveyance, the then grantor shall be
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automatically freed and relieved from and after the date of such transfer or
conveyance of all liability as respects the performance of any covenants or
obligations on the part of Landlord contained in this Lease thereafter to be
performed, provided that any funds in the hands of such landlord or the then
grantor at the time of such transfer, in which Tenant has an interest, shall be
turned over to the grantee, and any amount then due and payable to Tenant by
Landlord or the then grantor under any provision of this Lease, shall be paid to
Tenant, and further provided that the now Landlord expressly assumes in writing
for the benefit of Tenant all obligations of Landlord under this Lease. The
covenants and obligations contained in this Lease on the part of Landlord shall,
subject to the aforesaid, be binding on Landlord's successors and assigns during
and in respect of their respective successive periods of ownership. Nothing
herein contained shall be construed as relieving Landlord of its obligations
under Article 11 of this Lease or releasing Landlord from any obligation to
complete the cure of any breach by Landlord during the period of its ownership
of the Demised Premises.
20.7 ESTOPPEL. Either Tenant or Landlord shall, without charge at any
time and from time to time, within ten (10) business days after written request
by the other, certify by written instrument, duly executed, ' acknowledged and
delivered to any mortgagee, assignee of a mortgagee, proposed mortgagee,
purchaser or proposed purchaser, or any other person dealing with Landlord,
Tenant or the Demised Premises:
(a) That this Lease (and all guaranties, if any) is unmodified and in
full force and effect (or, if there have been modifications, that the same is in
full force and effect, as modified and stating the modifications);
(b) The dates to which the Base Rent or Additional Rent have been paid
in advance.
(c) Whether or not there are then existing any breaches or defaults by
such party or the other party known by such party under any of the covenants,
conditions, provisions, terms or agreements of this Lease, and specifying such
breach or default, if any, or any set-offs or defenses against the enforcement
of any covenant, condition, provision, term or agreement of this Lease (or of
any guaranties) upon the part of Landlord or Tenant (or any guarantor), as the
case may be, to be performed or complied with (and, if so, specifying the same
and the steps being taken to remedy the same); and
(d) Such other statements or certificates as Landlord, Tenant or any
mortgagee may reasonably request.
It is the intention of the parties hereto that any statement delivered
pursuant to this Section 20.7 may be relied upon by any of such parties dealing
with Landlord, Tenant or the Demised Premises. Failure by Tenant to timely
respond to such request shall be deemed Tenant's certification of the accuracy
of such matters.
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20.8 DELIVERY OF CORPORATE DOCUMENTS. In the event that Tenant is a
corporation or similar business entity (e.g., limited partnership, limited
liability company or limited liability partnership), Tenant shall, without
charge to Landlord, at any time and from time to time within ten (10) business
days after written request by Landlord, deliver to Landlord, in connection with
any proposed sale or mortgage of the Demised Premises, the following instruments
and documents:
(a) Certificate of Good Standing in the state of incorporation of
Tenant and in the state in which the Demised Promises are located issued by the
appropriate state authority and bearing a current date;
(b) A copy of Tenant's articles of incorporation and by-laws (or
partnership or operating agreement, as the case may be) and any amendments or
modifications thereof certified by the secretary or assistant secretary (or
managing partner or member, as the case may be) of Tenant;
(c) A written and certified confirmation from the secretary or
assistant secretary (or managing partner or member, as the case may be) that 0)
this Lease has been duly authorized by all necessary corporate action and is a
valid and binding agreement enforceable in accordance with its terms; and (ii)
Tenant is a duly organized and validly existing corporation under the laws of
its state of incorporation, is duly authorized to carry on its business, and is
in good standing under the laws of the state in which the Demised Premises are
located, if different from the state of incorporation.
20.9 MEMORANDUM OF LEASE. Upon March 2, 1998, the parties shall
execute, acknowledge and deliver to each other, a Memorandum of Lease in the
form attached hereto as Exhibit "C" and made a part hereof. Such Memorandum of
Lease may be recorded by either party, at their sold cost and expense.
20.10 SEVERABILITY. If any covenant, condition, provision, term or
agreement of this Lease shall, to any extent, be held invalid or unenforceable,
the remaining covenants, conditions, provisions, terms and agreements of this
Lease shall not be affected thereby, but each covenant, condition, provisions,
term or agreement of this Lease shall be valid and in force to the fullest
extent permitted by law.
20.11 SUCCESSORS AND ASSIGNS. The covenants and agreements herein
contained shall bind and inure to the benefit of Landlord, its successors and
assigns, and Tenant and its permitted successors and assigns.
20.12 CAPTIONS. The caption of each article of this Lease is for
convenience and reference only, and in no way defines, limits or describes the
scope or intent of such article or of this Lease.
20.13 RELATIONSHIP OF PARTIES. This Lease does not create the
relationship of principal and agent, partnership, joint venture, or any
association or relationship between Landlord
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and Tenant, the sole relationship between Landlord and Tenant being that of
landlord and tenant.
20.14 ENTIRE AGREEMENT. All preliminary and contemporaneous
negotiations are merged into and incorporated in this Lease. This Lease,
together with the exhibits attached hereto, contains the entire agreement
between the parties and shall not be modified or amended in any manner except by
any instrument in writing executed by the parties hereto.
20.15 NO MERGER. There shall be no merger of this Lease or of the
leasehold estate created by this Lease with any other estate or interest in the
Demised Premises by reason of the fact that the same person, firm, corporation
or other entity may acquire, hold or own, directly or indirectly, (a) this Lease
or the leasehold interest created by this Lease or any interest therein, and (b)
any such other estate or interest in the Demised Promises, or any portion
thereof. No such merger shall occur unless and until all persons, firms,
corporations or other entities having an interest (including a security
interest) in (1) this Lease or the leasehold estate created thereby, and (2) any
such other estate or interest in the Demised Premises, or any portion thereof,
shall join in a written instrument expressly affecting such merger and shall
duly record the same.
20.16 POSSESSION AND USE. Tenant acknowledges that the Demised Premises
are the property of Landlord and that Tenant has only the right to possession
and use thereof upon the covenants, conditions, provisions, terms and agreements
set forth in this Lease.
20.17 SURRENDER OF DEMISED PREMISES. Subject to the other provisions of
this Lease, at the expiration of the Term of this Lease, Tenant shall surrender
the Demised Premises in the same condition as they were in upon delivery of
possession thereto at March 2, 1998, reasonable wear and tear, casualty and
condemnation excepted, and shall surrender all keys to the Demised Premises to
Landlord at the place then fixed for the payment of Base Rent, and shall inform
Landlord of ' all combinations on locks, safes and vaults, if any. Tenant shall
at such time remove all of its property therefrom and all alterations and
improvements placed thereon by Tenant if so requested by Landlord or otherwise
allowed, subject to Sections 19(e) and (g). Tenant shall repair any damage to
the Demised Premises caused by such removal, and any and all such property not
so removed shall, at Landlord's option, become the exclusive property of
Landlord or be disposed of by Landlord, at Tenant's cost and expense, without
further notice to or demand upon Tenant, subject to applicable law and Sections
19(e) and (g).
All property of Tenant not removed on or before the last day of the
Term of this Lease shall be deemed abandoned in accordance with, and subject to,
applicable law.
20.18 HOLDING OVER. In the event Tenant remains in possession of the
Demised Premises after expiration of this Lease and without the execution of a
new lease, it shall be deemed to be occupying the Demised Premises as a tenant
from month-to-month, subject to all the provisions, conditions and obligations
of this Lease insofar as the same can be applicable to a month-to-month
tenancy, except that the Base Rent shall be escalated to one hundred and fifteen
percent 0 15 %) of the then current Base Rent for the Demised Premises for the
first three (3) months of such
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tenancy and one hundred fifty percent (150%) of such amount thereafter, and from
and after such three (3) month period, Tenant shall indemnify, defend and hold
Landlord harmless against loss or liability resulting from the delay by Tenant
in so surrendering the Demised Premises, including without limitation any claim
made by any succeeding occupant founded on such delay. Tenant's obligation to
observe or perform this covenant shall survive the expiration or other
termination of this Lease.
20.19 SURVIVAL. All obligations of either party (together with interest
or money obligations at the Maximum Rate of Interest) accruing prior to
expiration of the Term of this Lease shall survive the expiration or other
termination of this Lease.
20.20 BROKER'S COMMISSION. Tenant and Landlord represent that they have
dealt only with (i) C13 Commercial Real Estate Group, Inc., as brokers in
connection with this Lease. Landlord shall be responsible for paying the
commissions owing to such brokers under separate written agreements between
Landlord and such brokers. Tenant and Landlord will indemnify, defend and hold
the other harmless from and against any loss, cost or expense, including, but
not limited to, reasonable attorneys' fees and court costs, resulting from any
claim for a fee or commission by any other broker or finder resulting from their
own actions.
20.21 APPLICABLE LAW. This Lease shall be governed and interpreted in
accordance with the laws of the State of California.
20.22 COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall be deemed an original and all of which, when
taken together, shall constitute a single instrument.
20.23 EXPANSION OPTION. Provision has been made on the Land for the
construction of an additional building of approximately 56,000 square feet in
size as illustrated on the site plan which is included as part of the
Preliminary Plans and Specifications (the "EXPANSION BUILDING"). At any time
within twelve 0 2) months following March 2, 1998 (the "EXPANSION EXERCISE
PERIOD"), Tenant shall have the option (the "EXPANSION OPTION") of requiring
Landlord to construct the Expansion Building and leasing it to Tenant on the
same terms and conditions as Tenant leases the Demised Premises with the Term of
the lease of the Expansion Building ending concurrently with the Term of this
Lease, with the exception that the monthly Base Rent shall be an amount equal to
One Dollar and Six Cents ($1.06) per square foot of the Expansion Building
("EXPANSION RENT"). The Expansion Rent shall be increased every twenty-four (24)
months during the Initial Term to an amount equal to the product of (i) the then
applicable Expansion Rent, as may have been previously adjusted, and (iii) 1.06.
The Expansion Option may be exercised by Tenant's delivery to Landlord by the
first (1st) anniversary of March 2, 1998 of a written and irrevocable notice of
exercise ("EXERCISE NOTICE"). Upon the receipt of the Exercise Notice, Landlord
and Tenant shall meet and begin the development of plans and specifications for
the construction of Tenant Improvements in the Expansion Building. The
provisions of this Lease for the development of the Plans and Specifications
shall apply to the development of the Plans and Specifications for the Expansion
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Building.' Tenant shall be responsible for the cost of all Tenant Improvements
constructed in the Expansion Building, provided that Landlord shall provide
Tenant with an additional Tenant Improvements Allowance of Twenty-Five Dollars
($25.00) per square foot of the Expansion Building on the same basis as the
original Tenant Improvements Allowance was provided in connection with the
construction of the Demised Premises. All other terms and conditions of this
Lease shall apply to the Expansion Building. Tenant and Landlord shall promptly
execute such supplementary documents or amendments to this Lease as Landlord or
Tenant shall deem reasonably necessary to document the addition of the Expansion
Building to the Demised Premises and the terms and conditions under which it is
leased to Tenant.
20.24 RIGHT OF FIRST OFFER ON EXPANSION BUILDING. Landlord reserves the
right to construct the Expansion Building and to remove from the definition of
Land herein that portion of the Land which is used for and dedicated to the use
of the Expansion Building. If, after the Expansion Exercise Period, Landlord has
constructed the Expansion Building and Tenant did not timely and properly
exercise its rights under the Expansion Option, then Landlord shall be free to
lease the Expansion Building or any portion thereof to tenants other than
Tenant. Notwithstanding the foregoing, before leasing any portion of the
Expansion Building to a tenant other than Tenant, Landlord shall first deliver
to Tenant a written notice of the terms and conditions under which Landlord
proposes to lease Expansion Building space to tenants ("LEASING NOTICE"). Tenant
shall have fifteen (15) days following receipt of the Leasing Notice within
which to deliver to Landlord notice of Tenant's acceptance of those terms and
conditions ("TENANT'S ACCEPTANCE") and identifying how much of the Expansion
Building (if less than the entire Expansion Building) Tenant elects to lease
from Landlord ("EXPANSION SPACE"), at which time this Lease shall be deemed
amended to include the Expansion Space into the definition of Demised Premises
and all other terms and conditions of this Lease shall prevail with respect to
the Expansion Space, with the exception of those terms and conditions contained
in the Leasing Notice which differ from the terms and conditions of this Lease
(e.g. Base Rent, Term, Tenant Improvement Allowance (if any), etc.), which
different terms and conditions shall apply to the Expansion Space in lieu of the
terms of this Lease. Tenant and Landlord shall promptly execute such
supplementary documents or amendments to this Lease as Landlord or Tenant shall
deem reasonably necessary to document the addition of the Expansion Space to the
Demised Premises and the terms and conditions under which it is leased to
Tenant. If Tenant rejects the Leasing Notice or fails to deliver Tenant's
Acceptance in a timely manner, Landlord shall be free to offer the Expansion
Building to other tenants, provided that if Landlord wishes to offer the
Expansion Building to other tenants (i) on terms more favorable than those
contained in the Leasing Notice, or (ii) on any terms and more than one (1) year
has passed since Tenant was last delivered a Leasing Notice, Landlord shall
first offer the Expansion Building to Tenant pursuant to the same procedures
described in this Section 20.24.
20.25 LEASE SECURITY - LETTER OF CREDIT. In addition to its primary
obligation under this Lease, Tenant shall provide additional security against an
Event of Default under this Lease in the form of a One Million Four Hundred
Thousand Dollar ($1,400,000) Irrevocable Standby Letter of Credit ("LC"), naming
Landlord as the payee thereunder, with terms as described in more detail below.
The LC shall be delivered to Landlord concurrent with the recordation of
Landlord's
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construction loan, provided that Tenant has had at least five (5) days advance
notice from Landlord of the date of such recordation, and shall be held by
Landlord until such time as both W Tenant's Equity Balance, calculated as
defined below, exceeds its Debt Balance, also as defined below, and 00 Tenant's
Equity Balance exceeds $20,000,000.
(a) TERMS OF LETTER OF CREDIT. The LC shall be an irrevocable standby
letter of credit, issued by Royal Bank of Canada, Bank of Nova Scotia, Bank of
Montreal or an equivalent rated bank, in a form which meets international treaty
standards for letters of credit. The LC shall be for a twelve (12) month term.
The LC shall be drawable by Landlord upon presentation of a sight draft or
demand to the LC issuer. Landlord may present such a sight draft or demand if
(i) the LC has not been renewed and replaced by Tenant by thirty (30) days prior
to the expiry date of the then effective LC, or (ii) Tenant defaults under the
Lease and, as a result of such default, the Lease is terminated. Proceeds of the
drawn LC shall be applied to damages or charges to which Landlord is entitled
under the Lease as a result of Tenant's default. The LC is not intended to
represent liquidated damages for Tenant's default, but only a mechanism for
paying the damages or charges to which Landlord may be entitled. Landlord shall
be entitled to grant a security interest in, or make a collateral assignment of,
Landlord's rights under the LC in connection with mortgage indebtedness incurred
by Landlord to a bona fide third party institutional lender in an arms-length
transaction.
(b) RETURN OF LETTER OF CREDIT. The Letter of Credit shall be returned
to Tenant upon receipt by Landlord of written certification from Tenant's CFO or
CEO that (i) the Equity Balance of Tenant exceeds the Debt Balance and (ii) the
Equity Balance of Tenant exceeds $20,000,000. The certification shall contain
reasonably adequate back-up information to evidence the calculation of Equity
Balance and Debt Balance. I
(i) EQUITY BALANCE. Equity Balance shall equal Tenant's share
capital plus retained earnings as reflected in Tenant's annual and certified
financial statements. Retained earnings shall be calculated pursuant to U.S.
GAAP. A Goodwill adjustment (to the extent it is not reflected in retained
earnings) of approximately $25,000,000 which applies to the Goodwill created in
the acquisition of Tenant by Comtel in 1992, is the only major expected GAAP
adjustment to the Retained Earnings balance as of December 31, 1996.
(ii) Debt Balance. Debt Balance shall equal the "Investment
Control" intercompany debt due to Tenant's parent corporation at the time
calculated for purposes of this Section 20.25.
(c) Tenant and Landlord shall execute such documents as may be
reasonably necessary to document and perfect the security arrangements described
above.
20.26 RECONFIGURATION OF LAND; EASEMENT FOR OFF-SITE PARKING. Landlord
and Tenant acknowledge that the Land is currently comprised of three separate
legal lots. A portion of one of these three lots (Lot 4) is intended to be used
as the site of the Expansion Building (the "EXCESS LAND") which will be located
on a lot adjacent to the Land (Lot 3). It is Landlord's intention,
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at some time after the execution of this Lease and the recordation of the
Memorandum of Lease, to adjust the lot line between Lot 4 and the adjacent Lot 3
with the result that the size of the three lots comprising the Land will be
reduced to approximately 9.85 acres. If, and to the extent, it is not feasible
to locate all 750 parking spaces which are part of the Demised Premises on the
Land as then configured, Landlord shall arrange for access to parking spaces on
the Excess Land or on Lot 3 so as to provide Tenant with the required parking.
Tenant shall cooperate with Landlord in connection with the reconfiguration of
the Land and the Excess Land, including the execution of such documents as may
be reasonably necessary in connection therewith.
20.27 TITLE INSURANCE. Tenant's obligations under this Lease shall be
subject to and expressly conditioned on Tenant being able to obtain, at Tenant's
sole cost and expense, a leasehold policy of title insurance from First American
Title Company ("TITLE COMPANY") which insures that Tenant's leasehold interest
granted pursuant to this Lease is subject only to W non-delinquent real property
taxes and assessments for the current year; (ii) all exceptions to title
disclosed in a preliminary title report which Tenant shall obtain from Title
Company promptly following execution of this Lease and to which Tenant does not
object, (iii) standard printed exceptions, customarily set forth in Title
Company's leasehold policy of title insurance, and (iv) any other lien
voluntarily imposed or agreed to by Tenant as of the date of this Lease or
arising from Tenant's acts or omissions ("LEASEHOLD POLICY"). It is the
intention of the parties that this condition precedent is established as an
accommodation to Tenant to allow it to make arrangements to obtain the Leasehold
Policy. Accordingly, Tenant shall not object to any item which appears in the
preliminary title report which does not materially and adversely affect the
utility and functionality of Tenant's use of the Demised Premises as
contemplated in this Lease and shall exercise its best efforts to obtain such
Leasehold Policy and to pay the costs and premiums associated therewith. Tenant
shall be deemed to have obtained the Leasehold Policy, and this condition
satisfied, unless Landlord receives written notice from Tenant fifteen 0 5) days
following the date of this Lease that Tenant has been unable to obtain such
Leasehold Policy and the reasons it has been unable to do so. If Landlord cannot
correct such matters as may be needed to be corrected in order for Tenant to
obtain the Leasehold Policy within thirty (30) days following receipt of such
notice, then this Lease shall automatically terminate.
20.28 ATTORNEYS' FEES. In the event of any litigation, arbitration,
mediation or any other action taken by either party to this Lease to enforce any
provision of this Lease, enforce any remedy available upon default under this
Lease, or seek a declaration of the rights of a party under this Lease, the
prevailing party shall be entitled to recover in such action such attorneys'
fees and costs as may be reasonably incurred, including, without limitation, the
costs of reasonable investigation, preparation and professional or expert
consultation, travel expenses, costs on appeal, court reporter fees and
expenses, incurred by reason of such litigation, arbitration or other action.
All other attorneys' fees and cost relating to this Agreement and the
transactions described herein shall be borne by the party incurring the same.
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IN WITNESS WHEREOF, each of the parties hereto have caused this Lease
to be duly executed as of the day and year first above written.
LANDLORD:
ADI COMMUNICATION PARTNERS, L.P.
a California limited partnership
By: Allen Development, Inc.,
a California corporation
Its General Partner
By: /s/ Steven L. Black
-------------------
Name: Steven L. Black
Its: President
TENANT:
COMSTREAM CORPORATION
a Delaware corporation
By: /s/ Donna S. Birks
-------------------
Name: Donna S. Birks
Its: VP & CFO
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Exhibit "A"
LEGAL DESCRIPTION OF PROPERTY
Parcels 4, 5 & 6 of Parcel Map No. 17755, in the City of San Diego, County of
San Diego, State of California, filed in the Office of the County Recorder of
San Diego County, September 17, 1996, as File No. 1996-47 4607 of Official
Records.
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Exhibit "13"
PRELIMINARY PLANS AND SPECIFICATIONS
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Exhibit 10.4
AMENDMENT TO LEASE
This Amendment to Lease ("Amendment") is entered into as of June 16,
1997, by and between ADI COMMUNICATION PARTNERS. L.P., a California limited
partnership ("Landlord"), and COMSTREAM CORPORATION, a Delaware corporation
("Tenant"), with reference to that certain Lease dated as of April 23, 1997, by
and between Landlord and Tenant ("Lease").
RECITALS
A. Pursuant to Section 20.25 of the Lease, Tenant is required to
deliver to Landlord an Irrevocable Standby Letter of Credit ("LC"), naming
Landlord as the payee thereunder, in the amount of One Million Four Hundred
Thousand Dollar ($1,400,000) as additional security against an Event of Default
under the Lease.
B. Landlord and Tenant have agreed that additional provisions should be
added t the Lease to address certain issues regarding the LC, including, without
limitation, how proceeds drawn by Landlord on the LC will be applied.
NOW, THEREFORE, Landlord and Tenant agree to amend the Lease as
follows:
AGREEMENT
1. AMENDMENT OF LETTER OF CREDIT. Section 20.26 of the Lease is hereby
amended to add the following as subsection (d):
"(d) If (i) the LC is drawn by Landlord because it was not renewed by
Tenant in a timely manner as required by subsection (a)(i), above, or
(ii) the LC is drawn by Landlord because an Event of Default by Tenant
occurs under the Lease and, as a result of such an Event of Default,
the Lease is terminated, as provided in subsection (a)(ii), above, the
amount drawn shall be held by Landlord as security for Tenant's
faithful performance of its obligations under this Lease. When such
funds are drawn they shall be invested by Landlord in investment grade
fixed income securities (e.g. United States government securities) with
a maturity of not more than six (6) months, with interest thereon paid
as received by Landlord to Tenant. Such funds shall be paid to Landlord
only upon a final determination, either by mutual agreement of Landlord
and Tenant, or by the judgment of a court of competent jurisdiction, of
the amount of monetary damages to which Landlord is entitled as a
result of such Event of Default, if any, following an Event of Default
by Tenant which results in a termination of the Lease. Any such funds
held by Landlord which exceed such amount of monetary damages to which
Landlord is determined to be entitled shall be promptly refunded to
Tenant."
<PAGE>
2. RATIFICATION OF LEASE; NO OTHER MODIFICATIONS. Except as expressly
amended and modified by this Amendment, Landlord and Tenant hereby ratify and
affirm the terms and provisions of the Lease in its entirety. Except as
otherwise amended by this Amendment, all other provisions of the Lease are
unmodified hereby.
3. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, each of the parties hereto have caused this
Amendment to Lease to be duly executed as of the day and year first above
written.
LANDLORD: TENANT:
ADI COMMUNICATION PARTNERS, L.P. COMSTREAM CORPORATION
a California limited partnership a Delaware corporation
By: Allen Development, Inc. By: /s/ Vina Saycocie
a California corporation -----------------
Its General Partner Name: Vina Saycocie
Its: VP Finance and CFO
By: /s/ Steven L. Black
-------------------------
Name: Steven L. Black
Its: President
2
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Exhibit 10.5
SECOND AMENDMENT TO LEASE
This SECOND AMENDMENT TO LEASE ("Amendment") is made to be effective as of the
18th day of November, 1998, by and between KILROY REALTY, L.P., a Delaware
limited partnership ("Landlord") and COMSTREAM CORPORATION, a Delaware
corporation ("Tenant"), with reference to the following facts:
R E C I T A L S :
A. ADI Communication Partners, L.P., a California limited partnership,
Landlord's predecessor-in-interest, and Tenant entered into that certain Lease
(Bondable Triple Net) dated April 23, 1997 ("Original Lease") with respect to
certain premises located in San Diego, California and more particularly
described in the Lease ("Demised Premises"), upon which two (2) 2-story concrete
tilt-up commercial and industrial buildings ("Buildings") and certain other
related improvements were previously constructed by Landlord pursuant to the
Original Lease. The Original Lease was amended by that certain First Amendment
dated July 16, 1997 ("Amendment"). The Original Lease and the Amendment are
hereinafter collectively referred to as the "Lease."
B. Capitalized terms used in this Amendment and not otherwise defined
herein shall have the meaning ascribed to them in the Lease.
C. Tenant desires to vacate, in its entirety, the approximately 132,600
rentable square foot Building known as "Building A" ("Building A") and certain
portions of the Land and consolidate its business operations into the
approximately 66,400 rentable square foot Building known as "Building B"
("Building B").
D. Landlord is willing to allow Tenant to so consolidate its operations
and reduce the Demised Premises on certain conditions, including the condition
that Landlord enter into a replacement lease for Building A on terms acceptable
to Landlord.
E. Concurrently with Landlord's execution of this Amendment, Landlord
is entering into a lease ("Pac Bell Lease") with Pacific Bell ("Pac Bell")
regarding Pac Bell's lease of Building A in its entirety and certain portions of
the Land and Improvements, as more particularly provided below.
F. Landlord and Tenant now desire to amend the Lease, subject to the
terms and conditions set forth herein, to (i) reflect Tenant's agreement to
deliver to Landlord (for its concurrent delivery to Pac Bell) possession of the
"Initial Surrender Space" described below on or before November 26, 1998; (ii)
redefine the Demised Premises by eliminating Building A and certain portions of
the Land on the "Surrender Date" described below, (iii) reduce the Monthly Base
Rent payable under the Lease as of March 1, 1999 ("Rent Adjustment Date"), (iv)
reduce the amount of
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the LC currently required under Section 20.25 of the Lease to $462,000, (v)
provide Tenant with a $300,000 tenant improvement allowance ("New Allowance")
and concurrently therewith, provide for the repayment by Tenant to Landlord of
such New Allowance over the remaining Initial Term; (vi) provide for Tenant's
delivery to Landlord of a $2,000,000 payment as partial consideration for
Landlord's agreement to reduce the Demised Premises and enter into this
Amendment which consideration shall be payable in two installments, the first of
which shall be due and payable upon the Rent Adjustment Date and the second of
which shall be due on or before September 1, 1999 and shall be secured by a
$1,000,000 irrevocable standby letter of credit ("New LC"), and (vii) make
certain other modifications to the Lease, as more particularly set forth below.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Landlord and Tenant hereby agree to amend the
Lease, as follows:
1. DEMISED PREMISES. Tenant hereby agrees to vacate and surrender to
Landlord, on or prior to November 26, 1998, possession of the approximately
33,000 square feet of Building A ("Initial Surrender Space") depicted on the
site plan attached hereto AS EXHIBIT "A" ("Site Plan"). In addition, on or
before December 15, 1998 ("Surrender Date"), Tenant hereby covenants and agrees
to vacate, in its entirety, the balance of Building A and surrender the balance
of Building A to Landlord. Effective as of the Surrender Date, the "Demised
Premises," as described in the Lease, are hereby redefined to consist solely of
Building B and the portion of the Land (and related Improvements constructed
thereon) more particularly depicted on the Site Plan, subject, however, to
Tenant's continuing obligation to pay Monthly Base Rent, until the Rent
Adjustment Date, as more particularly set forth in Paragraph 3 below. As a
result thereof, effective as of the Surrender Date, all references in the Lease
to the Demised Premises shall mean the Demised Premises depicted on the Site
Plan and, any references in the Lease to (1) Buildings shall instead mean
Building B and (ii) the Land shall mean the Land depicted as the Demised
Premises on the Site Plan. In connection with the reduction of the Demised
Premises to Building B and the portion of the Land depicted on the Site Plan,
Tenant shall be required to perform, at Tenant's sole cost and expense, the work
described in EXHIBIT "B" attached hereto ("Sur-render Work"). All of the
Surrender Work shall be completed in its entirety by Tenant on or before January
31, 1999. All of such Surrender Work shall be performed in compliance with
Article XIX of the Lease (to the extent Article XIX is applicable to such
Surrender Work). Pacific Cornerstone Architects ("PCA") shall have the
opportunity to review, on behalf of Landlord, any required plans and
specifications for any such Surrender Work and the Building B Improvements
described below. The costs incurred by PCA in connection with such review shall
be applied against the New Allowance. Following such reconfiguration of the
parking areas, Tenant shall (notwithstanding anything to the contrary contained
in the definition of Improvements contained in the Lease), during the balance of
the Term, be entitled solely to the use of the 144 parking spaces identified on
the Site Plan (with the balance thereof to be for the sole use of the tenant(s)
of Building A and any Expansion Building(s) constructed within the Project by
Landlord); provided, however, in the event Tenant elects, at its option and at
Its sole cost and expense, to modify the parking areas around the Building B
truck doors, the parking spaces allocated for Tenant's exclusive use may be
increased to up to a maximum of 178 spaces. Such election may be made at any
time during the Term by
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Tenant, subject to the requirements, to the extent applicable, of Article XIX of
the Lease. Tenant shall not permit any of its employees, contractors, agents,
visitors or invitees to use any parking spaces in the Project other than such
parking spaces allocated to Tenant as set forth above and as identified on the
Site Plan.
2. COMMENCEMENT DATE. Landlord and Tenant hereby acknowledge that the
Commencement Date of the Lease occurred on March 2, 1998. As a result thereof,
the Initial Term of this Lease shall end on February 28, 2005.
3. RENT. Effective as of the Rent Adjustment Date (but subject to
adjustment pursuant to Paragraph 4 below and the "Credit" described in Paragraph
I I below), the Base Rent schedule set forth in Section 3.1 of the Lease is
hereby deleted in its entirety and the following Base Rent schedule is inserted
in lieu thereof-
<TABLE>
<CAPTION>
Period Monthly Base Rent Annual Base Rent
- -------------------------------------------------------------------------
<S> <C> <C>
Rent Adjustment Date- $72,447 $ 869,364
02/29/00
03/01/00-02/28/02 $76,794 $ 921,528
03/01/02-02/29/04 $81,402 $ 976,824
03/01/04-02/28/05 $86,286 $1,035,432
</TABLE>
From and after the Rent Adjustment Date, Tenant shall no longer be obligated to
pay any rent or other charges with respect to Building A nor any portion of the
Land no longer part of the Demised Premises; provided, however, Tenant shall, as
partial consideration for Landlord's agreement to enter into this Amendment and
reduce the Demised Premises, until the Rent Adjustment Date, continue to be
solely responsible for all Monthly Base Rent payable with respect to the
original Demised Premises (including Building A); subject, however, to the
Credit described in Paragraph 11 below. Following the Surrender Date, Tenant
shall no longer have any obligations with respect to the portions of the Demised
Premises no longer leased by Tenant (i.e., Building A and portions of the Land
no longer included in the Demised Premises) with the exception of (i) Tenant's
obligation to complete the Surrender Work; (ii) Tenant's obligation to pay all
Monthly Base Rent due with respect thereto until the Rent Adjustment Date, and
(iii) any other obligations which expressly survive the expiration or earlier
termination of the Term of the Lease to the extent such obligations arise on or
before the Surrender Date. Tenant acknowledges that the Impositions payable with
respect to the original Demised Premises through the Surrender Date will include
supplemental taxes reflecting the increased value of the Demised Premises as a
result of the prior construction of the Buildings and other improvements thereon
whether or not such supplemental tax bill is delivered by the taxing authority
prior to or after the Surrender Date.
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4. NEW ALLOWANCE. Landlord shall provide Tenant with the New Allowance
in the amount of $300,000, which New Allowance shall be utilized by Tenant
solely for the costs of improving Building B for Tenant's consolidated business
operations ("Building B Improvements"). Notwithstanding the foregoing, Landlord
hereby agrees that up to $75,000 of the New Allowance may be used by Tenant for
the cost of performing the portion of the Surrender Work relating to the
necessary modifications to the parking lots as more particularly described IN
EXHIBIT "B." The Building B Improvements shall be constructed in compliance with
the requirements of Article XIX of the Lease. Notwithstanding anything to the
contrary contained in the Lease, Tenant shall not be required to remove the
Building B Improvements at the expiration or earlier termination of the Lease.
Further, Tenant shall only be required to remove any subsequent alterations or
other improvements constructed to Building B to the extent required under the
Lease; provided, however, in the event of any Transfer by Tenant pursuant to
Article XV of the Lease, Landlord shall have the right to reasonably require
that any subsequent alterations made to the Premises by or on behalf of such
transferee be removed at the expiration or earlier termination of the Lease
("Landlord's Removal Election"). Landlord's Removal Election shall be set forth
in a written notice delivered concurrently with Landlord's approval of the plans
for any such alterations Tenant shall be solely responsible for obtaining, at
Tenant's sole cost and expense, from any Authority all necessary governmental
approvals and permits subject to the New Allowance. Landlord shall reasonably
cooperate with Tenant in connection with obtaining such approvals. In the event
the New Allowance is insufficient to pay for the entire cost of the Building )3
Improvements, Tenant shall be solely responsible for such excess. As a result of
the New Allowance, the Monthly Base Rent payable under this Lease shall be
increased, as of the Rent Adjustment Date, by an amount equal to (i) the New
Allowance disbursed to Tenant, (ii) multiplied by a percentage factor sufficient
to amortize the New Allowance over the remaining Initial Tenn (approximately 72
months) at an annual interest rate of 10%, (iii) divided by 12. Any undisbursed
New Allowance remaining following the construction of the Building B
Improvements shall belong to Landlord. With the exception of the New Allowance,
Landlord shall have no obligation to contribute any allowance or make any
improvements with respect to the Demised Premises and the consolidation of
Tenant into the reduced Demised Premises described herein.
5. REDUCTION OF LETTER OF Credit. Within five (5) days after full
execution of this Amendment by Landlord and Tenant, the LC required as
additional security against an Event or Default under this Lease by Tenant shall
be replaced with the New LC in the amount of $462,000. The form of the New LC
shall be identical to the forrn of the existing LC, as more particularly
provided in Section 20.25(a) of the Lease. In addition, Section 20.25(b) of the
Lease is hereby deleted in its entirety and the following is hereby inserted in
lieu thereof-
"(b) RETURN OF NEW LC. The New LC shall be returned to Tenant at such
time as Tenant meets the following financial requirements for a period
of four (4) consecutive quarters:
(i) Tenant shall have annual revenues of not less than $40,000,000;
4
<PAGE>
(ii) Tenant shall have annual operating income (before interest
payments and taxes) of not less than $2,000,000; and
(iii) Tenant's debt to equity ratio shall not be greater than 1:2.
Notwithstanding the foregoing, in the event that the New LC has been
returned to Tenant as a result of Tenant meeting all of tile foregoing
financial requirements and Tenant's financial coridition subsequently
falls to meet all of such requirements, Landlord shall be entitled to
require that a New LC in the amount of $462,000 be reestablished on the
terms and provisions set forth in this Section 20.25 in which event
Tenant shall, within five (5) days of written notice from Landlord,
deliver the New LC to Landlord in the form required hereunder."
6. CONSIDERATION FOR REDUCTION OF TENANT'S OBLIGATIONS. As partial
consideration for Landlord agreeing to enter into this Amendment and reduce the
size of the Demised Premises by removing Building A and other certain portions
of the Land from the Lease as of the Surrender Date, Tenant hereby covenants and
agrees to pay to Landlord the sum of $2,000,000 ("Amendment Consideration"). The
first $1,000,000 of the Amendment Consideration shall be payable by Tenant to
Landlord, in cash or by cashier's check or wire transfer of funds ("Cash") on or
before the Rent Adjustment Date. Concurrently with Tenant's execution hereof,
Tenant shall deliver evidence to Landlord that Tenant has the ftinds available
to pay the Amendment Consideration and shall reasonably demonstrate to Landlord
that such funds shall remain available to pay the Amendment Consideration as and
when required hereunder. The second $ 1,000,000 installment of the Amendment
Consideration shall be payable by Tenant to Landlord in Cash on or before
September 1, 1999. As additional security to ensure Tenant's payment of the
Amendment Consideration, Tenant shall deliver to Landlord, within five (5) days
after full execution of this Amendment by Landlord and Tenant, a $ 1,000,000
irrevocable standby letter of credit ("Amendment Consideration LC") naming
Landlord as the payee thereunder. The Amendment Consideration LC shall be held
by Landlord until such time as Tenant has paid to Landlord, in full, the
$2,000,000 Amendment Consideration. The Amendment Consideration LC shall be an
irrevocable standby letter of credit, issued by Citibank or another federally
insured bank reasonably acceptable to Landlord, and shall be in a form and
content reasonably acceptable to Landlord. Tenant shall pay all expenses, points
and/or fees incurred by Tenant in obtaining the Amendment Consideration LC. The
Amendment Consideration LC shall have an expiration date of September 30, 1999.
Landlord may present a site draft or demand with respect to the Amendment
Consideration LC if Tenant fails to deliver to Landlord the first S 1,000,000
installment of the Amendment Consideration on or before the Rent Adjustment Date
or falls to deliver to Landlord the second installment of the Amendment
Consideration on or before September 1, 1999. Landlord shall be entitled to
grant a security interest in, or make a collateral assignment of, Landlord's
rIghts under the Amendment Consideration LC in connection with mortgage
indebtedness incur-red by Landlord to a bona fide third party institutional
lender at an arm's length transaction. Landlord and Tenant shall execute such
documents as may be reasonably
5
<PAGE>
necessary to document and perfect the security arrangements described
hereinabove. The Amendment Consideration LC shall be returned to Tenant upon
receipt by Landlord of the entire $2,000,000 Amendment Consideration.
7. NON-APPLICABILITY OF CERTAIN TERMS OF THE Lease. Notwithstanding
anything to the contrary contained in this Amendment or the Lease, Landlord and
Tenant hereby acknowledge and agree that:
(i) Tenant shall relinquish its signage rights witli respect to
Building A and any existing monument or other freestanding signs for Building A
on or before the Surrender Date. Tenant sliall, at Tenant's sole cost and
expense, promptly repair any and all damage caused to Building A in connection
with such removal.
(ii) Section 20.23 of the Lease (Expansion Option) is liereby deleted
in its entirety as Tenant shall no longer have any riglits with respect to
"Parcel C" identified on the Site Plan with the exception of Tenant's exclusive
night to use the 24 parking spaces, which spaces are part of Tenant's 144 total
spaces (subject to Tenant's right to increase such total up to 178 spaces
pursuant to Paragraph I above) located on Parcel C (as depicted on the Site
Plan) for the balance of the Term.
(iii) Section 20.24 of the Lease (Right of First Offer on Expansion
Building) is hereby deleted in its entirety as Tenant no longer has any right of
first offer with respect to any building hereinafter constructed on said Parcel
C.
(iv) Section 20.26 of the Lease (Reconfiguration of Land) is hereby
deleted in its entirety.
kI8. IMPOSITIONS. The following new Section 5.7 is inserted at the
end of Article V:
"5.7 SEPARATE ASSESSMENT. In the event the Improvements on the
Demised Premises or the Land are not separately assessed, but a part of a
larger parcel ("Larger Parcel") for assessment purposes, Tenant shall pay, as
its share of Impositions, all Impositions with respect to all Improvements on
the Demised Premises plus Tenant's Share of Impositions on the realty
underlying the Large Parcel. For purposes of this Lease Landlord and Tenant
agree that Tenant's Share of Impositions on the realty underlying the Larger
Parcel shall equal the square footage of the realty comprising Land depicted
on Site Plan divided by the total square footage of the realty comprising the
Larger Parcel. Landlord shall deliver to Tenant, contemporaneously with
delivery of the bill therefore, the calculations and assumptions made by
Landlord in determining Tenant's share of such impositions."
9. NOTICES. Landlord hereby amends its notices infori-nation contained in the
Lease as follows:
To Landlord: Kilroy Realty, L.P.
6
<PAGE>
2250 East Imperial Highway, Suite 1200
El Segundo, California 92045
Attn: Nadine Kirk
Facsimile: (310) 322-8790
with a copy to: Kilroy Realty, L.P.
2250 East Imperial Highway, Suite 1200
El Segundo, California 92045
Attn: Jeff Hawken
Facsimile: (310) 322-5981
with an additional copy to:
Kilroy Realty, L.P.San Diego, California 92121
Attn: Steve Scott
Facsimile: (619) 550-1935
To Tenant:
ComStream Corporation
6340 Sequence DriveSan Diego, California 92121
Attn: President
Facsimile: (619) 657-5401
10. AMENDED AND RESTATED MEMORANDUM OF LEASE. Landlord and Tenant previously
recorded a Memorandum of Lease against the Land originally leased by Tenant.
Promptly after the Surrender Date, Landlord and Tenant shall execute an Amended
and Restated Memorandum of Lease in a form similar to Exhibit "C" to the Lease
modifying the legal description of the Land to be consistent with the reduced
Land leased by Tenant as of the Surrender Date.
11. CREDIT. Notwithstanding anything to the contrary contained herein, on
February 1, 1999, Landlord shall provide Tenant with a credit against Monthly
Base Rent, Impositions and other charges due under this Lease in an amount equal
to $120,000 ("Credit").
12. COMMON AREA PAYMENTS. As more particularly depicted on the Site Plan, when
Pac Bell solely occupies Building A, there will exist certain common area
between Building A and Building B consisting of a plaza, walkways and certain
other improvements (collectively, "Common Area"). Pursuant to the Pac Bell
Lease, Pac Bell (or Landlord) will be required to maintain and repair the Common
Area in good condition. Tenant hereby agrees to reimburse Landlord, within 15
days of Tenant's receipt of an invoice therefor (accompanied by reasonable
supporting documentation), for 33.3% of the reasonable costs actually incurred
in connection with such maintenance and repair of the Common Area. Such
reimbursement obligations shall constitute Additional Obligations under the
Lease. Tenant hereby grants Pac Bell and Landlord an irrevocable license to
enter upon the
7
<PAGE>
portion of the Common Area located on the Land and further agrees that Pac
Bell's or Landlord's entering upon the Land to perform such maintenance and
repair obligations shall not constitute a breach of Landlord's quiet enjoyment
covenant under the Lease; provided, Landlord agrees to use (and cause Pac Bell
to use) its commercially reasonable efforts not to interfere with Tenant's
business operations in connection therewith.
13. RETROFIT ALLOWANCE. Landlord and Tenant agree that the Retrofit Allowance
described in Section 2.11 of the Lease is hereby reduced to equal $335,000. As
more particularly set forth in said Section 2.11, such reduced Retrofit
Allowance shall be provided to Tenant upon the commencement of each Extension
Term. Such Retrofit Allowance shall be repaid as part of Base Rent as more
particularly set forth in Section 3.2 of the Lease.
14. LEGAL DESCRIPTION. Exhibit 'W' of the Lease is hereby deleted in its
entirety. The Land leased to Tenant shall, as of the Surrender Date, consist of
Land depicted as part of the Demised Premises upon the Site Plan attached hereto
as EXHIBIT "A".
15. HAZARDOUS MATERIALS. Landlord and Tenant acknowledge and agree that,
notwithstanding Tenant's complete vacation of Building A as of the Surrender
Date, the covenants, representations and indemnities a f Landlord and Tenant
with respect to Hazardous Materials shall survive the expiration of the Lease
with respect to Building A; provided, however, Tenant shall not be responsible
for the introduction of Hazardous Materials to Building A from and after the
Surrender Date unless such Hazardous Materials are so introduced to Building A
by Tenant or Tenants employees, agents, contractors or invitees.
16. COUNTERPARTS- This Amendment may be executed in multiple counterparts, all
of which together shall constitute one and the same Amendment.
17. EFFECT OF AMENDMENT This Amendment and all. terms herein are effective as
of the date hereof subject to the terms and conditions set forth herein. Except
as expressly amended hereby, all terms and conditions of the Lease shall
CONTINUE IN FULL FORCE AND EFFECT throughout the Lease Term, The Lease, as
amended hereby, constitutes the entire agreement of the parties and no further
modification of the Lease shall be binding and effective unless evidenced by an
AGREEMENT, IN WRITING, signed by both Landlord and Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the
date fast above written,
8
<PAGE>
"Landlord" KILROY REALTY, L.P.,
a Delaware limited partnershipBy
By: Kilroy Realty Corporation Kilroy Realty Corporation,
a Maryland corporation a Maryland corporation
Its General Partner Its General Partner
By:__/s/_Jeffrey L. Hawken______ By:___/s/ Steven L. Black
Name:__Jeffrey L. Hawken_______ Name: Steven L. Black
Its:_____EVP & COO___________ Its: Executive Vice President
"Tenant" COMSTREAM CORPORATION
a Delaware corporation
By:__/s/Jamie Crichton______ By:_/s/ Jamie Crichton__________________
Name: Jamie Crichton Name: Jamie Crichton
Title: Vice President/Secretary Title: Chief Financial Officer
9
<PAGE>
EXHIBIT "B"
SURRENDER WORK
Tenant shall cause all of the following Surrender Work to be completed
in its entirety on or before the applicable dates described in the Amendment to
which this Exhibit "B" is attached:
I . Tenant shall vacate, in its entirety, Building A and deliver
Building A to Landlord in the same condition as they were upon delivery of
possession thereof at the Commencement Date, reasonable wear and tear, casualty
and condemnation excepted, and shall surrender all keys to the Demised Premises
to Landlord at the address set forth in the Lease and shall inform Landlord of
all combinations on locks, safes and vaults, if any. Tenant shall move all of
its property therefrom and all alterations and improvements placed therein by
Tenant. Tenant shall repair any material damage to the Demised Premises caused
as a result of Tenant's vacation, including but not limited to, in connection
with the removal of its lab area cable trays, all materially damaged ceiling
tiles, floor tiles, walls and other Building A interior improvements damaged
during Tenant's occupancy of Building A and during the course of Tenant's
vacation of Building A.
2. Tenant shall remove the existing volleyball court and Tenant's
satellite farm and shall relocate Tenant's satellite equipment to the roof of
Building B. In connection with such removal, Tenant shall cause the areas
previously occupied by such volleyball court and such satellite farm to be paved
and improved to match the balance of the parking areas to create an additional
approximately 34 parking spaces. Tenant's satellite equipment shall be
installed, replaced, repaired, removed, operated and maintained in compliance
with all governmental laws, rules and regulations. Landlord shall reasonably
approve the location of such satellite equipment on the roof of Building B. Such
satellite equipment shall be reasonably screened and located on roof pads such
that there shall be no penetrations of the roof of Building B except for
installation of a roof Jack in connection therewith. All costs of installation,
operation and maintenance of the satellite equipment and any necessary related
equipment shall be borne by Tenant. Landlord shall not have any obligations with
respect to the satellite equipment. Landlord makes no representation that the
satellite equipment will be able to receive or transmit communication signals
without interference or disturbance and Tenant agrees that Landlord shall not be
liable to Tenant therefor. Tenant shall be solely responsible for any damage
caused as a result of the installation, operation, maintenance or removal of the
satellite equipment. Such satellite equipment shall remain the sole property of
Tenant and Tenant shall remove the satellite equipment and related equipment at
Tenant's sole expense upon the expiration or earlier termination of the Lease or
upon the imposition of any governmental law or regulation which may require
removal, and shall repair Building B upon such removal to the extent required by
such work or removal. If Tenant falls to remove such satellite equipment and
repair Building B within ten (10) days after the expiration or earlier
tennination of the Lease, Landlord may do so at Tenant's expense.
10
<PAGE>
3. Tenant shall reconfigure the parking area and related Improvements
utilized by Building A and Building B in accordance with the Site Nan attached
to the Amendment as EXHIBIT "A."
4. All of the Surrender Work shall be performed in a good and
workmanlike manner and free of defects. Tenant shall be solely responsible at
its cost and expense to repair any defects arising with respect to the Surrender
Work during the Term. The obligation to repair any such defects shall survive
the expiration or earlier termination of the Lease. The materials and
specifications for any Surrender Work relating to the parking areas and other
areas outside of Building B (e.g., paving of the areas occupied by the
volleyball court) shall be consistent with the existing surrounding
improvements.
11
<PAGE>
Exhibit 10.6
INDEMNITY AGREEMENT
This Indemnity Agreement is made as of November 20, 1998, by Pacific Bell
Corporation, a California corporation ("PacBell"), in favor of ComStream
Corporation, a Delaware corporation "ComStream"), who agree as follows:
1. RECITALS. ComStream and ADI Communication Partners, L.P.,
predecessor-in-interest to Kilroy Realty, L.P. ("Landlord"), entered into the
Lease dated as of April 23, 1997, as amended by the First Amendment dated as of
July 16, 1997, and the Second Amendment to Lease dated as of November 1 , 1998
(the "Lease"). Pursuant to the Lease, ComStream leased from Landlord the
property described in the Lease (the "Original Premises"), but has agreed under
the Lease to vacate, on or before November 27, 1998, that portion of the
Original Premises consisting of approximately 33,000 square-feet described and
depicted on the attached Exhibit "A" (the "Vacated Space"). Landlord and PacBell
have entered into an agreement whereby Landlord is granting PacBell the rights
to occupy the Vacated Space commencing on November 27, 1998. As partial
consideration for ComStream's agreement to vacate the Vacated Space, ComStream
has requested this Indemnity.
2. INDEMNITY. PacBell shall defend, indemnify, and hold ComStream harmless from
and against all costs, liabilities, claims, and damages ("Obligations")
occurring within the Vacated Space or arising out of PacBell's occupancy of, or
operation out of, the Vacated Space between November 27, 1998, and December 15,
1998, inclusive, including Obligations to Landlord or others under the Lease.
The foregoing Indemnity EXCLUDES, however, Base Rent and the Additional
Obligations (as defined in the Lease) and other Obligations which ComStream
would have incurred under the Lease regardless of PacBell's occupancy of, or
operation out of, the Vacated Space. For purposes of this Indemnity, PacBell is
responsible for the acts and omissions of its officers, agents, employees,
independent contractors, clients, guests, and other third parties (but only to
the extent such other third parties' acts, omissions, or presence at the
Original Premises relate solely to PacBell's occupancy of the Vacated Space).
ComStream shall defend, indemnify and hold PacBell harmless from and against all
Obligations occurring within the Original Premises other than the Vacated Space
between November 27, 1998, and December 15, 1998, inclusive, or arising out of
ComStream's occupancy of, or operation out of, the Original Premises other than
the Vacated Space. For purposes of this Indemnity, ComStream is responsible for
the acts and omissions of its officers, agents, employees, independent
contractors, clients, guests, and other third parties (but only to the extent
such other third parties' acts, omissions, or presence at the Original Premises
relate solely to ComStream's occupancy of the Original Premises other than the
Vacated Space).
1
<PAGE>
3. MISCELLANEOUS. Each party to this Agreement shall execute and deliver all
instruments and documents and take all actions as may be reasonably required or
appropriate to carry out the purposes of this Agreement. The prevailing
party(ies) in any litigation, arbitration, mediation, bankruptcy, insolvency or
other proceeding ("Proceeding") relating to the enforcement or interpretation of
this Agreement may recover from the unsuccessful party(ies) all costs, expenses,
and actual attorneys' fees (including expert witness and other consultants' fees
and costs) relating to or arising out of (a) the Proceeding (whether or not the
Proceeding proceeds to judgment), and (b) any post-judgment or post-award
proceeding including, without limitation, one to enforce or collect any judgment
or award resulting from the Proceeding. All such judgments and awards shall
contain a specific provision for the recovery of all such subsequently incurred
costs, expenses, and actual attorney's fees. Each provision of this Agreement is
valid and enforceable to the fullest extent permitted by law. If any provision
of this Agreement (or the application of such provision to any person or
circumstance) is or becomes invalid or unenforceable, the remainder of this
Agreement, and the application of such provision to persons or circumstances
other than those as to which it is held invalid or unenforceable, are not
affected by such invalidity or unenforceability. Each of the individuals signing
below on behalf of an entity represents and warrants that it is fully authorized
to do so on behalf of such entity.
This Agreement is effective only if PacBell enters into a lease agreement with
Landlord relating to the Vacated Space.
(STAMP)
PACIFIC BELL, a California corporation
By: /s/William M. Miller
COMSTREAM CORPORATION, a Delaware corporation
By: /s/ James Crichton, Vice President and CFO
By: /s/ James Crichton, Secretary
2
<PAGE>
November 18, 1998
Mr. Mark Steinman
Senior Vice President & Chief Financial Officer
Spar Aerospace Limited
121 King Street West
Suite 1800
Toronto, Canada
M5H 4C2
Dear Mark:
Please find enclosed the Second Amendment to Lease ("Amendment") dated November
18, 1998 between Kilroy Realty and ComStream Corporation regarding the Sequence
Drive real estate. The total costs pursuant to this Amendment are estimated to
be $US 2,570,000 and are described in Schedule A.
Radyne Corp. hereby releases Spar Aerospace Limited ("Spar") from any and all
liabilities or obligations under the Lease dated April 23, 1997 between ADI
Communication Partners, L.P., and ComStream Corporation as amended June 16, 1997
and November 18, 1998 (collectively, the "Lease") and under the Stock Purchase
Agreement dated as of August 28, 1998 between Radyne Corp. and Spar with respect
to the Lease under the following terms and conditions:
1. Spar agrees to pay to ComStream or its successor $US 980,000 by
wire transfer on or before March 1, 1999.
2. Spar shall continue to be responsible for the rent and operating
costs for Building B through December 15, 1998 and afterwards shall
have no such responsibility.
3. Spar agrees to reimburse ComStream for 50% of actual costs incurred
in connection with completion of the Surrender Work (as described
in Exhibit B to the Amendment) to a maximum of $US 75,000, 50% of
any commissions paid to CB Commercial Ward in connection with the
Amendment to a maximum of $70,000, and 50% of legal fees paid to
Soloman Ward in connection with the Amendment to a maximum of $US
3,500. Such amounts will be paid to ComStream within ten business
days of receipt of invoices by Spar.
4. Spar agrees to reimburse ComStream for 50% of the costs of Building A during
the period of December 16, 1998 to February 28, 1999, which amount shall be
reduced by 50% of the credit described in paragraph H of the Amendment. The
estimated amount shall be paid to ComStream in two installments; $US 68,000
shall be payable on January 1, 1999 and $US 68,500 shall be payable on
February 1, 1999.
If the foregoing accurately describes your understanding, please sign in the
space provided below.
Sincerely,
/s/ Jamie Crichton
- ------------------
Jamie Crichton
Vice President & CFO
3
<PAGE>
AGREED AND ACCEPTED:
/ S / Mark C. Steinman
- ---------------------------------------
Date: 26 November 1998
Mark C. Steinman
Senior Vice President & CFO
Spar Aerospace Limited
/ S /Robert C. Fitting
- ---------------------------------------
Date: 18 November 1998
Robert Fitting
President
Radyne Corp.
4
<PAGE>
Schedule A
ESTIMATED LEASE AMENDMENT COST ($000S)
<TABLE>
<CAPTION>
Total Spar Radyne
-------------------------------
Cost ComStream
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A. Cash buyout
1. March 1, 1999 payment $ 1,000.0 $ 980.0 $ 20.0
2. September 1, 1999 payment (undiscounted) $ 1,000.0 $ 1,000.0
-------------------------------------------
$ 2,000.0 $ 980.0 $ 1,020.0
B. Estimated Surrender Work costs:
1. Return volleyball court, satellite farm and loading
dock areas to parking to create additional 40 spaces
2. Remove lab area cable trays and replace
ceiling tiles $ 150.0 $ 75.0 $ 75.0
C. CB commission (as if building B sublease $ 140.0 $ 70.0 $ 70.0
was successful)
D. Rent payments for Sequence A during vacant period $ 273.0 $ 136.5 $ 136.5
of 12/16/98 thru 2/28/99
E. Legal $ 7.0 $ 3.5 $ 3.5
-------------------------------------------
$ 2,570.0 $1,265.0 $ 1,305.0
-------------------------------------------
-------------------------------------------
</TABLE>
NOTES
1. Between the Closing date of the Spar/Radyne transaction and 12/15/98, Spar
would continue to fund the Building B costs and Radyne-Com Stream would fund
the Building A costs as per the Stock Purchase Agreement.
2. Commencing December 15, 1998, Radyne-ComStream would occupy and fund
Building B.
<PAGE>
Schedule B
SEQUENCE A COSTS DURING VACANCY PERIOD
(December 16, 1998 to February 28, 1999)
<TABLE>
<CAPTION>
BLDG A
<S> <C>
SF 132600
Rent $ 145,260
Costs of vacant space
2.5 months $ 363,151
Prorated amount of rent credit (90,000)
--------------
$ 273,151
--------------
--------------
</TABLE>
SUMMARY OF CREDIT TO TENANT DESCRIBED IN PARAGRAPH 11 OF THE AMENDMENT
NOV 26TH TO DEC 15TH
<TABLE>
<CAPTION>
<S> <C>
"Rent" (33,000 SF *$1.10 per month * 19/31 days 22,000
Operating costs 8,000
--------------
30,000
DEC 16TH TO FEB 28TH
"Rent" (33,000 SF * $1.10 per month for 2.5 months) 90,000
--------------
120,000
--------------
--------------
</TABLE>
<PAGE>
Exhibit 13.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
FOR THE FISCAL YEAR COMMISSION FILE NUMBER
ENDED DECEMBER 31, 1997 0-11685
</TABLE>
------------------------
RADYNE CORP.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 11-2569467
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
</TABLE>
5225 S. 37TH STREET, PHOENIX, ARIZONA 85040
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (602) 437-9620
SECURITIES REGISTERED UNDER SECTION 12 (B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, $.002 PAR VALUE
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates
(deemed by the registrant to be persons, along with members of their families,
known to the registrant to beneficially own, exclusive of shares subject to
options, less than 5% of the outstanding shares of the registrant's common
stock) of the registrant as of March 4, 1998 was approximately $1,388,000.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a Court. Yes _X_ No ____
As of March 10, 1998, there were 5,931,346 shares of the registrant's common
stock outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in the
Letter of the President included in the Annual Report to Stockholders and in
this Form 10-K, including without limitation the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business", are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Various economic and competitive factors could
cause actual results to differ materially from those discussed in such
forward-looking statements, including factors which are outside of the control
of the Company, such as interest rates, foreign exchange rates and changes in
raw material costs, along with other factors noted in this Form 10-K with
respect to the Company's business.
ITEM 1. BUSINESS
GENERAL
Radyne was incorporated in the State of New York on November 25, 1980. The
Company's current address is 5225 South 37th Street, Phoenix, Arizona 85040 and
its telephone number is (602) 437-9620.
Radyne has been involved in the advanced design and production of digital
data communications equipment and associated equipment for satellite
telecommunications systems for over seventeen years. Since the Company's
inception in 1980, Radyne has established itself as a supplier in the satellite
ground equipment business.
Radyne designs, manufactures and sells satellite modems, frequency
converters, ancillary products and equipment racks containing integrated modems
and supporting equipment for data communications.
Although the Company was forced to file for Chapter 11 bankruptcy protection
in April 1994, it successfully emerged from bankruptcy in December of that year
upon the acquisition of approximately 91% of its Common Stock by Engineering and
Technical Services, Inc. ("ETS"), then a major customer of Radyne. On August 12,
1996, ETS was acquired by Singapore Technologies Pte Ltd through its indirect
wholly owned subsidiary, Stetsys US, Inc. ("ST"). As a result, approximately 91%
of the Company's Common Stock is now held by ST and an affiliate thereof. See
"Bankruptcy Reorganization" below.
In 1995, ETS caused Radyne to install a new management team, which promptly
moved the Company's operations from New York to Phoenix, Arizona and commenced
the hiring of an almost all new staff of engineering, sales and support
personnel, with funding advanced by ETS and subsequently ST and its affiliates.
The new Radyne team has reinstituted Radyne's research, development and
marketing programs and reinvigorated its product line.
On June 16, 1997, the Company completed an offering of its Common Stock to
its shareholders of record ("Rights Offering"). The Company sold a total of
2,171,625 shares of its Common Stock, including 144,100 shares to Directors and
employees of the Company and its affiliates and 1,976,000 shares to an affiliate
of ST, for $2.50 per share. The total proceeds of the Rights Offering were
$5,429,063, partially offset by $335,696 in associated costs.
OPERATING STRATEGY
Radyne's operating strategy is to (i) continue to build on the experience,
skills and customer access of its new management team, (ii) capitalize on its
development of smaller, less costly satellite modems, and (iii) expand into
market segments, such as rural telephone, private networks, government networks
and compressed television transmission. See "Target Markets" below.
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The Company's engineering staff and support facilities are dedicated to (i)
maintaining the state-of-the-art status of Radyne's traditional products for the
satellite ground equipment segment of the market, (ii) designing and enhancing
products for emerging markets, such as rural telephony for developing areas,
high-speed satellite communications, government data equipment and the growing
private network market, and (iii) providing special configurations to satisfy
customers' special needs.
Radyne's modems cover data rates from 2.4 Kilobytes per second to 155
Megabytes per second. The Company's frequency converters handle all three
frequency bands used in satellite communications. Radyne believes that most of
its current line of modems and converters are smaller and lower priced than the
previous generation of products, enabling large system installation in
significantly less rack space than the products of the Company's competitors.
The Company also markets redundancy switches which operate in conjunction with
satellite modems and converters and provide automatic fault monitoring and
switch over to standby equipment in the event of modem or converter failure.
Radyne's line of frequency converter products is usable in virtually all
earth stations for the conversion of intermediate frequencies to microwave
frequencies for satellite transmission. These converters are competitively
priced, small in size and offer either single, dual or all three bands used in
the satellite industry. In addition to being offered to commercial customers,
there is a military market for the three-band units.
The Company's newer products include a low cost modem with expanded features
and super fast acquisition capabilities, making it attractive for use in both
private networks and rural telephone systems being offered in China, Indonesia
and India, and a line of satellite frequency translators presently used for
testing in satellite earth stations.
The development of digital compression technology has allowed the
transmission of television in a small bandwidth, which has made TV transmission
by satellite more economical than ever before. Video compression allows many
times more channels on a satellite than was previously the case, thus producing
a market of major interest. This compression technology is used for transmission
of TV to network facilities, distribution of cable TV to cable companies, high
definition TV distribution and video teleconferencing. Radyne has developed
modulator products to be used in conjunction with compression equipment and has
been shipping these products for over one and one-half years with exceptional
market acceptance.
BANKRUPTCY REORGANIZATION
In December 1994, Radyne emerged from protection under Chapter 11 of the
Bankruptcy Code. The Company believes that the reasons for Radyne having sought
bankruptcy protection have been neutralized by its new management team and
interim financing sources. When Radyne filed its bankruptcy petition in April
1994, it was suffering from severe cash flow problems due to shrinking sales.
Years of uninspired management and the failure to maintain the sort of research
and development program which is necessitated by the fast-moving data
communications industry had left Radyne with an aging product line and an
inability to access emerging markets.
On April 28, 1994, Radyne filed a petition for relief under Chapter 11 of
the federal bankruptcy laws in the United States Bankruptcy Court for the
Eastern District of New York. Under Chapter 11, certain claims against the
Company in existence prior to the filing were stayed while the Company continued
business operations as debtor-in-possession. Claims secured against the
Company's assets were also stayed, although the holders of such claims had the
right to move the court for relief from the stay prior to the Company's
reorganization plan being confirmed. Secured claims were secured primarily by
liens on all of the Company's assets.
The Company received approval from the Bankruptcy Court to pay certain of
its pre-petition obligations, employee wages and benefits. Tax claims were
rescheduled for payment in equal quarterly
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installments of $9,600, with interest at 7%, over six years. A portion of these
tax claims is the sole remaining pre-petition liability of the Company.
On December 16, 1994, the Bankruptcy Court confirmed the Company's Plan of
Reorganization effective at the close of business on December 16, 1994. The
Plan, which has been consummated, called for the establishment of an escrow
account from which to pay claims and provided for the following:
(1) Exchange of Debt for Common Stock--The Company issued 17,000,000
(prior to a 1-for-5 Reverse Split) shares of previously authorized but
unissued Common Stock to Radyne Florida (a special purpose subsidiary of
ETS), which had previously purchased the Company's secured bank debt and the
position of certain holders of secured promissory notes. This issuance of
stock gave Radyne Florida approximately 91% of the Company's outstanding
Common Stock. In exchange for the stock, the Company was discharged of
$2,350,000 of debt owed to Radyne Florida. In addition, the 1,750,000
warrants held by Radyne Florida (purchased with the secured promissory
notes) were cancelled.
(2) Cancellation of Debt--Unsecured claims and capitalized lease
obligations were settled as follows:
<TABLE>
<CAPTION>
ORIGINAL
TYPE OF CLAIM AMOUNT REDUCTIONS COMPROMISED
- --------------------------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Accounts payable, accrued expenses, and capitalized
lease obligations................................ $ 1,483,343 $ 1,111,872 $ 371,471
Convertible debentures and bridge notes............ 487,885 439,225 48,660
Taxes.............................................. 309,143 99,866 209,277
------------ ------------ -------------
$ 2,280,371 $ 1,650,963 $ 629,408
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
(3) Other Claims--Priority Claims for wages of $53,786 were paid in
full.
Holders of the Company's Common Stock and options to purchase the Company's
Common Stock had their interests significantly diluted by the distribution of
Common Stock to Radyne Florida.
Holders of warrants to purchase the Company's Common Stock exchanged the
warrants for an aggregate of 53,437 shares of Common Stock.
TARGET MARKETS
Radyne has historically operated in an industry that has relatively few
customers. Today, fewer than 1,000 customers make up the market for satellite
data communication subsystems. Radyne's target markets include international
telecommunications, high speed satellite communications, rural telephony and
private network DAMA (demand assigned multiple access) users, as well as the
United States Government. Currently, Radyne has a presence in the international
telecommunications market, the DAMA products market and, with its new
DM-45/DD-45 and MM-155 modems, the High- Speed Video Conferencing and High
Definition Television markets but anticipates movement into the other markets in
the near future. Of course, there can be no assurance that Radyne will succeed
in capturing a significant share of these other markets.
The international telecommunications market includes users of IDR
(intermediate data rate), IBS (international business service) and open network
satellite equipment. The IDR environment is primarily for voice traffic, while
IBS is specific to business data traffic. In addition, the market includes
customers for MUX (multiplexers), switches and peripheral equipment. The
international telecommunications market should provide substantial business
opportunities for Radyne in the near future. To illustrate the magnitude of the
potential market for Radyne's satellite modems alone, the projected growth in
transponders can be depicted as follows. A transponder is the part of the
satellite that receives an uplink signal at one frequency, converts that
signal's frequency, amplifies it and then retransmits the signal to the ground.
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Satellites have an average of 24 transponders each. For each transponder, an
average of 50 modems is required (25 on the transmitting side and 25 on the
receiving end).
Rural telephony and private network DAMA products require special
communications equipment which is efficient for low traffic volume at many
different locations. DAMA products allow many users to access the same channel
on demand. Radyne serves the DAMA products segment of the market with its
DMD-2400 modem. The DMD-2400 can be utilized in both rural telephony and private
network systems. Rural telephony can be described as an intra-country
telecommunications network linking many small villages or islands in a country
like the Philippines, for example, ultimately allowing the villages to
communicate with each other and the world. A private network can be described as
a network in the commercial world. For example, many banks and other financial
institutions, airlines, and large and multi-unit corporations have the need for
satellite communications and may be linked via private networks.
Additionally, the Company has developed the new DMD-2401 VSAT/SCPC Modem,
which has enhanced features, to compliment the DMD-2400 products and to address
other user requirements. The Company sells its DAMA/VSAT compatible products to
system integrators (customers who make a business of supplying turnkey earth
station operations for their customers), domestically and abroad, as components
to systems that they have designed, as well as directly to end users. The
Company offers these products for sale on a global basis and believes their use
to be global.
Radyne has entered the high-speed satellite communications market with
various products that have been designed to incorporate the most advanced
technologies available. Communications equipment in this segment possesses
higher data rate capabilities of approximately 12-155 megabits per second,
allowing much more data to be transmitted. Over the last year and one-half, the
Company has introduced products such as the DVB- 3000 and DVB-3030 for the
Digital Television industry, which are ideal for use in digital video hub
uplinks, flyaway and mobile satellite news gathering applications. The DD-45 and
DM-45 is a multi-purpose solution for Digital Video Broadcast and High Speed
data transmission for use in, among other things, cable system
backup/restoral-over-satellite and high data rate links. The Company's newest
high-speed entrants are the DM-160 and MM-160 that offer an excellent solution
for high data rate requirements. Also, our new MM-155 Microwave Modem is ideal
for microwave link upgrades.
Additionally, the United States Government has provided a significant market
opportunity for Radyne as the defense budget shrinks and it becomes cost
prohibitive for the government to develop its own products. Because of the
expected growth in commercial off-the-shelf (COTS) and non-developmental item
(NDI) procurement, Radyne has targeted the US Government as an important revenue
source.
PRINCIPAL PRODUCTS
The following is a brief description of the Company's principal product
lines.
RCS-10/DMD-10 MODEM AND REDUNDANCY CONTROL SYSTEM
The RCS-10 represents the new generation system which is replacing the
RCS5000 family in Radyne's product line. It serves the same functions as the
RCS5000, but with a number of notable improvements. Up to 30 modems can be
combined in a single rack and each redundancy switch can control up to 10
modems. In addition to an expanded data rate range (9.6 Kbps to 8.448 Mbps
compared to the RCS5000's 64 Kbps to 8.448 Mbps), the RCS-10 offers an improved
display and menu structure and more options.
DMD-4500 IBS/IDR SATELLITE MODEM
This standard satellite modem provides selectable functions for Intelsat
IDR, IBS and closed network services and is easily programmable by earth station
personnel. Data rates may be selected in 8 Kbps steps between 48 Kbps and 8.448
Mbps. The DMD- 4500 can be used with a variety of redundancy switches and other
options.
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DMD-2401 SATELLITE MODEM (NEW PRODUCT)
The DMD-2401 is a low cost, light weight (8 pounds), fast acquisition (under
20 second) modem. It is capable of data rates ranging from 9.6 Kbps to 2.048
Mbps in steps of 1 Bps. Digital signal processing eliminates virtually all
on-board adjustments. This modem is designed to perform as both ends of a single
channel per carrier link or as a VSAT remote site modem in a hub system. Its
other applications include video conferencing, long distance learning, paging
and news gathering.
DVB-3000 AND DVB-3030 DIGITAL BROADCAST MODULATORS
The DVB-3000 AND DVB-3030 are flexible, programmable digital video satellite
modulators offering full compatibility with digital video standards. Their
principal applications are for digital video hub uplinks, mobile satellite news
gathering, video distribution and one-way data distribution. The DVB-3000 AND
DVB-3030 are high speed, offering programmable data rates ranging from 1.0 to
30.0 Mbps and fixed data rates of 30 to 50 Mbps. They are frequency agile with a
base range of 50 to 90 MHz and an optional range of 100 to 180 MHz in steps of
1.0 Hz.
CONVERTERS, TRANSLATORS AND OTHER MICROWAVE PRODUCTS
Radyne has a complete line of synthesized frequency up converters and down
converters. The SFC6400 C-Band Up Converter converts data or video signals in
the IF range of 50-180 MHz to uplink frequencies between 5.845 and 6.420 GHz.
The SFC4200 C-Band Down Converter converts microwave carriers in the 3.62 to
4.20 GHz range to the IF range of 50-180 MHz. The Company believes that its
SFC1450 Ku-Band Up Converter and the SFC1275G Ku-Band Global Down Converter
offer low phase noise, superior standard transmit output compression and the
only down converter to receive data and detect carrier power simultaneously. The
SFC1468 Tri-Band Synthesized Up Converter is capable of converting signals in
the IF range of 50-180 MHz to C, X and Ku band microwave uplink carriers. The
SFC1274G Tri-Band Synthesized Down Converter does the reverse.
The Company also offers a full line of Loop Test Translators, including
C-Band, Ku-Band, X-Band and Tri-Band models. These are self contained frequency
converters which perform transmit to receive loopback testing of earth station
equipment.
Following is a comparison of sales, by product category:
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS TWELVE MONTHS
PRODUCT CATEGORY ENDED 12-31-97 ENDED 12-31-96 ENDED 6-30-96
- --------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Modems and Peripherals....................... $ 11,605,016 $ 4,453,807 $ 3,626,398
Microwave Products........................... $ 1,841,836 $ 451,252 $ 203,125
-------------- -------------- --------------
Totals....................................... $ 13,446,852 $ 4,905,059 $ 3,829,523
</TABLE>
MANUFACTURING
The Company's products are to a certain extent assembled and tested at its
Phoenix, Arizona facilities using subsystems and circuit boards supplied by
subcontractors. Although the Company believes that it maintains adequate stock
to reduce the procurement lead time for certain components, the Company's
products use a number of specialized chips and customized components or
subassemblies produced by a limited number of suppliers. In light of previous
financial difficulties, Radyne had experienced some inflexibility on the part of
certain suppliers in regard to credit terms for delivered components. Due to the
Company's most recent history of credit performance, this inflexibility has
subsided during the last fiscal period and the Company now enjoys an overall
good working relationship with its vendors. However, in the event that such
suppliers were to be unable or unwilling to fulfill the Company's requirements,
the Company could experience an interruption in production until an alternative
source of supply was developed. The Company maintains an inventory of certain
chips and components and subassemblies to
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limit the potential for such an interruption. The Company believes that there
are a number of companies capable of providing replacements for the types of
unique chips and customized components and subassemblies used in its products.
SALES AND MARKETING
The Company sells its products through international representatives,
distributors and systems integrators which are supported by the Company's sales
and marketing personnel. In-house direct sales by the Company are targeted
toward large accounts, new accounts and the establishment of distributors in new
markets. The Company has recently established new distribution or representation
arrangements in the Middle East, South America, Asia and the Pacific Rim.
The Company's direct sales force is comprised of 10 individuals in the
marketing department, supported by systems and applications engineers. Direct
sales activities are focused on expanding the Company's international sales by
identifying emerging markets and establishing new distributor accounts.
Additionally, the Company directly targets certain major accounts which may
provide entry into new markets or lead to subsequent distribution arrangements.
Such major accounts tend to be telecommunications agencies and major
corporations in new international markets. The Company has a customer service
and support group, which primarily supports distributors and is responsible for
after-sale support and installation supervision. In certain instances the
Company uses third party companies for installation and maintenance.
Significant customers for the periods ended as indicated were as follows:
<TABLE>
<CAPTION>
SIX-MONTHS
TWELVE-MONTHS DECEMBER 31, TWELVE- MONTHS SIX-MONTHS
DECEMBER 31, 1997 1996 JUNE 30, 1996 JUNE 30, 1995
--------------------- --------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Customer A............... 2.5% 1.6% 6.4% 22.0%
Customer B............... 1.1 -0- -0- 15.3
Customer C............... 1.1 6.3 8.1 14.2
Customer D............... 2.7 15.6 12.7 11.7
Customer E............... 2.2 18.3 -0- -0-
Customer F............... 14.5 -0- -0- -0-
</TABLE>
No other customers represented more than 10% of the Company's sales.
The Company's sales in its principal foreign markets for the year ended
December 31, 1997 and for the six-month period ended December 31, 1996 consisted
of the following percentages of total sales:
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS TWELVE MONTHS
REGION ENDED 12-31-97 ENDED 12-31-96 ENDED 6-30-96
- --------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Asia......................................... 32% 31% 24%
Latin America................................ 12% 25% 6%
Europe....................................... 7% 9% 20%
</TABLE>
Export sales, as a percentage of total net sales, were about 46% in the six
and one half month period ended June 30, 1995, about 50% in the fiscal year
ended June 30, 1996, about 66% for the six month period ended December 31, 1996,
and approximately 55% for the fiscal year ended December 31, 1997. The Company
believes that this figure may rise in subsequent periods. The Company considers
its ability to continue to make sales in developing markets to be important to
its growth potential. However, there can be no assurance that the Company will
succeed in its efforts to cultivate such markets.
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COMPETITION
The Company has a number of major competitors in the satellite
communications field. These include large companies, such as Hughes Network
Systems, NEC, the EFData division of California Microwave and Spar Aerospace,
which have significantly larger and more diversified operations and greater
financial, marketing, human and other resources than Radyne. The Company
estimates that the major competitors, in the main markets in which it operates,
have the following market shares as compared to the Company's share:
<TABLE>
<CAPTION>
VSAT GOV'T DATA
COMPETITOR INTELSAT DIGITAL VIDEO NETWORKS EQUIPMENT
- ----------------------------------------------- ------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
EFData......................................... 35% 5% 25% 35%
Comstream/Spar................................. 10 10 10 5
Hughes Network................................. 10 0 0 0
NEC............................................ 10 10 0 0
SSE/Fairchild.................................. 10 0 5 15
Radyne......................................... 15 25 5 5
</TABLE>
The Company does not believe that any other single competitor has a greater
than 10% market share for any of these product classes. However, the foregoing
market share figures represent estimates based on the limited information
available to the Company, and there can be no assurance of precision.
The Company believes that it has been able to compete by concentrating its
sales efforts in the international market, utilizing the resources of local
distributors, and by emphasizing product features. However, most of the
Company's competitors offer products which have one or more features or
functions similar to those offered by the Company. The Company believes that the
quality, performance and capabilities of its products, its ability to customize
certain network functions and the relatively lower overall cost of its products,
as compared to the costs generally offered by the Company's major competitors,
have contributed to Radyne's ability to compete successfully. However, the
Company's major competitors have the resources available to develop products
with features and functions competitive with those offered by the Company. There
can be no assurance that such competitors will not successfully develop such
products or that the Company will be able to maintain a lower cost advantage for
its products. Moreover, there can be no assurance that the Company will not
experience increased competition in the future from these or other competitors
currently unknown.
EMPLOYEES
As of February 5, 1998, the Company had 75 full time employees, including
two executive officers, 55 in engineering, manufacturing and marketing
operations, and 18 in administration. None of the Company's employees are
represented by a union or governed by a collective bargaining agreement, and the
Company believes that its relations with its employees are satisfactory.
TECHNOLOGY
The Company believes that improvement of existing products, reliance upon
trade secrets, copyrights and unpatented proprietary know-how and the
development of new products are generally as important as patent protection in
establishing and maintaining a competitive advantage. Because patents often
provide only narrow protection which may not provide a competitive advantage in
areas of rapid technological change and because patent applications require
public disclosure of information which may otherwise be subject to trade secret
protection, Radyne has not obtained, and has no present intention to obtain,
patents on existing products. However, there can be no assurance that the
Company's technology will not be found to infringe upon the intellectual
property of others. If the Company's technology should be found to impermissibly
utilize the intellectual property of others, the Company's ability to utilize
the technology could be materially restricted or prohibited. In such event, the
Company might be required to obtain
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licenses from third parties to utilize the patents or proprietary rights of
others. No assurance can be given that any licenses required could be obtained
on terms acceptable to the Company or at all. In addition, in such event, the
Company could incur substantial costs in defending itself against infringement
claims made by third parties or in enforcing its own intellectual property
rights.
ITEM 2. PROPERTIES
The Company's sole office and production facility consists of a 16,337
square foot facility in Phoenix, Arizona. This facility is leased at an annual
cost of approximately $88,000. The fixed term of the lease expires on March 30,
1998, after which the term becomes month-to-month at a 25% increase in rental
rate. On November 6, 1997, the Board of Directors authorized the Company to
enter into a contract for a new facility, which is expected to be available for
occupancy in July 1998. The term of the lease is 10 years with options to renew.
The lease provides for rent in the amount of $45,000 per month, subject to a
nominal increase dependant upon costs of tenant improvements, for the first year
with an escalation of 3% per year during years 2 through 10 (Note 9). The
building is approximately 65,000 square feet in size (and is expandable to some
degree) and the Company believes that this new facility will provide for the
company's expected growth for the next ten years.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of securities holders during the three
months ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market under
the OTC Bulletin Board symbol "RADN" (prior to the January 1997 1-for-5 Reverse
Split, the symbol was "RDYN"). However, there is no established trading market
as actual transactions are infrequent. The following table sets forth the range
of high and low trading prices as reported by the National Quotation Bureau,
Inc. for the periods indicated. It should be noted that these quotations relate,
to some extent, to periods prior to the Reverse Split. All pre-split quotations
have accordingly been multiplied by 5. At March 24, 1998, the Company had
approximately 450 shareholders of record. The Company believes that the number
of beneficial owners is actually in excess of 1,300, due to the fact that a
large number of shares are held in street name.
<TABLE>
<CAPTION>
HIGH LOW
----------- ---
<S> <C> <C>
1996:
First Quarter................................................................ 55/8 21/2
Second Quarter............................................................... 67/8 33/4
Third Quarter................................................................ 97/32 41/16
Fourth Quarter............................................................... 10 5
1997:
First Quarter................................................................ 6 31/8
Second Quarter............................................................... 31/4 3
Third Quarter................................................................ 103/4 5
Fourth Quarter............................................................... 101/2 4
</TABLE>
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The Company has not paid dividends on the Common Stock since inception and
does not intend to pay any dividends to its stockholders in the foreseeable
future. The Company currently intends to reinvest earnings, if any, in the
development and expansion of its business. The declaration of dividends in the
future will be at the election of the Board of Directors and will depend upon
the earnings, capital requirements and financial position of the Company,
general economic conditions and other pertinent factors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations data for the year ended
December 31, 1997,the six month period ended December 31, 1996, the year ended
June 30, 1996, the six and one-half month period ended June 30, 1995 and the ten
and one-half months ended December 16, 1994 and the selected balance sheet data
at those dates, are derived from the Financial Statements of the Company and
notes thereto audited by Deloitte & Touche LLP, independent certified public
accountants for the Company. The selected statement of operations data for the
year ended January 31, 1994 and the selected balance sheet data at January 31,
1994 are derived from the unaudited financial statements of the Company. These
unaudited financial statements have been prepared on the same basis as the
audited financial statements and, in the opinion of management, contain all
adjustments, consisting only of normal recurring accruals necessary for a fair
presentation of the financial position and results of operations for the periods
presented. Per share data and shares outstanding reflect an adjustment for the
effects of the 1-for-5 reverse split of the Company's common stock, which became
effective on January 9, 1997. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of the Company and notes thereto
included elsewhere in this 10-K Annual Report.
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STATEMENT OF OPERATIONS DATA
PREDECESSOR COMPANY (1)
<TABLE>
<CAPTION>
SIX MONTHS SIX-AND-ONE-HALF TEN-AND-ONE-HALF
YEAR ENDED ENDED YEAR ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, DECEMBER 16,
1997 1996 1996 1995 1994
------------- ------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Net Sales.............................. $ 13,446,852 $ 4,905,059 $ 3,829,523 $ 1,861,262 $ 2,569,396
Cost of Sales.......................... 8,022,262 4,052,433 2,559,350 1,228,747 2,229,329
Gross Profit (loss).................... 5,424,590 852,626 1,270,173 632,515 340,067
Selling, general and administrative
expense.............................. 4,242,138 1,437,971 1,843,576 961,162 1,658,388
Asset impairment charge (2)............ 421,000
Professional fees related to
reorganization....................... 600,198
Research and development............... 2,262,066 808,025 1,794,823
Operating income (loss)................ (1,079,614) (1,814,370) (2,368,226) (328,647) (1,918,519)
Interest expense....................... 677,102 255,604 256,871 36,209 118,235
Income (loss) before fresh start
adjustments and extraordinary
items................................ $ (1,756,716) $ (2,069,974) $ (2,625,097) $ (364,856) $ (2,036,754)
Fresh start adjustments................ 1,598,841
Loss before extraordinary items and
taxes on income...................... $ (1,756,716) $ (2,069,974) $ (2,625,097) $ (364,856) $ (437,913)
Extraordinary items (3)................ 2,699,156
Income (loss) before taxes............. (1,756,716) (2,069,974) (2,625,097) (364,856) 2,261,243
Net loss per share before extraordinary
items................................ (0.35) (0.55) (0.70) (0.10) (1.33)
Net Income (loss) per share............ (0.35) (0.55) (0.70) (0.10) 6.87
Weighted avg. number of outstanding
shares............................... 5,012,664 3,750,699 3,742,227 3,729,721 329,020
<CAPTION>
YEAR ENDED
JANUARY 31,
1994
-------------
<S> <C>
Net Sales.............................. $ 4,966,617
Cost of Sales.......................... 5,620,108
Gross Profit (loss).................... (653,491)
Selling, general and administrative
expense.............................. 3,363,893
Asset impairment charge (2)............
Professional fees related to
reorganization.......................
Research and development............... 785,679
Operating income (loss)................ (4,803,063)
Interest expense....................... 634,061
Income (loss) before fresh start
adjustments and extraordinary
items................................ $ (5,437,124)
Fresh start adjustments................
Loss before extraordinary items and
taxes on income...................... $ (5,437,124)
Extraordinary items (3)................
Income (loss) before taxes............. (5,437,124)
Net loss per share before extraordinary
items................................ (21.30)
Net Income (loss) per share............ (21.30)
Weighted avg. number of outstanding
shares............................... 255,169
</TABLE>
- ------------------------
(1) The Company petitioned for bankruptcy protection in April 1994 and operated
as a debtor-in-possession until December 16, 1994.
(2) Consists of the writedown of designs and drawings in light of the
introduction of replacement products.
(3) Consists of $1,062,667 gain on exchange of debt for common stock and
$1,636,489 gain on debt forgiveness.
BALANCE SHEET DATA
PREDECESSOR COMPANY
<TABLE>
<CAPTION>
AT 12/31/97 AT 12/31/96 AT 6/30/96 AT 6/30/95 AT 12/16/94
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............................ 569,692 186,488 971 2,109 256,398
Working capital (deficit)............................ 1,654,857 (5,851,527) (4,082,987) (1,343,018) (977,678)
Total assets......................................... 10,231,617 6,572,917 3,272,686 3,452,999 3,084,394
Long-term liabilities................................ 4,649,404 161,968 130,414 168,304 192,603
Total liabilities.................................... 11,381,678 11,019,543 5,669,338 3,264,554 2,531,093
Stockholder equity (deficit)......................... (1,150,061) (4,446,626) (2,396,652) 188,445 553,301
<CAPTION>
AT 1/31/94
------------
<S> <C>
Cash and cash equivalents............................ 84,467
Working capital (deficit)............................ (2,284,575)
Total assets......................................... 1,354,933
Long-term liabilities................................ 188,123
Total liabilities.................................... 3,612,875
Stockholder equity (deficit)......................... (2,257,942)
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In reviewing the following material, the reader should take note of the fact
that the respective periods being compared are of various durations. This is due
to several changes in the Company's fiscal year. Upon emergence from bankruptcy
on December 16, 1994, the predecessor company's fiscal year ended on that date.
The adoption of the fiscal year of the Company's new parent (ETS) at that time
created a fiscal period from December 17, 1994 through June 30, 1995, followed
by a full year ended June 30, 1996. Upon becoming a subsidiary of ST in August
of 1996, the Company adopted ST's fiscal year (the calendar year), creating a
stub fiscal period from July 1 through December 31, 1996.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996.
The Company's net sales increased 174% to $13,447,000 during the twelve
month period ended December 31, 1997 from $4,905,000 during the six months ended
December 31, 1996. This increase is primarily attributable to the increased time
frame of the current period relative to the prior period and to the introduction
of the Company's new product lines which have experienced exceptional market
acceptance.
The Company's cost of sales as a percentage of net sales decreased to 60%
during the twelve months ended December 31, 1997 from 83% for the six months
ended December 31, 1996. During the six months ended December 31, 1996,
adjustments to inventory of approximately $491,000 (10% of sales) for
obsolescence, of which $364,000 was related to the introduction of new products
(which essentially rendered one entire older product line obsolete), and
$340,000 (7% of sales) for start-up costs related to the introduction of new
products were included in the cost of sales as old product lines were replaced
with new product lines. These products included a new generation modem
sub-system which makes use of the Company's proprietary technology from older
products while adding features and reducing future manufacturing costs. Also,
the Company has introduced and shipped new "Digital Video Broadcast" modems
which have experienced exceptional acceptance in the marketplace.
The Company is obligated to pay royalties to Merit Microwave, Inc. ("Merit")
on sales of certain translator products developed by Merit. The royalty rate
ranges from five to ten percent of the selling price. During the period ended
December 31, 1997, the Company accrued $5,600 for royalty expenses, which were
included in direct cost of goods sold.
Selling, general and administrative costs increased to $4,242,000 or 32% of
sales during the twelve months ended December 31, 1997 from $1,438,000 or 29% of
sales for the six months ended December 31, 1996. The increase in expenses as a
percentage of sales was primarily attributable to company growth and market
expenses incurred for market penetration. The increase in pure dollars is also
attributable to the increased time frame of the current period over the prior
period.
The Company recorded an "asset impairment charge" of $421,000 during the six
months ended December 31, 1996, to reflect a valuation adjustment to Designs and
Drawings which were partially impaired due to the introduction of new product
lines. The valuation of designs and drawings is the result of adjustments made
by the Company to adopt Fresh Start reporting in accordance with AICPA Statement
of Position ("SOP") 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION
UNDER THE BANKRUPTCY CODE, and represents the excess reorganization value that
has been applied to the acquired technology supporting the Company's products
(Note 1 to the Financial Statements). Amortization of designs and drawings is
computed using the straight-line method over an estimated useful life of
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
four to seven years. The remaining asset carries a net book value of $472,000
and will be amortized using the straight-line method over the remaining
estimated useful life of one to four years.
Research and development expenditures increased to $2,262,000 (17% of sales)
during the twelve months ended December 31, 1997 from $808,000 (16% of sales)
for the six months ended December 31, 1996. The increase in expenses was
primarily attributable to the increased time frame of the current period over
the prior period and to major development programs instituted during the fiscal
year ended December 31, 1997. It is anticipated that the Company will continue
to experience high R&D expenses as it positions itself, through the introduction
of new products, to gain market share.
As of the last day of the fiscal period, the Company held approximately
$600,000 worth of inventory, in the form of finished goods in a ready-to-ship
status (Note 3), on the shipping dock for two orders placed with the Company
which were to be purchased with funds underlying international letters of
credit. Due to unexpected difficulties, the letters of credit were not received
by the end of the period reported on herein and so the products were not
shipped. Subsequent to the year end, only one of those letters of credit has
been received, for approximately one-half of the inventory (and about $450,000
in sales) while the other letter of credit is still pending. The pending letter
of credit is to be issued by an Indonesian bank and it is possible that this
letter of credit will not materialize, in which case the Company will be forced
to sell these goods to other customers. The impact of these delayed letters of
credit was to delay shipment, and revenue recognition, of approximately $945,000
in sales.
Interest expense net of interest income increased to $677,000 (5% of sales)
during the twelve months ended December 31, 1997 from $256,000 (5% of sales) for
the six months ended December 31, 1996. The large increase in expense was
primarily attributable to the increased time frame of the current period over
the prior period.
For the period ended December 31, 1997, the Company did not provide for
income taxes, due to the net loss. The Company also did not provide for income
taxes, for the six months ended December 31, 1996, due to net operating losses.
For the twelve month period ended December 31, 1997, the Company had a net
loss of ($1,757,000) as compared with a net loss of ($2,070,000) in the six
month period ended December 31, 1996. The decrease was primarily attributable to
increased sales with a lower percentage of cost of sales.
"New Orders Booked" (firm, fixed orders from customers) for the twelve
months ended December 31, 1997 were $15,788,000 as compared to $5,939,000 for
the year ended December 31, 1996. This increase was as a result of the increased
time frame of the current period over the prior period coupled with the
increased effort, on the part of the Company, to rejuvenate its marketing
strategy.
The Company's "Backlog" of orders to be shipped (unshipped orders from the
prior period (Backlog) plus New Orders Booked less orders shipped during the
period) was $4,814,000 as of December 31, 1997, an increase of 95% over the
$2,473,000 in Backlog as of December 31, 1996. The Company's Backlog consists of
firm orders as evidenced by written contracts and/or purchase orders from
customers. Approximately $945,000 of this amount is due to the effect of the
late letters of credit from two orders. One of these orders was from South
America and has subsequently shipped. The other order is from Indonesia and has
not shipped to date. This order is in jeopardy due to the current economic
crisis in Asia and particularly Indonesia. If this order is cancelled, the
Company will sell the inventory to other customers from which there are
sufficient orders in house to deplete this inventory. The Company believes that
while projected sales to certain Asian countries, including Indonesia, may be
affected by the current economic crisis, sales to other regions, including
domestic sales, should increase substantially during the 1998 fiscal year and
more than offset any decline in sales to the Asian region.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
SIX MONTH PERIOD ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30,
1996.
The Company's net sales increased 28% to $4,905,000 during the six month
period ended December 31, 1996 from $3,830,000 during the twelve months ended
June 30, 1996. This increase was primarily attributable to the introduction of
the Company's new product lines which have experienced exceptional market
acceptance. Volume in terms of units sold has increased with sales of products
introduced since July 1, 1995 increasing from $434,000 for the period ended June
30, 1996 to $3,477,000 for the period ended December 31, 1996.
The Company's cost of sales as a percentage of net sales increased to 83%
during the six months ended December 31, 1996 from 67% for the fiscal year ended
June 30, 1996. There were two primary reasons for this increase in percentage,
both of which the Company considers largely extraordinary. First, there were
adjustments to inventory of $491,000 (10% of sales) for obsolescence. Of this
amount, $364,000 was related to the introduction of new products which
essentially rendered one entire product line obsolete, $110,000 was related to
ongoing product development and $17,000 was related to the valuation of excess
materials on hand. Second, $340,000 (7% of sales) of start-up costs related to
the introduction of new products were included in the cost of sales for the
period ended December 31, 1996. These products included a new generation modem
sub-system which makes use of the Company's proprietary technology from older
products while adding features and reducing future manufacturing costs. Also,
the Company introduced and shipped the new "Digital Video Broadcast" modem which
has experienced exceptional market acceptance. Also contributing to the increase
in cost of sales as a percentage of sales were freight charges related to
international sales (2% of sales) and higher than anticipated warranty expense
on some of the Company's older products (1% of sales).
The Company is obligated to pay royalties to Merit Microwave, Inc. ("Merit")
on sales of certain translator products developed by Merit. The royalty rate
ranges from five to ten percent of the selling price. During the period ended
December 31, 1996, the Company paid $2,200 for royalty expenses, which were
included in direct cost of goods sold.
Selling, general and administrative costs decreased to $1,438,000 or 29% of
sales during the six months ended December 31, 1996 from $1,844,000 or 48% of
sales for the fiscal year ended June 30, 1996. The decrease in expenses was
primarily attributable to the decreased time frame of the latter period over the
prior period and partially offset by increased costs related to the higher level
of business that the Company experienced during the latter period.
The Company recorded an "asset impairment charge" of $421,000 during the six
month period ended December 31, 1996 to reflect a valuation adjustment to
Designs and Drawings which were partially impaired due to the introduction of
new product lines.
Research and development expenditures decreased to $808,000 (16% of sales)
during the six months ended December 31, 1996 from $1,795,000 (47% of sales) for
the twelve months ended June 30, 1996. The decrease in expenses was primarily
attributable to the decreased time frame of the latter period relative to the
prior period. Additionally, the Company had embarked on a major development
program during the fiscal year ended June 30, 1996, in order to regain a
competitive posture after two fiscal periods during which the Company had made
no development effort. Interest expense net of interest income decreased to
$256,000 (5% of sales) during the six months ended December 31, 1996 from
$257,000 (7% of sales) for the fiscal year ended June 30, 1996. The small
decrease in expense was primarily attributable to the
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
decreased time frame of the latter period as compared to the prior period,
offset by additional interest from the Company's increased debt level.
For the six month period ended December 31, 1996, the Company did not
provide for income taxes, due to the net loss. The Company also did not provide
for income taxes for the twelve month period ended June 30, 1996, due to net
operating losses.
For the six month period ended December 31, 1996, the Company had a net loss
of ($2,070,000) as compared with a net loss of ($2,625,000) in the twelve month
period ended June 30, 1996. The decrease was primarily attributable to the
decreased time frame of the latter period relative to the prior period as
partially offset by the increase in cost of sales as a percentage of sales and
the expenses of increased business activity, and the $421,000 asset impairment
charge as discussed above.
"New Orders Booked" (firm, fixed orders from customers) for the six months
ended December 31, 1996 were $5,939,000 as compared to $4,184,000 for the year
ended June 30, 1996. The Company's "Backlog" of orders to be shipped (orders
from the prior period which had not yet been shipped plus New Orders Booked less
orders shipped during the period) was $2,473,000 as of December 31, 1996, an
increase of 72% over the $1,439,000 in Backlog as of June 30, 1996. The
Company's Backlog consists of firm orders as evidenced by written contracts
and/or purchase orders from customers.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO SIX AND ONE-HALF MONTH PERIOD ENDED
JUNE 30, 1995
The Company's net sales increased 206% to $3,830,000 during the period ended
June 30, 1996 from $1,861,000 during the six and one-half months ended June 30,
1995 primarily due to the increased time frame of the later period being
reported upon herein over the prior period.
The Company's cost of sales as a percentage of net sales increased to 67%
during the fiscal year ended June 30, 1996 from 66% for the six and one-half
months ended June 30, 1995.
Selling, general and administrative costs increased to $1,844,000 or 48% of
sales during the fiscal year ended June 30, 1996 from $961,000 or 52% of sales
for the six and one-half months ended June 30, 1995. The increase in expenses
was primarily attributable to the increased time frame of the later period over
the prior period.
Research and development expenditures increased to $1,795,000 during the
fiscal year ended June 30, 1996 from $-0- for the six and one-half months ended
June 30, 1995. The Company embarked on a major development program during the
fiscal year ended June 30, 1996, in order to regain a competitive posture after
two fiscal periods during which the Company had made no development effort.
Interest expense net of interest income increased to $257,000 (7% of sales)
during the fiscal year ended June 30, 1996 from $36,000 (2% of sales) for the
six and one-half months ended June 30, 1995, due primarily to increased
borrowings.
For the period ended June 30, 1996, the Company did not provide for income
taxes, due to the net loss. The Company also did not provide for income taxes
for the six and one-half month period ended June 30, 1995, due to net operating
losses.
For the twelve month period ended June 30, 1996, the Company had a net loss
of ($2,625,000) as compared with a net loss of ($365,000) in the period ended
June 30, 1995. The increase was primarily
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
attributable to the increased level of research and development expenditures and
interest expense, along with the increased time frame of the later period over
the prior period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $1,654,857 at December 31, 1997, as
compared to a deficit of ($5,852,000) at December 31, 1996, ($4,083,000) at June
30, 1996 and ($1,837,000) at December 31, 1995. The elimination of the deficit
from December 31, 1996 was due primarily to $5,050,000 of net proceeds from the
sale of Common Stock, pursuant to a Rights Offering to the Company's
shareholders ("Rights Offering"), new bank borrowings of $9,500,000 ($4,500,000
of which is classified as long-term) and a decrease in accounts receivable and
other current assets of approximately $400,000. This amount was partially offset
by payments on notes payable under lines of credit agreements of $1,994,000 and
payments on notes payable to affiliates of $6,600,000 and an approximately
$611,000 decrease in accounts payable and accrued liabilities, and an increase
of $3,399,000 in inventories.
Net cash used in operating activities was $4,945,000 for the twelve month
period ended December 31, 1997, as compared to $3,546,000 for the six months
ended December 31, 1996, as compared to $2,581,000 used in the year ended June
30, 1996 and $938,000 used in the six and half months ended June 30, 1995. The
principal causes for the difference in 1997 were the net loss for the period of
$1,757,000 and increases in inventories, approximately $600,000 of which was in
the form of finished goods which had been built in anticipation of two orders
placed with the Company which were to be purchased with funds underlying
international letters of credit. Due to unexpected difficulties, the letters of
credit were not received by the end of the period reported on herein and so the
products were not shipped. Subsequent to the year end, only one of those letters
of credit has been received, for approximately one-half of the inventory (and
about $450,000 in sales) while the other letter of credit is still pending. The
pending letter of credit is to be issued by an Indonesian bank and it is
possible that this letter of credit will not materialize, in which case the
Company will be forced to sell these goods to other customers. The impact of
these delayed letters of credit was to delay shipment, and revenue recognition,
of approximately $945,000 in sales as discussed above.
Cash used in investing activities, consisting of additions to equipment,
amounted to $593,000 for the period ended December 31, 1997, $255,000 for the
period ended December 31, 1996, $389,0000 for year ended June 30, 1996 and
$119,000 for the six and one-half month period ended June 30, 1995. The current
year's increase of $338,000 is consistent with management's plans to continue
investment in research & development and Company growth. The Company has no
material commitments to make capital expenditures in 1998 or thereafter. Certain
leasehold improvements relative to the new facility (ITEM 2 and Note 9), if any,
will be added to the landlord's cost basis of the property and amortized in the
form of increased rent.
The Company derived net cash from financing activities of $5,922,000 during
the year ended December 31, 1997, $3,986,000 during the six month period ended
December 31, 1996 and $2,969,000 during the year ended June 30, 1996, with the
difference resulting from greater net borrowings and the proceeds from the sale
of stock during the current period.
As a result of the foregoing, the Company increased its cash balance by
$383,000 for the twelve month period ended December 31, 1997, increased its cash
balance by $186,000 for the six months ended December 31, 1996 and decreased its
cash balance by $1,000 for the year ended June 30, 1996.
A bank line of credit, in the amount of $5,000,000, was established for the
Company with Bank of America NT&SA, Asian Banking Unit, by Stetsys US, Inc., the
beneficial owner of 57.3% of the
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Company's outstanding stock. As of December 31, 1997, the Company had drawn down
$4,500,000 of the available funds in the form of demand loans. An affiliate of
Stetsys US, Inc. issued a non-binding letter of awareness to the bank which
replaced a previous guarantee. The interest rates on these loans ranged from
7.15625% to 8.5% per annum. The Company also has an uncommitted $5,500,000
credit facility with Citibank NA with respect to which the same affiliate of ST
has also issued a non-binding letter of awareness. As of December 31, 1997, the
Company had drawn down $5,000,000 of the available funds in the form of demand
loans. Subsequent to the end of the period reported on herein, the bank line
with Bank of America was terminated and paid in full by the proceeds of a loan
from Stetsys US, Inc. in the amount of $4,618,272. The loan from Stetsys US,
Inc. bears interest at the rate of 6.84375% per annum and matures on February
15, 1999. Another $500,000 loan was made by ST at the same interest rate and
matures on January 4, 1999.
The purpose of all of the above described loans has been to finance or
refinance the capital needs associated with the Company's recent rapid sales and
Backlog growth and the cost of research and development. To date, the Company's
capital resources (as supplemented by loans from ST and its affiliates) have
been sufficient to fund its operations and increased level of business. The
Company believes that its bank credit lines and cash from operations are
unlikely to be sufficient to fund its planned future operations and capital
requirements for continued aggressive growth through the end of 1998. Therefore,
in order to sustain a high rate of sales increases and new product development,
management intends to formulate a plan for the Company to sell a substantial
amount of additional Common Stock during the second or third quarter of this
year. Of course there can be no assurance that the Company will be successful in
offering such securities. If the Company were to be unable to raise sufficient
capital, it might be necessary to delay or cut back on its plans for future
growth.
SUPPLEMENTARY INFORMATION
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance (Year 2000)
issue. As the year 2000 approaches, such systems may be unable to accurately
process certain date-based information.
The Company is in the process of communicating with others with whom it does
significant business to determine their Year 2000 readiness and the extent to
which the Company may be vulnerable to any third party Year 2000 issues. While
there do not appear to be any issues for which the Company is not prepared,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to convert by
another company would not have a material adverse effect on the Company.
In the opinion of the Company's management, the cost of addressing Year 2000
compliance will not be material. Management has studied the known problems of
Year 2000 compliance and has found that in all material respects, the Company's
existing software and hardware are compatible with Year 2000. Any future costs
to comply with Year 2000 issues will be expensed in the period that the costs
are incurred.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material impact on
revenues or expenses during the last four fiscal periods reported on herein.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements as of December 31, 1997, December 31,
1996, June 30, 1996 and June 30, 1995 are included in this report as listed in
the Index to Financial Statements in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None reportable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors and executive officers of the Company, their positions held
with the Company, and their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Lim Ming Seong............................. 50 Director, Chairman of the Board
Chan Wee Piak.............................. 42 Director
Lee Yip Loi................................ 54 Director
Robert A. Grimes........................... 45 Director
Robert C. Fitting.......................... 62 Director and President
Steven W. Eymann........................... 45 Executive Vice President
Garry D Kline.............................. 48 Vice President of Finance
</TABLE>
Each director is elected for a period of one year at the Company's annual
meeting of stockholders and serves until the next meeting and until his
successor is duly elected and qualified. Officers are elected by, and serve at
the discretion of, the Board of Directors.
The following is a brief summary of the background of each director,
executive officer and certain key employees of the Company:
DIRECTORS AND EXECUTIVE OFFICERS:
LIM MING SEONG has a been a Director and Chairman of the Board of the
Company since August 13, 1996 and is chairman of its Compensation Committee. He
is the Chairman of ST and of Vertex Management, Inc., a member of the Singapore
Technologies group, and he has been Group Director of Singapore Technologies Pte
Ltd, an indirect parent of ST since February of 1995. From March 1992 until
February 1995, he was Executive Director of Singapore Technologies Ventures Pte
Ltd and from February 1990 to March 1992, he was Group President of Singapore
Technologies Holdings Pte Ltd. Prior to that time he held various corporate and
government positions, including Deputy Secretary in the Singapore Ministry of
Defense from 1979 to 1986.
LEE YIP LOI has been a Director of the Company since August 13, 1996 and is
chairman of the Audit Committee and a member of the Compensation Committee of
the Board. Mr. Lee is also a director of ST. He has been Regional Director
(America) of Singapore Technologies Pte Ltd since March 1994 and, from May 1990
to January 1997, he was President of it's affiliate, Metheus Corporation. Prior
to that time he held a number of managerial positions with such corporations as
Morgan Guaranty Trust and Singapore Technologies Pte Ltd and government
positions with the Singapore Ministries of Education, Defense, Culture and Home
Affairs.
CHAN WEE PIAK has been a Director since August 13, 1996 and is a member of
the Compensation Committee of the Board. He is a director of ST and has been
General Manager of Agilis Communication Technologies Pte Ltd, also a member of
the Singapore Technologies group, since January 1992. From
17
<PAGE>
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES (CONTINUED)
November 1989 to February 1992, he was General Manager of Chartered Microwave
Pte Ltd. Prior to that time, he held various managerial positions in the
Singapore Ministry of Defense and with Singapore Electronic and Engineering.
ROBERT A. GRIMES, who is a member of the Audit and Compensation Committees
of the Board, has served as a member of the Board of Directors since December,
1994. For the past seven years Mr. Grimes has also served as a member of the
Board of Engineering and Technical Services, Inc. of which he was President
until December 31, 1997. He was also the President of ST from February 24, 1997
to January 23, 1998.
ROBERT C. FITTING has been President of the Company since February, 1995,
became a Director of the Company in March, 1995 and is a member of the Audit
Committee of the Board. Mr. Fitting has a Master of Electrical Engineering
degree from New York University and a Bachelors with distinction from Penn State
University. His professional career began at Bell Laboratories in 1962 where he
spent six years developing innovative communication technologies. Mr. Fitting
then joined the Motorola Government Electronics Division where he was an
engineering manager. He published more than a dozen technical papers and was
awarded a number of patents. He left Motorola in 1978 to build a new company
under an agreement with Comtech Telecommunications. The new company was named
Comtech Data Corporation, currently known as Fairchild Data Corporation. Mr.
Fitting was the General Manager and President of Comtech Data Corporation from
1978 to 1984. He left Comtech to start a new company called EFData Corporation.
As co-founder, CEO and President of EFData Corporation, Mr. Fitting built the
company into a worldwide market leader in satellite communications equipment.
While at EFData, Mr. Fitting won the "Arizona Entrepreneur of the Year" award in
1993 in the manufacturing/high technology category.
STEVEN EYMANN has been Executive Vice President of the Company since
February, 1995. Mr. Eymann graduated with honors and a Bachelor of Science in
Electrical Engineering from the University of Nebraska. His professional career
began at the Motorola Government Electronics Division where he was a design
engineer, task leader and finally a project leader for the DSU-23/29B fuse
development program. As project leader, he was responsible for project
management, budgets, schedules, and design and testing of the fuse. He designed
the computer-controlled automatic test set for factory testing based on an HP
9825 computer. The DSU-23/29B is an L-Band PN radar for accurate, low-cost
altitude direction. In June of 1981, Mr. Eymann joined Comtech Data Corporation
where he was Director of Product Development. He was responsible for budget,
schedule and technical aspects of all new product development within Comtech.
Prior to becoming the Director of Product Development, he served as a senior
engineer with program and technical design responsibility. He left Comtech in
1984 to begin a new company called EFData Corporation. As co-founder and Vice
President of EFData, Mr. Eymann was responsible for new product development and
engineering management in the design and manufacture of high technology,
military and commercial communications equipment.
GARRY KLINE, Vice President of Finance, Chief Financial Officer and
Secretary, joined the Company in September of 1995. From that time until July
1997 he was Secretary and Controller of the Company. From 1987 through 1995, Mr.
Kline served as CFO and Controller of EFData Corporation. Prior to 1987, Mr.
Kline served in various positions, including Vice President of Finance for
Megatronics Inc., a publicly held printed circuit board manufacturer, Vice
President of Operations for Vernal Lodging Associates, a hospitality management
company, and General Partner of Tax and Accounting Computer Service, an
accounting firm.
CERTAIN KEY EMPLOYEES:
PETER WEISSKOPF has been the President of the Microwave Products Division at
Radyne since June, 1995. At Radyne, he is responsible for the operation of the
microwave products division. His duties include
18
<PAGE>
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES (CONTINUED)
marketing, design and manufacture of existing and new microwave products as well
as the administration of the division. Mr. Weisskopf has a Bachelor of Science
in Computer and Electrical Engineering from George Mason University. He has
worked as an engineer for several companies during his professional career,
including Magnavox Data Systems, M/A-COM Linkabit and M/A-COM Active Assemblies
Division. From 1990 to 1992, Mr. Weisskopf was an engineer at EFData
Corporation, where he designed synthesized frequency converters for use in
satellite communications. In 1992, Mr. Weisskopf founded Merit Microwave, Inc.
As founder and President of this start-up firm, Mr. Weisskopf designed and
marketed various microwave components and systems, including a complete line of
satellite loopback test translators.
ALAN POTTER has been the Vice President of Marketing for the Company since
December 1995. His duties at Radyne include market research, neoteric product
concepts, new corporate alliances and distribution systems in Europe and the
Middle East. He joined Radyne after ten years with EFData as Sales Manager. Mr.
Potter graduated from the University of Houston with honors, holding a Bachelor
of Arts in Communications. After post graduate studies at the University of
Massachusetts, Amherst, he began his professional career as an Associate
Professor of Communications at the University of Texas at Houston. While there,
in 1973, he developed and operated the first practical bi-directional coaxial
cable network to simultaneously carry voice, data and video communications. He
then designed, developed and managed a series of broadband cable television and
data networks for Columbia Cable Television, Michelson Media and Cox Cable
Communications. Mr. Potter joined Comtech Data in 1984 and, two years later, he
followed Messrs. Fitting and Eymann to initiate the Sales and Marketing
Department at EFData. He is currently an MBA candidate at the University of
Phoenix.
DAVE KOBLINSKI has been the Vice President of Operations for the Company
since March, 1995. Mr. Koblinski has a Bachelor of Science in Business
Administration from Arizona State University. He also holds a degree in
Electronics Technology from Mesa Community College. His professional career
began in 1982 at Comtech Data Corporation where he held the position of Customer
Service Representative. He was responsible for repairs, field and telephone
support of satellite data modems. From 1985 to 1995, Mr. Koblinski was the
Senior Product Manager for EFData Corporation. His general responsibilities at
EFData included relating customer requests and concerns to the factory. His
direct responsibilities included the customer service, technical publication and
order entry departments.
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the registrant during the period from January 1,1997 to December
31, 1997, none of the officers or directors of the registrant or the beneficial
owners of its equity securities failed to file reports on Forms 3, 4 or 5
required to be filed during such period or prior thereto, except that Form 4
Reports were filed late on one occasion by each of Stetsys Pte Ltd, Temasek
Holdings (Private) Limited, Chan Wee Piak and Radyne Corp.
ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION
The Company's policy is to pay no compensation to directors for acting as
such.
The following table sets forth the compensation for services in all
capacities to the Company for the period from the commencement of employment on
March 1, 1995 through December 31, 1997 of the Company's President and Executive
Vice President. No other executive officer or employee received total annual
salary and bonus of more than $100,000.
19
<PAGE>
ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION (CONTINUED)
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
YEAR ALL OTHER
NAME AND PRINCIPAL POSITION ENDED(1) SALARY OPTIONS (#) COMPENSATION(2)
- ----------------------------------------------------------- --------- ---------- ----------- -----------------
<S> <C> <C> <C> <C>
Robert C. Fitting. President............................... 12/31/97 $ 116,529 $ 1,165
12/31/96 $ 40,000 279,085 $ 435
06/30/96 $ 80,000 0 $ 738
06/30/95 $ 29,231 0 0
Steven Eymann Exec. Vice Pres.............................. 12/31/97 $ 111,162 $ 1,112
12/31/96 $ 40,000 279,085 $ 435
06/30/96 $ 80,000 0 $ 738
06/30/95 $ 29,231 0 0
</TABLE>
- ------------------------
(1) Mr. Fitting's and Mr. Eymann's employment with the Company commenced on
March 1, 1995, so the figures shown for the fiscal year ended June 30, 1995
reflect a four-month period. The Company's fiscal year has been changed to
the calendar year, so the figures shown for the period ended December 31,
1996 reflect a period of six months.
(2) Matching 401(k) plan contributions.
STOCK OPTIONS
No stock options were granted to the above executive officers during the
fiscal period ended December 31, 1997.
AGGREGATE OPTION EXERCISES IN 1997 AND HOLDINGS AT YEAR END
The following table sets forth information concerning option exercises and
option holdings for the fiscal period ended December 31, 1997 with respect to
Robert C. Fitting, the President of the Company and Steven Eymann, the Executive
Vice President.
AGGREGATE OPTIONS EXERCISED IN THE
LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED,
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS HELD AT OPTIONS AT
NUMBER OF DECEMBER 31, 1997 DECEMBER 31, 1997(2)
SHARES ACQUIRED VALUE ---------------------------- ------------------------------
NAME ON EXERCISE REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- --------------- --------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Fitting.................. 0.00 $ 0.00 0.00 215,085 $ 0.00 $ 0.00
Steven Eymann...................... 4,000.00 $ 0.00 0.00 215,085 $ 0.00 $ 0.00
</TABLE>
- ------------------------
(1) Based on the fair market value of the Common Stock on the exercise date,
less the per share exercise price.
(2) Based on the fair market value of the Common Stock of $2.50 per share, as
determined by the Company's Board of Directors, less the per share exercise
price.
20
<PAGE>
ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION (CONTINUED)
EMPLOYMENT AGREEMENTS
Under the employment agreement between the Company and Mr. Fitting and Mr.
Eymann, they will serve as President and Vice President of the Company until the
earlier of June 30, 2000 or such time as the stock options described in the
above table become fully exercisable. Pursuant to the agreement, the Company
presently pays Mr. Fitting and Mr. Eymann annual salaries of $130,000 and
$125,000, respectively, and has granted them the stock options described in the
above table. Each of Mr. Fitting and Mr. Eymann has also agreed that if he
exercises any of the stock options, he will not engage in any business which
competes with the Company until after the second anniversary of his termination
of employment with the Company, except in the case of involuntary termination
without cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Lim, Chan, Lee and Grimes.
There were no interlocking relationships between the Company and other entities
that might affect the determination of the compensation of the executive
officers of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date hereof, the ownership of the
Common Stock by (i) each person who is known by the Company to own of record or
beneficially more than 5% of the outstanding Common Stock, (ii) each of the
Company's directors and its President and Executive Vice President, and (iii)
all directors and executive officers of the Company as a group. Except as
otherwise indicated, the stockholders listed in the table have sole voting and
investment powers with respect to the shares indicated.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
NAME AND ADDRESS OF SHARES OF CLASS
- --------------------------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
Stetsys US, Inc. c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The
Curie Singapore Science Park Singapore 118258........................................ 3,400,000 57.3%
Stetsys Pte Ltd. c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The
Curie Singapore Science Park Singapore 118258........................................ 5,376,000(1) 90.6%
Steven Eymann 5225 S. 37th Street Phoenix, Arizona 85040............................... 4,000 *
Robert C. Fitting 5225 S. 37th Street Phoenix, Arizona 85040........................... -- --
Robert A. Grimes 5225 S. 37th Street Phoenix, Arizona 85040............................ 5,500 *
Lee Yip Loi c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The
Curie Singapore Science Park Singapore 118258........................................ -- --
Chan Wee Piak c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The
Curie Singapore Science Park Singapore 118258........................................ 10,000 *
Lim Ming Seong c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The
Curie Singapore Science Park Singapore 118258........................................ -- --
All directors and executive officers of the Company as a group (4 persons)............. 21,000 *
</TABLE>
- ------------------------
* Less than one percent.
(1) The shares reported as owned by Stetsys Pte Ltd include the shares reported
as beneficially owned by Stetsys US, Inc., of which Stetsys Pte Ltd is sole
shareholder. 100% of the stock of Stetsys US, Inc. and Stetsys Pte Ltd is
ultimately owned by the Minister for Finance (Incorporated) of Singapore.
21
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Sales to ETS for the twelve month period ended December 31, 1997, the six
month period ended December 31, 1996, the year ended June 30, 1996 and the six
and one-half period ended June 30, 1995 were $152,500, $307,300, $311,600 and
$159,700, respectively. ETS is a wholly owned subsidiary of ST. During the
fiscal year ended December 31, 1997, the six month period ended December 31,
1996 and the year ended June 30, 1996, respectively, the Company made sales to
Agilis Communication Technologies Pte Ltd, another member of the Singapore
Technologies group, of $540,500, $375,000 and $118,900. The General Manager of
Agilis, Chan Wee Piak, is a Director of the Company.
On August 12, 1996, Stetsys US, Inc. ("ST"), a member of the Singapore
Technologies Pte Ltd ("STPL") group, acquired 100% of the outstanding common
stock of ETS. (ST is a wholly owned Delaware subsidiary of Stetsys Pte Ltd,
which is a wholly owned subsidiary of STPL. STPL is an indirect wholly owned
subsidiary of Temasek Holdings (Private) Limited, which is in turn wholly owned
by the Minister for Finance (Incorporated) of Singapore). Messrs. Lim Ming
Seong, Lee Yip Loi and Chan Wee Piak are all both Directors of the Company and
officers of other corporations in the STPL group. From February 24, 1997 to
January 23, 1998, Robert A. Grimes, a Director of the Company, was also
President of ST.
On August 12, 1996, Singapore Technologies Electronics Pte Ltd ("STE"),
another member of the STPL group, made an unsecured loan of $4,500,000 to the
Company, the proceeds from which were used to pay down the loan payable to ETS.
This loan, which bore interest at 8%, was repaid on February 10, 1997 from the
proceeds of loans provided by Citibank NA and ST. Between November 8 and
December 18, 1996, ST made loans to the Company in the aggregate principal
amount of $2,100,000, with interest at 8% per annum and maturing in March, 1997.
At or about maturity, the accrued interest on these loans was paid by the
Company and the principal amounts were repaid with the proceeds of new loans
maturing on April 30, 1997. These loans by ST to the Company, totaling
$4,100,000 were repaid with proceeds of the Rights Offering.
Interest expense on notes payable to affiliates was $148,000, $205,900 and
$248,400 for the year ended December 31, 1997, the six-month period ended
December 31, 1996 and the year ended June 30, 1996, respectively, of which
$-0-and $152,400 were included in accrued expenses in the accompanying balance
sheet as of December 31, 1997 and 1996, respectively.
Subsequent to December 31, 1997, ST made loans of $500,000 and $4,618,272 to
the Company. The loans bear interest at 6.844% per annum with the principal and
accrued interest due on January 4 and February 15, 1999, respectively. The
proceeds of the $4,618,272 loan were used by the Company to repay a note payable
under the above mentioned $5,000,000 line of credit agreement with Bank of
America which was outstanding as of December 31, 1997 (Note 7). This line of
credit, as to which an ST affiliate had issued a non-binding letter of
awareness, was terminated at that time. The Company also has an uncommitted
$5,500,000 line of credit from Citibank N.A. as to which the same ST affiliate
has issued a non-binding letter of awareness. As of December 31, 1997,
$5,000,000 had been drawn down in the form of demand loans under this line of
credit.
The Company has notes receivable from stockholders totaling $40,086. These
notes bear interest at 4% and are due June 20, 1998.
22
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) The following is an index of financial statements of Radyne Corp.,
financial statement schedules and exhibits included in Part IV, Item 14:
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-1
Balance Sheets as at December 31, 1997 and 1996....................................... F-2
Statements of Operations for the Year Ended December 31, 1997, the Six-Month Period
Ended December 31, 1996, the Year Ended June 30, 1996 and the Six and One-Half Month
Period Ended June 30, 1995............................................................ F-3
Statements of Stockholders' Capital Deficiency for the Year Ended December 31, 1997,
the Six Month Period Ended December 31, 1996, the Year Ended June 30, 1996 and the Six
and One-Half Month Period Ended June 30, 1995......................................... F-4
Statements of Cash Flows for the Year Ended December 31, 1997, the Six-Month Period
Ended December 31, 1996, the Year Ended June 30, 1996 and the Six and One-Half Month
Period Ended June 30, 1995............................................................ F-5
Notes to Financial Statements......................................................... F-6
</TABLE>
FINANCIAL SCHEDULES
None
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<S> <C>
3.1* Restated Certificate of Incorporation
3.2* Bylaws, as amended and restated
10.1** 1996 Incentive Stock Option Plan
10.2*** Employment Agreement with Robert C. Fitting (Radyne Termsheet)
10.3 Lease dated November 11, 1997
27 Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference from Registrant's report on Form 10-Q, filed March
11, 1997.
** Incorporated by reference from Registrant's Registration Statement on Form
S-8, dated and declared effective on March 12, 1997.
*** Incorporated by reference from Registrant's amended Registration Statement
on Form S-1, dated May 9, 1997 and declared effective on May 12, 1997.
b) Registrant filed no reports on Form 8-K during the period of October 1
through December 31, 1997.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Radyne Corp.
(Registrant)
By: /s/ ROBERT C. FITTING
-----------------------------------------
Robert C. Fitting,
PRESIDENT
Dated: 21 March, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf by the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ ---------------------------
/s/ LIM MING SEONG Chairman of the Board of March 20, 1998
- ------------------------------ Directors
Lim Ming Seong
/s/ ROBERT C. FITTING President, Director March 20, 1998
- ------------------------------
Robert C. Fitting
Vice President, Finance, March 20, 1998
/s/ GARRY D. KLINE Chief Financial
- ------------------------------ (Principal Financial
Garry D. Kline Officer)
/s/ ROBERT A. GRIMES Director March 20, 1998
- ------------------------------
Robert A. Grimes
/s/ LEE YIP LOI Director March 20, 1998
- ------------------------------
Lee Yip Loi
/s/ CHAN WEE PIAK Director March 20, 1998
- ------------------------------
Chan Wee Piak
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Radyne Corp.
Phoenix, Arizona
We have audited the accompanying balance sheets of Radyne Corp. (the "Company")
as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' capital deficiency and cash flows for the year ended December 31,
1997, the six-month period ended December 31, 1996, the year ended June 30, 1996
and the six and one- half-month period ended June 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1996, and the results of its operations and its cash flows for the year ended
December 31, 1997, the six-month period ended December 31, 1996, the year ended
June 30, 1996 and the six and one-half-month period ended June 30, 1995 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
February 4, 1998
Phoenix, Arizona
F-1
<PAGE>
RADYNE CORP.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ----------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 569,692 $ 186,488
Accounts receivable--trade, net of allowance for doubtful accounts of $15,000
(1997) and $13,000 (1996)...................................................... 2,359,443 2,733,902
Inventories (Note 3)............................................................. 5,389,920 1,991,360
Prepaid expenses................................................................. 68,076 19,280
Deferred offering costs.......................................................... 75,018
------------- -------------
Total current assets........................................................... 8,387,131 5,006,048
------------- -------------
PROPERTY AND EQUIPMENT--NET (NOTES 4 AND 8)........................................ 1,322,551 849,564
------------- -------------
OTHER ASSETS:
Designs and drawings--net of accumulated amortization of $705,404 (1997) and
$475,696 (1996)................................................................ 471,935 701,643
Deposits......................................................................... 50,000 15,662
------------- -------------
Total other assets............................................................. 521,935 717,305
------------- -------------
TOTAL.............................................................................. $ 10,231,617 $ 6,572,917
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY CURRENT LIABILITIES
Note payable under line of credit agreement (Note 7)............................. $ 5,000,000 $ 1,993,820
Notes payable to affiliates (Note 6)............................................. 6,600,000
Obligations under capital leases (Note 8)........................................ 109,258 53,042
Accounts payable--trade.......................................................... 667,202 805,279
Accounts payable--affiliate...................................................... 16,062 436,362
Accrued expenses (Notes 5 and 6)................................................. 901,032 926,956
Taxes payable (Note 2)........................................................... 38,720 42,116
------------- -------------
Total current liabilities...................................................... 6,732,274 10,857,575
NOTE PAYABLE UNDER LINE OF CREDIT AGREEMENT (NOTES 6 AND 7)........................ 4,500,000
OBLIGATIONS UNDER CAPITAL LEASES (NOTE 8).......................................... 93,543 81,016
TAXES PAYABLE (NOTE 2)............................................................. 55,861 80,952
------------- -------------
Total liabilities.............................................................. 11,381,678 11,019,543
------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 7, 9 AND 12) STOCKHOLDERS' CAPITAL
DEFICIENCY (NOTES 2 AND 13):
Common stock, $.002 par value--authorized, 20,000,000 shares; issued and
outstanding, 5,931,346 shares (1997) and 3,759,721 shares (1996)............... 11,862 7,519
ADDITIONAL PAID-IN CAPITAL....................................................... 5,694,806 605,782
ACCUMULATED DEFICIT.............................................................. (6,816,643) (5,059,927)
NOTES RECEIVABLE FROM STOCKHOLDERS (NOTE 6)...................................... (40,086)
------------- -------------
Total stockholders' capital deficiency......................................... (1,150,061) (4,446,626)
------------- -------------
TOTAL.............................................................................. $ 10,231,617 $ 6,572,917
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
F-2
<PAGE>
RADYNE CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX AND ONE-
SIX-MONTH HALF-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1996 1996 1995
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net Sales (Notes 6 and 11).................................. $ 13,446,852 $ 4,905,059 $ 3,829,523 $1,861,262
Cost of Sales (Note 6)...................................... 8,022,262 4,052,433 2,559,350 1,228,747
------------- ------------- ------------- ------------
Gross Profit............................................ 5,424,590 852,626 1,270,173 632,515
Operating Expenses:
Selling, general and administrative (Note 6).............. 4,242,138 1,437,971 1,843,576 961,162
Asset impairment charge (Note 1).......................... 421,000
Research and development.................................. 2,262,066 808,025 1,794,823
------------- ------------- ------------- ------------
Total Operating Expenses.................................... 6,504,204 2,666,996 3,638,399 961,162
------------- ------------- ------------- ------------
Loss from operations before interest expense................ (1,079,614) (1,814,370) (2,368,226) (328,647)
Interest Expense--Net (Note 6).............................. 677,102 255,604 256,871 36,209
------------- ------------- ------------- ------------
Net loss.................................................... $ (1,756,716) $ (2,069,974) $ (2,625,097) $ (364,856)
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Basic and diluted net loss per common share (Note 1)........ $ (.35) $ (.55) $ (.70) $ (.10)
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Weighted average number of common shares outstanding........ 5,012,664 3,750,699 3,742,227 3,729,721
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</TABLE>
See notes to financial statements
F-3
<PAGE>
RAYDYNE CORP.
STATEMENTS OF STOCKHOLDERS' CAPITAL DEFICIENCY
YEAR ENDED DECEMBER 31, 1997,
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF MONTH PERIOD ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- PAID-IN FROM
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS TOTAL
---------- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 16, 1994 (Note
1)................................ 3,729,721 $ 7,459 $ 545,842 $ 553,301
Net loss.......................... $ (364,856) (364,856)
---------- --------- ------------ ------------ ------------
BALANCE, JUNE 30, 1995.............. 3,729,721 7,459 545,842 (364,856) 188,445
Shares issued to Merit Microwave
(Note 6)........................ 20,000 40 39,960 40,000
Net loss.......................... (2,625,097) (2,625,097)
---------- --------- ------------ ------------ ------------
BALANCE, JUNE 30, 1996.............. 3,749,721 7,499 585,802 (2,989,953) (2,396,652)
Additional shares issued to Merit
Microwave (Note 6).............. 10,000 20 19,980 20,000
Net loss.......................... (2,069,974) (2,069,974)
---------- --------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996.......... 3,759,721 7,519 605,782 (5,059,927) (4,446,626)
Issuance of common stock-net of
issuance costs of $335,696...... 2,171,625 4,343 5,089,024 5,093,367
Promissory notes received in
connection with issuance of
stock (Note 6).................. $ (40,086) (40,086)
Net loss.......................... (1,756,716) (1,756,716)
---------- --------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997.......... 5,931,346 $ 11,862 $ 5,694,806 $ (6,816,643) $ (40,086) $ (1,150,061)
---------- --------- ------------ ------------ ------------
---------- --------- ------------ ------------ ------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
RADYNE CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX AND ONE
YEAR SIX-MONTH YEAR HALF-MONTH
ENDED PERIOD ENDED ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1996 1996 1995
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(1,756,716) $(2,069,974) ($2,625,097) $ (364,856)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of assets.............................. 2,122
Depreciation and amortization........................... 454,183 177,535 276,913 147,523
Asset impairment charge................................. 421,000
Changes in operating assets and liabilities:
Accounts receivable....................................... 374,459 (2,450,031) 251,806 (202,687)
Bankruptcy claims escrow.................................. 106,613
Prepaids and other current assets......................... 26,222 (73,872) 73,581 99,534
Employee relocation incentives and advances............... 112,353 (109,353)
Inventories............................................... (3,398,560) (840,691) (247,843) (353,686)
Deposits.................................................. (34,338) (7,650) (191,796)
Accounts payable--trade................................... (138,077) 339,848 (113,243) 284,495
Accounts payable--affiliate............................... (420,300) 436,362
Accrued expenses.......................................... (25,924) 545,990 (253,337) (348,004)
Taxes payable............................................. (28,487) (24,053) (56,063) (6,093)
------------ ------------ ----------- ------------
Net cash used in operating activities................... (4,945,416) (3,545,536) (2,580,930) (938,310)
------------ ------------ ----------- ------------
Cash flows from investing activities--Capital expenditures.... (593,072) (255,118) (388,770) (119,042)
------------ ------------ ----------- ------------
Cash flows from financing activities:
Net borrowings from notes payable under line of credit
agreements................................................ 7,506,180 1,993,820
Proceeds from notes payable to affiliates................... 4,600,000 6,600,000 3,052,912 853,206
Payments on note payable to affiliate....................... (11,200,000) (4,594,696)
Net proceeds from sale of common stock...................... 5,053,281
Principal payments on capital lease obligations............. (37,769) (12,953) (84,350) (50,143)
------------ ------------ ----------- ------------
Net cash provided by financing activities............... 5,921,692 3,986,171 2,968,562 803,063
------------ ------------ ----------- ------------
Net increase (decrease) in cash............................... 383,204 185,517 (1,138) (254,289)
Cash and cash equivalents, beginning of period................ 186,488 917 2,109 256,398
------------ ------------ ----------- ------------
Cash and cash equivalents, end of period...................... $ 569,692 $ 186,488 $ 971 $ 2,109
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Supplemental disclosures of cash flow information--Cash paid
for interest................................................ $ 687,626 $ 72,258 $ 3,996 $ 7,059
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Supplemental disclosures of noncash investing and financing
activities:
The Company incurred capital lease obligations of $106,512
and $85,887 for new machinery and equipment for the year
ended December 31, 1997 and the six-month period ended
December 31, 1996, respectively...........................
In December 1996, the Company issued an additional 10,000
shares of common stock in conjunction with the asset
purchase from Merit Microwave, Inc. (Note 6)..............
</TABLE>
See notes to financial statements.
F-5
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business--Radyne Corp. (the "Company" or "Radyne") is located
in Phoenix, Arizona and designs, manufactures, and sells products, systems, and
crsoftware used for the transmission and reception of data over satellite and
cable communication networks.
Upon emergence from bankruptcy proceedings on December 16, 1994 (Note 2),
the Company became a majority-owned subsidiary of Radyne, Inc., which was a
wholly-owned subsidiary of Engineering and Technical Services, Inc. ("ETS"). On
August 12, 1996, Singapore Technologies Pte Ltd. ("STPL") acquired 100 percent
of the outstanding common stock of ETS through its indirect wholly owned
subsidiary, Stetsys US, Inc. ("ST"). The purchase price for the ETS stock was
$5,756,425. Subsequent to the acquisition of ETS by ST, Radyne, Inc. was merged
into ETS, which in turn distributed all of its Radyne shares to ST. ETS did not
push down any related purchase accounting adjustments since its ownership in the
Company was less than 95 percent. As a result, the accompanying financial
statements continue to reflect the historical accounts of the Company. The
Company changed its fiscal year-end to December 31 to conform to the year-end of
ST.
UNAUDITED SUMMARIZED FINANCIAL INFORMATION
Change in Fiscal Year--Effective August 12, 1996, the Company changed its
fiscal year-end from June 30 to December 31, to conform to the year-end of ST.
Summarized unaudited financial information for the six-months ended December 31,
1995 is as follows:
<TABLE>
<CAPTION>
UNAUDITED
------------
<S> <C>
Net sales....................................................................... $ 2,397,235
Gross profit.................................................................... 921,951
Net loss before income taxes.................................................... (583,887)
Income taxes.................................................................... --
Net loss........................................................................ (583,887)
Net loss per common share....................................................... (0.16)
</TABLE>
Rights Offering--In November 1996, the Board of Directors approved the
distribution to stockholders, other than the Company's principal stockholder,
ST, of subscription rights for the purchase of up to 215,833 shares of the
Company's common stock at a price of $2.50 per share. The Board of Directors
further approved the distribution of subscription rights to an affiliate of ST
to purchase up to 2,040,000 shares of the Company's common stock at a price of
$2.50 per share. This Rights Offering became effective on May 12, 1997 and was
concluded in June. ST's affiliate exercised 1,976,000 of its rights and
individuals associated with such affiliate exercised another 34,000. An
additional 51,525 rights issued to stockholders other than ST were exercised. In
a related offering under the Company's Incentive Stock Option Plan, 110,100
shares of the Company's common stock were purchased by employees at $2.50 per
share. Total proceeds received from the Rights Offering were partially offset by
approximately $336,000 of associated costs. The proceeds from the exercise of
these rights were used, in part, to satisfy notes payable to affiliates shown on
the accompanying balance sheet at December 31, 1996.
F-6
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash Equivalents--The Company considers all money market accounts with a
maturity of 90 days or less to be cash equivalents.
Revenue Recognition--The Company recognizes revenue upon shipment of
product.
Inventories, consisting of satellite modems and related products, are valued
at the lower of cost (first-in, first-out) or market, including material, direct
labor, and overhead costs.
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to operations as incurred, and improvements which extend
the useful lives of the assets are capitalized. Depreciation and amortization of
machinery and equipment are computed using the straight-line method over an
estimated useful life of three to seven years.
Designs and Drawings--The valuation of designs and drawings is the result of
adjustments made by the Company to adopt Fresh Start reporting in accordance
with AICPA Statement of Position ("SOP") 90-7, Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code, and represents the excess
reorganization value that has been applied to the acquired technology supporting
the Company's products (Note 2). Amortization of designs and drawings is
computed using the straight-line method over an estimated useful life of four to
seven years.
At December 31, 1996, the Company recognized a design and drawing impairment
charge of $421,000, with no associated tax benefit. With the introduction of new
products in October 1996, management determined that a portion of the technology
related to the original designs and drawings would be phased out or modified
with technology used in new products. Impairment was determined by comparing the
amount of undiscounted projected future cash flows attributable to each product
using the related technology to the carrying value of the asset. Projected
future cash flows were estimated for a period approximating the estimated
remaining lives of the long lived assets, based on products' earnings history,
market conditions and assumptions reflected in internal operating plans and
strategies.
Research and Development--The cost of research and development is charged to
expense as incurred.
Income Taxes--Radyne will file a consolidated federal income tax return with
ETS and ST through June 1997 (conclusion of the Rights Offering). Subsequent to
June 1997, Radyne will file separate federal income tax returns. Income taxes
have been computed as if the Company filed separate income tax returns for each
year. The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
consequences attributed to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Differences between income for financial and tax reporting
purposes arise primarily from amortization of certain designs and drawings and
accruals for warranty reserves and compensated absences. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-7
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risk--The Company maintains ongoing credit
evaluations of its customers and generally does not require collateral. The
Company provides reserves for potential credit losses and such losses have not
exceeded management's expectations.
Net Loss Per Common Share--The Company presents earnings per share in
accordance with Statement of Financial Standards No. 128, Earnings per Share
("SFAS No. 128"). SFAS No. 128 prescribes a presentation of basic earnings per
share, which is calculated utilizing only weighted average common shares
outstanding, and a diluted earnings per share which gives effect to all dilutive
potential common shares outstanding during the reporting periods. Per share
amounts have been adjusted to reflect a 1- for-5 reverse stock split that
occurred on January 9, 1997.
Fair Value of Financial Instruments--The fair value of accounts receivable,
accounts payable, and accrued expenses approximates the carrying value due to
the short-term nature of these instruments. Management has estimated that the
fair values of the notes payable, capital lease obligations, and taxes payable
approximate the current balances outstanding, based on currently available rates
for debt with similar terms.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the financial statement
date and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
New Accounting Pronouncements--The Financial Accounting Standards Board has
issued SFAS No. 131 on Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. This standard requires that public companies report certain
information about operating segments in their financial statements. It also
establishes related disclosures about products and services, geographic areas,
and major customers. The Company is currently evaluating what impact this
standard will have on its disclosures.
2. REORGANIZATION
On December 16, 1994, the Bankruptcy Court confirmed the Predecessor
Company's Plan of Reorganization effective at the close of business on December
16, 1994. Under the Plan of Reorganization, tax claims were rescheduled for
quarterly payments totaling approximately $9,600, with interest at 7 percent
through September 2000.
Under the provision of SOP 90-7, Radyne Corp., the Successor Company, was
required to adopt Fresh Start reporting as of the close of business on December
16, 1994, because the reorganization value of the Predecessor Company was less
than the total of all post-petition liabilities and prepetition allowed claims,
and the preconfirmation stockholders retained less than 50 percent of the
Successor Company's common stock.
F-8
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
3. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Raw materials and components...................................... $ 2,605,397 $ 1,108,019
Work-in-process................................................... 1,124,929 792,119
Finished goods.................................................... 1,950,594 577,222
Valuation allowance............................................... (291,000) (486,000)
------------ ------------
Total............................................................. $ 5,389,920 $ 1,991,360
------------ ------------
------------ ------------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Machinery and equipment............................................. $ 1,298,715 $ 731,778
Furniture and fixtures.............................................. 373,548 243,559
------------ ----------
Total............................................................... $ 1,672,263 975,337
Less accumulated depreciation....................................... 349,712 125,773
------------ ----------
Property and equipment--net......................................... $ 1,332,551 $ 849,564
------------ ----------
------------ ----------
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Wages and related payroll taxes....................................... $ 486,840 $ 356,624
Interest.............................................................. 183,968 194,492
Professional fees..................................................... 85,500 171,000
Warranty reserve...................................................... 105,000 139,775
Other................................................................. 39,724 65,065
---------- ----------
Total accrued expenses................................................ $ 901,032 $ 926,956
---------- ----------
---------- ----------
</TABLE>
6. RELATED PARTY TRANSACTIONS
In June 1995, the Company acquired certain assets of Merit Microwave, Inc.
("Merit"), as well as the manufacturing rights to the Merit line of microwave
products, which include translators and frequency converters. The purchase price
of approximately $120,000 was allocated to inventory and machinery and
equipment, and was paid by the issuance of 30,000 shares of the Company's stock
($40,000), cash of $60,000, and the assumption of a payable of $20,000. Under
the terms of the agreement, the Company is
F-9
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
6. RELATED PARTY TRANSACTIONS (CONTINUED)
required to pay royalties to Merit of 5-10 percent on certain sales of microwave
products. From June 1995 to December 31, 1997, the Company paid royalties of
$10,200.
In July 1995, the Company's manufacturing operations were moved to ETS
pending the Company's relocation to Phoenix. As a result, the Company
transferred $726,345 of inventory and $115,155 of machinery and equipment to ETS
in exchange for an equal reduction in a loan payable to ETS, to facilitate the
commencement of subcontract manufacturing by ETS. During September 1996, in
recognition of the completion of the move to Phoenix and increase in staffing,
the Board of Directors determined that the Company should resume direct
manufacturing. To this end, the Company repurchased $22,100 of machinery and
equipment from ETS and was obligated to purchase $348,000 of inventory from ETS,
which ETS had acquired and or processed in the ordinary course of fulfilling
purchase orders from the Company. However, as the Company's products were
undergoing constant improvement, in September 1996, the Company considered it
necessary to treat $70,000 of such inventory as obsolete and another $20,000
thereof as slow-moving. Ongoing product development rendered another $90,000 of
this inventory obsolete shortly thereafter. Additional inventory of $457,000 and
$2,461,500 was purchased from ETS during the six-month period ended December 31,
1996 and the year ended June 30, 1996, respectively.
Sales to ETS for the year ended December 31, 1997, the six-month period
ended December 31, 1996, the year ended June 30, 1996 and the six and
one-half-month period ended June 30, 1995 were $152,500, $307,300, $311,600 and
$159,700, respectively.
Sales to Agilis Communication Technologies Pte Ltd. ("Agilis"), an affiliate
of ST, amounted to $540,000, $375,000 and $118,900 for the year ended December
31, 1997, the six-month period ended December 31, 1996 and the year ended June
30, 1996, respectively.
Prior to 1997, ETS provided management services to Radyne, for which ETS
charged Radyne $60,000, $120,000 and $65,000 for the six-month period ended
December 31, 1996, the year ended June 30, 1996 and the six and one-half-month
period ended June 30, 1995, respectively. Interest expense on notes payable to
affiliates was $148,000, $205,900 and $248,400 for the year ended December 31,
1997, the six-month period ended December 31, 1996 and the year ended June 30,
1996, respectively, of which $-0-and $152,400 were included in accrued expenses
in the accompanying balance sheet as of December 31, 1997 and 1996,
respectively.
Subsequent to December 31, 1997, an ST affiliate made loans of $5,118,272 to
the Company. The loans bear interest at 6.844 percent per annum with the
principal and accrued interest due in February 1999. The proceeds of the loan
were used in part by the Company to repay a note payable under a line of credit
agreement which was outstanding as of December 31, 1997 (Note 7).
The Company has notes receivable from stockholders totaling $40,086. These
notes bear interest at 4 percent and are due June 20, 1998.
F-10
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
7. NOTES PAYABLE
The Company had a note payable under a line of credit agreement with a bank
that permitted outstanding borrowings of $4,500,000. At December 31, 1997,
outstanding borrowings against the line were $4,500,000 plus accrued interest.
Subsequent to December 31, 1997, the Company repaid the note and accrued
interest with proceeds from affiliated debt (Note 6).
The Company has a $5,500,000 credit agreement with a bank that includes
$5,000,000 available under an uncommitted line of credit facility and facilities
for bank guarantees and/or standby letters of credit up to $500,000. STPL has
issued a nonbinding letter of awareness in connection with this credit
agreement. Borrowings under the line of credit bear interest at a fluctuating
rate equal to LIBOR or alternative Citibank's Quoted Rate plus 1 percent per
annum (6.844 percent-6.938 percent as of December 31, 1997). At December 31,
1997, outstanding borrowings against the line were $5,000,000 plus accrued
interest. The credit agreement requires that the Company maintain certain
financial leverage ratios. This credit facility is an uncommitted line of credit
which the bank may modify or cancel without prior notice.
8. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases machinery and equipment under capital leases. The net
book value of the equipment, $258,536 at December 31, 1997 and $146,958 at
December 31, 1996, is included in property and equipment in the accompanying
balance sheets and is being depreciated over the estimated useful lives of the
machinery and equipment.
Payments on capital lease obligations at December 31 are due as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 121,951
1999.............................................................. 81,453
2000.............................................................. 10,275
---------
Total minimum lease payments...................................... 213,679
Less amount representing interest................................. 10,878
---------
Present value of minimum lease payments........................... 202,801
Less current portion.............................................. 109,258
---------
Capital lease obligations due after one year...................... $ 93,543
---------
---------
</TABLE>
9. COMMITMENTS
Rent expense was approximately $94,000, $44,000, $95,000 and $57,000 for the
year ended December 31, 1997, the six-month period ended December 31, 1996, the
year ended June 30, 1996 and the six and one-half-month period ended June 30,
1995, respectively. During 1997, the Company entered into an agreement to lease
a new building which is scheduled to be ready for occupancy in June 1998. Future
minimum rentals under leases, including the new building lease, at December 31
are as follows:
F-11
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
9. COMMITMENTS (CONTINUED)
<TABLE>
<S> <C>
1998............................................................ $ 351,000
1999............................................................ 548,200
2000............................................................ 564,600
2001............................................................ 581,500
2002............................................................ 599,000
Thereafter...................................................... 3,568,400
---------
Total........................................................... $6,212,700
---------
---------
</TABLE>
10. INCOME TAXES
The following summary reconciles taxes (recovery) from operations at the
federal statutory rate with the actual provision (recovery):
<TABLE>
<CAPTION>
SIX AND
SIX-MONTH ONE-HALF-
YEAR PERIOD YEAR MONTH PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1996 1996 1995
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Income taxes (recovery) at statutory
rate.............................. $ (597,000) $ (704,000) $ (893,000) $ (124,000)
Increase (decrease) in income taxes
(recovery) resulting from:
State income tax benefit............ (64,000) (75,000) (95,000)
Change in valuation allowance....... 613,000 775,000 988,000 117,600
Other adjustments................... 48,000 4,000 -- 6,400
------------ ------------ ----------- -------------
Total............................... $ -- $ -- $ -- $ --
------------ ------------ ----------- -------------
------------ ------------ ----------- -------------
</TABLE>
Deferred tax assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Gross deferred tax assets:
Cumulative tax effect of net operating loss carryforwards......... $ 4,620,000 $ 3,930,000
Tax credits....................................................... 210,000 210,000
Temporary differences............................................. (107,000) (30,000)
Valuation allowance............................................... (4,723,000) (4,110,000)
------------ ------------
Total............................................................. $ -- $ --
------------ ------------
------------ ------------
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $12,278,000 expiring in various years through 2013 and general
business credit carryforwards of $210,000
F-12
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
10. INCOME TAXES (CONTINUED)
expiring in various years through 2004 for utilization against taxable
income/taxes payable of future periods, if any. Approximately $6,200,000 of the
Company's net operating loss and tax credit carryforwards are subject to an
annual limitation under Internal Revenue Code Section 382, in future years, as a
result of changes in ownership of the Company's stock. Management believes that
the inability to utilize net operating loss and tax credit carryforwards to
offset future taxable income within the carryforward periods under existing tax
laws and regulations is more likely than not. Accordingly, a 100 percent
valuation allowance has been recorded against the net deferred tax asset as of
December 31, 1997 and 1996.
11. SIGNIFICANT CUSTOMERS AND EXPORT SALES
Sales to significant customers as a percentage of net sales are as follows:
<TABLE>
<CAPTION>
SIX-MONTH SIX AND
YEAR PERIOD ONE-HALF- YEAR MONTH PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1996 1996 1995
--------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Customer A............................ 2.5% 1.6% 6.4% 22.0%
Customer B............................ 1.1% -- -- 15.3%
Customer C............................ 1.1% 6.3% 8.1% 14.2%
Customer D............................ 2.7% 15.6% 12.7% 11.7%
Customer E............................ 2.2% 18.3% -- --
Customer F............................ 14.5% -- -- --
</TABLE>
No other customers represented greater than 10 percent of net sales during
the year ended December 31, 1997, the six-month period ended December 31, 1996,
the year ended June 30, 1996 and the six and one-half- month period ended June
30, 1995.
Export sales were 55 percent, 66 percent, 50 percent and 46 percent of net
sales for the year ended December 31, 1997, the six-month period ended December
31, 1996, the year ended June 30, 1996 and the six and one-half-month period
ended June 30, 1995, respectively. Net sales to Asia, Latin America and Europe
were 58 percent, 22 percent and 13 percent, respectively, of total export sales
for the year ended December 31, 1997. Net sales to Asia and Latin America were
46 percent and 37 percent, respectively, of total export sales for the six-month
period ended December 31, 1996. Net sales to Asia and Europe were 46 percent and
38 percent, respectively, of total export sales for the year ended June 30,
1996.
12. EMPLOYEE BENEFIT PLAN
The Company has a qualified contributory 401(k) plan that covers all
employees who have attained the age of 18 and are employed at the enrollment
date. Matching contributions were $30,230, $8,576, $11,606 and $1,159 for the
year ended December 31, 1997, the six-month period ended December 31, 1996, the
year ended June 30, 1996 and the six and one-half-month period ended June 30,
1995, respectively. Each participant may elect to contribute up to 15 percent of
his or her gross compensation up to the
F-13
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
12. EMPLOYEE BENEFIT PLAN (CONTINUED)
maximum amount allowed by the Internal Revenue Service. The Company matches up
to 1 percent of the employee's salary.
13. STOCK OPTIONS
In November 1996, the Board of Directors adopted the 1996 Incentive Stock
Option Plan (the "Plan"), which was approved by the stockholders on January 8,
1997. The Plan provides for the grant of options to employees of the Company to
purchase up to 1,282,042 shares of common stock. The option price per share
under the Plan may not be less than the fair market value of the stock (110
percent of the fair market value for an optionee who is a 10 percent
stockholder) on the day the option is granted.
At December 31, 1997, the Company had 690,665 options outstanding at an
exercise price of $2.50 per share. 30,500 options are exercisable at the rate of
25 percent on each of the first four anniversaries of the grant date and expire
on the tenth anniversary of the grant date. The remaining 660,165 options have
been allocated among a group of 30 key employees. These options carry the right
to a cash bonus of $1.72 per purchased share, payable upon exercise. One-third
of these options will become exercisable, if and when the Company's earnings
before interest and taxes (calculated without regard to any charge for
compensation paid or payable under the Plan) for a period of four calendar
quarters ("EBIT") exceeds $1,000,000. Another one-third of these options will
become exercisable if and when EBIT exceeds $2,500,000 with the remaining
one-third becoming exercisable if and when EBIT exceeds $6,000,000. The options
become exercisable if EBIT exceeds the aforementioned prior to June 30, 2001.
All options which become exercisable expire in November 2006.
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for its Plan. The 660,165 options are
considered variable options, as defined by the provisions of APB No. 25 and
related interpretations. The Company will start recognizing compensation cost on
variable arrangements when the future events become probable of occurring. The
accrual of compensation cost under the variable arrangement has not commenced as
it is unlikely that the award will be earned in the near future due to
significant historical losses incurred by the Company. Accordingly, no
compensation cost has been recognized for the fixed or variable portions of the
Plan. Had compensation cost for the Plan been determined consistent with
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, the Company's pro forma net loss and loss per common share for the
year ended December 31, 1997 would have been $2,028,121 and $.40, respectively.
The Company's pro forma net loss and loss per common share for the six-month
period ended December 31, 1996 would have been $2,115,074 and $.56,
respectively. The fair value of options granted under the Plan was estimated on
the date of grant with vesting periods ranging from two to four years using the
Black-Scholes option-pricing model with the following weighted average
assumptions used: no dividend yield, expected volatility of 118 percent-132
percent, risk free interest rate of 5.87 percent-6.83 percent, and expected
lives of five years.
Subsequent to December 31, 1997, the Company granted additional options to
employees to purchase 204,000 shares of common stock at an exercise price of
$2.50.
F-14
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the three month period ended March 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-11685-NY
RADYNE CORP.
------------
(Exact name of registrant as specified in its charter)
NEW YORK
--------
(State or other jurisdiction of incorporation or organization)
11-2569467
----------
(IRS EMPLOYER IDENTIFICATION NO.)
5225 SOUTH 37TH STREET, PHOENIX, AZ 85040
-----------------------------------------
(Address of principal executive offices)
602-437-9620
------------
(Registrant's Telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements, for
the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
YES X NO
--- ---
The registrant had 5,931,346 shares of its common stock, par value $.002,
outstanding as of March 31, 1998.
1
<PAGE>
PART I - FINANCIAL INFORMATION
RADYNE CORP.
BALANCE SHEET
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
ITEM 1 Unaudited Audited
<S> <C> <C>
Current Assets:
Cash & Cash Equvalents $ 34,795 $ 569,692
Account Receivable, less allowance
for doubtful accounts of $17,000 and $15,000 respectively 3,238,476 2,359,443
Inventories 5,307,518 5,389,920
Prepaids and Other Current Assets 86,092 68,076
----------- -----------
Total Current Assets 8,666,881 8,387,131
----------- -----------
Property and Equipment - Net 1,277,182 1,322,551
----------- -----------
Other Assets:
Designs and Drawings - Net of accumulated amortization
of $765,065 and $705,404 respectively 414,935 471,935
Deposits 50,000 50,000
----------- -----------
Total Other Assets 464,935 521,935
----------- -----------
Total Assets $10,408,998 $10,231,617
=========== ===========
Liabilities and Stockholders' Capital Deficiency
Current liabilities:
Notes payable under lines of credit $ 5,000,000 $ 5,000,000
Notes payable to affiliates 5,118,272 0
Obligations under capital leases-ST 97,764 109,258
Accounts Payable - trade 824,452 667,202
Accounts Payable - affiliates 0 16,062
Accrued Liabilities 845,615 901,032
Taxes payable 29,862 38,720
----------- -----------
Total Current Liabilities 11,915,965 6,732,274
----------- -----------
Note Payable under Line of Credit Agreement 0 4,500,000
Obligation under Capital Leases 72,551 93,543
Taxes Payable 36,763 55,861
----------- -----------
Total Liabilities 12,025,279 11,381,678
----------- -----------
Stockholders' Capital Deficiency:
Common Stock, $.002 par value, 20,000,000 shares authorized,
shares issued and outstanding, 5,931,346 at March 31, 1998
and December 31, 1997. 11,862 11,862
Additional Paid-In Capital 5,694,806 5,694,806
Accumulated Deficit (7,306,683) (6,816,643)
Notes Receivable - employees (16,266) (40,086)
----------- -----------
Total Stockholders' Capital Deficiency (1,616,281) (1,150,061)
----------- -----------
Total $10,408,998 $10,231,617
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
RADYNE CORP.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1997
<S> <C> <C>
Net Sales $3,948,501 $2,740,668
Cost of Sales 2,754,829 1,679,812
----------------------------------
Gross Profit 1,193,672 1,060,856
----------------------------------
Operating Expenses:
Selling, general and administrative 847,166 811,281
Research and development 658,944 551,643
----------------------------------
Total Operating Expenses 1,506,110 1,362,924
----------------------------------
(Loss) from operations before interest expense (312,438) (302,068)
Interest Expense - Net 177,602 172,087
----------------------------------
Net (Loss) $ (490,040) $ (474,155)
==================================
Basic and Diluted Net (loss) per common shares $ (0.08) $ (0.13)
==================================
Weighted average number of common shares
outstanding. 5,931,346 3,759,721
==================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
RADYNE CORP.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH ENDED THREE MONTH ENDED
MARCH 31, 1998 MARCH 31, 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $ (490,040) $ (474,155)
Adjustments to reconcile net loss to cash flows used
in operating activities:
Depreciation and Amortization 128,975 118,565
Changes in operating assets and liabilities:
Accounts Receivable (879,033) 293,181
Inventories 82,402 (915,741)
Prepaid and Other Current Assets (18,016) (126,951)
Accounts Payable - Trade 157,250 239,240
Accounts Payable - Affiliates (16,062) (416,192)
Accrued Liabilities (55,417) (332,922)
Taxes Payable (27,956) (11,268)
---------------------------------
Net Cash used in Operating Activities (1,117,897) (1,626,243)
---------------------------------
Cash flows from investing activities:
Capital Expenditures (26,606) (82,188)
---------------------------------
Cash flows from financing activities:
Net Borrowing from or (Payment on) Notes Payable under
Line of Credit Agreements (4,500,000) 4,400,000
Proceeds from Notes Payable to Affiliates 5,118,272 0
Payments on Notes Payable to Affiliates 0 (2,500,000)
Notes Receivable - employees 23,819 0
Payments on Long Term Debt 0 (4,670)
Principle payments on capital lease obligations (32,486) 0
=================================
Net Cash provided by financing activites 609,606 1,895,330
---------------------------------
Net increase (decease) in Cash (534,897) 186,899
Cash, Beginning of year 569,692 186,488
=================================
Cash, End of Period $ 34,795 $ 373,387
=================================
Supplemental Disclosure of cash flow information:
Interest paid $ 243,250 $ 289,959
=================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR MARCH 31, 1998 AND MARCH 31, 1997 IS UNAUDITED)
1. BUSINESS
Radyne Corp. (the "Company") was incorporated on November 25, 1980 and
commenced operations on May 22, 1981. On August 12, 1996 the Company became a
majority owned subsidiary of Stetsys US, Inc ("ST"). The Company designs,
manufactures and sells products, systems and software used for the transmission
and reception of data over satellite and cable communications networks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The interim financial statements furnished reflect all adjustments which
are, in the opinion of management, necessary for a fair statement of financial
position as of March 31, 1998 and the results of operations and cash flows for
the three months ended March 31, 1998 and March 31, 1997. Such adjustments are
of a normal recurring nature. This information should be read in conjunction
with the financial statements included in the Company's Form 10-K for the
twelve-month period ended December 31, 1997.
The results of operations for the interim period are not necessarily
indicative of the results to be expected for the full year.
(b) REVENUE RECOGNITION
The Company recognizes revenue upon shipment of products.
(c) INVENTORIES
Inventories, consisting of satellite modems, converters and related
products, are valued at the lower of cost (first-in, first-out) or market value
including material, direct labor and overhead costs.
(d) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Expenditures for repairs and
maintenance are charged to operations as incurred, and improvements that extend
the useful lives of assets are capitalized. Depreciation and amortization of
machinery and equipment are computed using the straight-line method over the
extimated useful lives of three to seven years.
(e) DESIGNS AND DRAWINGS
The valuation of designs and drawings is the result of adjustments made by
the Company to adopt Fresh Start reporting in accordance with AICPA Statement of
Position 90-7, 'Financial Reporting By Entities in Reorganization Under the
Bankruptcy Code,' and represents the excess reorganization value that has been
applied to the acquired technology supporting the Company's products.
Amortization of designs and drawings is computed using the straight-line method
over an estimated useful life of four to seven years.
(f) RESEARCH AND DEVELOPMENT
The cost of research and development is charged to expense as incurred.
(g) TAXES ON INCOME
Radyne will file a consolidated federal income tax return with ETS and ST
through June 1997 (conclusion of the Rights Offering). Subsequent to June 1997,
Radyne will file separate federal income tax returns. Income taxes have been
computed as if the Company filed separate income tax returns for each year.
The company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future consequences
attributed to differences between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Differences between income for financial and tax reporting purposes arise
primarily from amortization of certain designs and drawings and accruals for
warranty reserves and compensated absences. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rate is recognized as income in the period that includes the enactment date.
5
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR MARCH 31, 1998 AND MARCH 31, 1997 IS UNAUDITED)
(h) PER SHARE DATA
The Company presents earnings per share in accordance with Statement of
Financial Standards No. 128, Earnings per Share ("SFAS No. 128"). SFAS No. 128
prescribes a presentation of basic earnings per share, which is calculated
utilizing only weighted average common shares outstanding, and a diluted
earnings per share which gives effect to all dilutive potential common shares
outstanding during the reporting periods.
(i) RIGHTS OFFERING
In November 1996 the Board of Directors approved the distribution to
stockholders, other than the Company's principal stockholder, ST, of
subscription rights for the purchase of up to 215,833 shares of the Company's
common stock at a price of $2.50 per share. The Board of Directors further
approved the distribution of subscription rights to an affiliate of ST to
purchase up to 2,040,000 shares of the Company's common stock at a price of
$2.50 per share. This Rights Offering became effective on May 12, 1997 and was
concluded in June. ST's affiliate exercised 1,976,000 of its rights and
individuals associated with such affiliate exercised another 34,000. 51,525
rights issued to stockholders other than ST were also exercised. In a related
offering under the Company's Incentive Stock Option Plan, 110,100 shares of the
Company's common stock were purchased by employees at $2.50 per share. Total
proceeds received from the Rights Offering were partially offset by $336,000 of
associated costs. The proceeds from the exercise of these rights were used, in
part, to satisfy notes payable to affiliates.
(j) NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standard No. 130
REPORTING COMPREHENSIVE INCOME, in the quarter ended March 31, 1998.
Comprehensive income is the same as net income for the quarter.
6
<PAGE>
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
3 INVENTORIES MARCH 31, 1998 DECEMBER 31, 1997
<S> <C> <C>
Inventories consist of the following:
Raw materials and components $3,181,822 $2,605,397
Work in Process 1,214,522 1,124,929
Finished Goods 1,232,174 1,950,594
----------------------------------------
Subtotal 5,628,518 5,680,920
----------------------------------------
Less Valuation Allowance (321,000) (291,000)
----------------------------------------
Total $5,307,518 $5,389,920
========================================
4 PROPERTY AND EQUIPMENT MARCH 31, 1998 DECEMBER 31, 1997
Property and Equipment consist of the following:
Machinery and Equipment $1,307,567 $1,298,715
Furniture and Fixtures 391,930 373,548
----------------------------------------
Subtotal 1,699,497 1,672,263
----------------------------------------
Less: Accumulated depreciation & Amortization (422,315) (349,712)
----------------------------------------
Total $1,277,182 $1,322,551
========================================
5 ACCRUED LIABILITIES MARCH 31, 1998 DECEMBER 31, 1997
Accrued liabilities consist of the following:
Wages and related payroll taxes $ 271,874 $ 486,840
Interest Expense 118,320 183,968
Professional fees 94,500 85,500
Warranty Reserve 105,000 105,000
Other 255,921 39,724
----------------------------------------
Total $ 845,615 $ 901,032
========================================
</TABLE>
7
<PAGE>
6. RELATED PARTY TRANSACTIONS
Sales to Engineering and Technical Services, Inc. and Agilis Communication
Technologies Pte Ltd, companies under common control with Radyne, for the
periods ended March 31, 1998 and March 31, 1997 were $38,181 and $347,660
respectively. Cost of such sales for the same periods were $11,459 and $250,664
respectively.
Accounts Receivable from affiliates at March 31, 1998 and March 31, 1997
was $44,834 and $441,315 respectively.
Notes payable to ST and affiliates outstanding at March 31, 1998 and March
31, 1997 were $5,118,272 and $4,100,000 respectively. An additional $250,000
was borrowed from ST on April 14, 1998. These notes bear interest at rates from
6.625% to 6.844% and mature at various dates between January 4. 1999 and January
15, 1999.
Interest expense on notes payable to affiliates was $73,926 for the current
period ended March 31, 1998 compared to $111,950 for the period ended March 31,
1997.
Accrued interest on notes payable to affiliates was $73,926 at March 31,
1998 compared to $20,170 at March 31, 1997.
7. NOTES PAYABLE
The Company had a note payable under a line of credit agreement with a bank that
permitted outstanding borrowings of $4,500,000. At December 31, 1997,
outstanding borrowings against the line were $4,500,000 plus accrued interest.
On January 15, 1998, the Company repaid the note and accrued interest with
proceeds from affiliated debt.
The Company has a $5,500,000 credit agreement with a bank that includes
$5,000,000 available under an uncommitted line of credit facility and facilities
for bank guarantees and/or standby letters of credit up to $500,000. An ST
affiliate has issued a nonbinding letter of awareness in connection with this
credit agreement. Borrowings under the line of credit bear interest at a
fluctuating rate equal to LIBOR or alternative Citibank's Quoted Rate plus 1
percent per annum (6.844 percent-6.938 percent as of December 31, 1997). At
March 31, 1998, outstanding borrowings against the line were $5,000,000 plus
accrued interest. The credit agreement requires that the Company maintain
certain financial leverage ratios. This credit facility is an uncommitted line
of credit which the bank may modify or cancel without prior notice.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The Company's assets have increased from $10,231,617 at December 31, 1997
to $10,408,998 at March 31, 1998, while the Company's liabilities have increased
from $11,381,678 at December 31, 1997 to $12,025,279 at March 31, 1998. The
decrease in net assets (assets minus liabilities) of $466,221 is primarily due
to the company's financial performance within the first quarter.
Results of operations for the three month period ended March 31, 1998
compared to the three month period ended March 31, 1997, were as follows:
The Company's net sales increased 44% to $3,948,501 during the period ended
March 31, 1998 from $2,740,668 during the period ended March 31, 1997 primarily
as a result of the Company's introduction of new products and aggressive
marketing efforts. A portion of the sales increase came from the newer DMD-2401
modem line that has enjoyed tremendous market acceptance. Other products that
contributed to the increase were the RCS-10 and RCS-20 subsystems with
associated modems and the new digital video product line.
The Company's cost of sales as a percentage of net sales increased to 70%
during the period ended March 31, 1998 from 61% during the fiscal period ended
March 31, 1997. Start-up costs associated with the delivery of new products to
the market place accounted for the high period costs.
8
<PAGE>
Selling, general and administrative costs increased to $847,166 (21% of
sales) during the current period from $811,281 (30% of sales) during the fiscal
period ended March 31, 1997. The decreased level of expenses as a percentage of
sales for the period was a result of the increase in the Company's base business
level during the period. Marketing expenses have remained high, based on the
Company's attempts to position itself to compete head-to-head with larger
competitors without giving up margin advantages.
Research and development expenditures increased to $658,944 (17% of sales)
during the current period from $551,643 (20% of sales) during the period ended
March 31, 1997. The increased level of expenses for the period (and the related
reduction in costs in terms of percentage of sales) was a result of the increase
in the Company's base business level during the period and the redirection of
efforts to marketing our newer lines of products.
Net interest expense increased from $172,087 in the period ended March 31,
1997 to $177,602 in the current period due mainly to an increase in the
Company's debt level.
Based on the decreases in margins and higher research and development
costs, the Company experienced net loss of ($490,040), during the period ended
March 31, 1998 as compared with a net loss of ($474,155) during the period ended
March 31, 1997.
The Company's new-orders-booked (Bookings) increased by 131% to $4,935,747
for the current period from $2,132,948 for the period ended March 31, 1997.
This increase was primarily due to the introduction of certain new product
lines.
The Company's level of unfilled-orders-to-ship (Backlog) increased 211% to
$5,801,309 for the current period from $1,865,545 at March 31, 1997 primarily
due to the record breaking level of Bookings received during the prior quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit was ($3,249,084) at March 31, 1998, a
decrease in working capital of ($4,903,941) from $1,654,857 at December 31,
1997. This change is primarily a result of the reclassification of debt from
long-term to short-term, based on due dates.
Net cash used in operating activities was $1,117,896 for the current
period, as compared to $1,626,243 used in the three month period ended March 31,
1997.
Cash used in investing activities, consisting of additions to equipment,
was $26,606 for the current period as compared to the prior period amount of
$82,188.
The Company derived net cash from financing activities of $609,606 and
$1,895,330 during the periods ended March 31, 1998 and March 31, 1997,
respectively.
As a result of the foregoing, the Company decreased its cash balances by
($534,897) during the current period, compared to an increase in cash balance by
$186,899 for the three month period ended March 31, 1997.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBIT DESCRIPTION
3.1* Restated Certificate of Incorporation
3.2* Bylaws, as amended and restated
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter covered by
this report.
* Incorporated by reference from Registrant's report on Form
10-Q, filed March 11, 1997.
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: April 30, 1998 RADYNE CORP.
----------------
By: /s/ Robert C. Fitting
---------------------------
Robert C. Fitting
President
By: /s/ Garry D. Kline
---------------------------
Garry D. Kline
Chief Financial Officer
10
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the six month period ended June 30, 1998.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-11685-NY
RADYNE CORP.
------------
(Exact name of registrant as specified in its charter)
NEW YORK
--------
(State or other jurisdiction of incorporation or organization)
11-2569467
----------
(IRS EMPLOYER IDENTIFICATION NO.)
5225 South 37th Street, Phoenix, AZ 85040
-----------------------------------------
(Address of principal executive offices)
602-437-9620
------------
(Registrant's Telephone number)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements, for the past 90 days.
YES |X| NO |_|
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
YES |X| NO |_|
The registrant had 5,931,346 shares of its common stock, par value
$.002, outstanding as of June 30, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
RADYNE CORP.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
ITEM 1 Unaudited Audited
<S> <C> <C>
Current Assets:
Cash & Cash Equivalents $ 813,648 $ 569,692
Account Receivable, less allowance
for doubtful accounts of $17,000 and $15,000 1,621,315 2,359,443
Inventories 4,693,509 5,389,920
Prepaids and Other Current Assets 51,239 68,076
------------ ------------
Total Current Assets 7,179,711 8,387,131
------------ ------------
Property and Equipment - Net 1,390,416 1,322,551
------------ ------------
Other Assets:
Designs and Drawings - Net of accumulated amortization
of $822,065 and $705,404 respectively 357,935 471,935
Deposits 50,000 50,000
------------ ------------
Total Other Assets 407,935 521,935
------------ ------------
Total Assets $ 8,978,062 $ 10,231,617
============ ============
Liabilities and Stockholders' Capital Deficiency
Current liabilities:
Notes payable under lines of credit $ 5,000,000 $ 5,000,000
Notes payable to affiliates 5,368,272 --
Obligations under capital leases-Current
Portion 90,068 109,258
Accounts Payable - trade 690,913 667,202
Accounts Payable - affiliates -- 16,062
Accrued Liabilities 1,063,646 901,032
Taxes payable 29,862 38,720
------------ ------------
Total Current Liabilities 12,242,761 6,732,274
------------ ------------
Note Payable under Line of Credit Agreement -- 4,500,000
Obligation under Capital Leases 53,768 93,543
Taxes Payable 30,496 55,861
------------ ------------
Total Liabilities 12,327,025 11,381,678
------------ ------------
Stockholders' Capital Deficiency:
Common Stock, $.002 par value, 20,000,000 shares
authorized, shares issued and outstanding,
5,931,346 at June 30, 1998 and December 31, 1997 11,862 11,862
Additional Paid-In Capital 5,694,806 5,694,806
Accumulated Deficit (9,055,631) (6,816,643)
Notes Receivable - employees -- (40,086)
------------ ------------
Total Stockholders' Capital Deficiency (3,348,963) (1,150,061)
------------ ------------
Total $ 8,978,062 $ 10,231,617
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
2
<PAGE>
RADYNE CORP.
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
<S> <C> <C> <C> <C>
Net Sales $ 2,717,965 $ 2,811,596 $ 6,666,465 $ 5,552,264
Cost of Sales 2,669,607 1,654,095 5,424,435 3,333,906
--------------------------------------------------------
Gross Profit 48,358 1,157,501 1,242,030 2,218,358
--------------------------------------------------------
Operating Expenses:
Selling, general and administrative 868,070 926,780 1,737,556 1,738,061
Research and development 708,700 572,079 1,367,644 1,123,721
--------------------------------------------------------
Total Operating Expenses 1,576,770 1,498,859 3,105,200 2,861,782
--------------------------------------------------------
Loss from operations (1,528,412) (341,358) (1,863,170) (643,424)
Interest Expense - Net 198,217 162,961 375,818 335,048
--------------------------------------------------------
Net (Loss) $(1,726,629) $ (504,319) $(2,238,988) $ (978,472)
========================================================
Basic and Diluted Net (loss) per common shares $ (0.29) $ (0.11) $ (0.38) $ (0.24)
========================================================
Weighted average number of common shares
outstanding 5,931,346 4,443,110 5,931,346 4,122,303
========================================================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE>
RADYNE CORP.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Month Ended Six Month Ended
June 30, 1998 June 30, 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $(2,238,988) $ (978,473)
Adjustments to reconcile net loss to cash flows used
in operating activities:
Depreciation and Amortization 261,603 222,065
Changes in operating assets and liabilities:
Accounts Receivable 738,128 394,620
Inventories 696,411 (1,630,695)
Prepaid and Other Current Assets 16,837 (23,506)
Accounts Payable - Trade 23,711 12,210
Accounts Payable - Affiliates (16,062) (436,362)
Accrued Liabilities 162,614 (157,487)
Taxes Payable (34,223) (20,105)
-----------------------------
Net Cash used in Operating Activities (389,969) (2,617,733)
-----------------------------
Cash flows from investing activities:
Capital Expenditures (215,468) (356,282)
-----------------------------
Cash flows from financing activities:
Net Borrowing from or (Payment on) Notes Payable under
Line of Credit Agreements (4,500,000) 5,506,180
Proceeds from Notes Payable to Affiliates 5,368,272 --
Payments on Notes Payable to Affiliates -- (6,600,000)
Net Proceeds from sale of common stock -- 5,154,802
Notes Receivable - employees 40,086 (96,500)
Principal payments on capital lease obligations (58,965) (10,158)
-----------------------------
Net Cash provided by financing activites 849,393 3,954,324
-----------------------------
Net increase (decease) in Cash 243,956 980,309
Cash, Beginning of year 569,692 186,488
-----------------------------
Cash, End of Period $ 813,648 $ 1,166,797
=============================
Supplemental Disclosure of cash flow information:
Interest paid $ 313,602 $ 367,509
=============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
RADYNE CORP.
Notes to Condensed Financial Statements
(Information for June 30, 1998 and June 30, 1997 is Unaudited)
1. Business
Radyne Corp. (the "Company") was incorporated on November 25, 1980 and
commenced operations on May 22, 1981. On August 12, 1996 the Company became a
majority owned subsidiary of Stetsys US, Inc ("ST"). The Company designs,
manufactures and sells products, systems and software used for the transmission
and reception of data over satellite and cable communications networks.
2. Summary of Significant Accounting Policies
(a) Basis of presentation
The interim unaudited condensed financial statements furnished reflect
all adjustments which are, in the opinion of management, necessary for a fair
statement of financial position as of June 30, 1998 and the results of
operations for the three and six months ended June 30, 1998 and 1997, and cash
flows for the six months ended June 30, 1998 and 1997. Such adjustments are of a
normal recurring nature. The financial statements and notes have been prepared
in accordance with the requirements of Form 10-Q and consequently do not include
all of the disclosure normally required by generally accepted accounting
principles. This information should be read in conjunction with the financial
statements included in the Company's Form 10-K for the year ended December 31,
1997.
The results of operations for the interim period are not necessarily
indicative of the results to be expected for the full year.
(b) Revenue Recognition
The Company recognizes revenue upon shipment of products.
(c) Inventories
Inventories, consisting of satellite modems, converters and related
products, are valued at the lower of cost (first-in, first-out) or market value
including material, direct labor and overhead costs.
(d) Property and Equipment
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to operations as incurred, and improvements that extend
the useful lives of assets are capitalized. Depreciation and amortization of
machinery and equipment are computed using the straight-line method over the
estimated useful lives of three to seven years.
(e) Designs and Drawings
The valuation of designs and drawings is the result of adjustments made
by the Company to adopt Fresh Start reporting in accordance with AICPA Statement
of Position 90-7, `Financial Reporting By Entities in Reorganization Under the
Bankruptcy Code,' and represents the excess reorganization value that has been
applied to the acquired technology supporting the Company's products.
Amortization of designs and drawings is computed using the straight-line method
over an estimated useful life of four to seven years.
(f) Research and Development
The cost of research and development is charged to expense as incurred.
(g) Taxes on Income
Radyne will file a consolidated federal income tax return with ST
through June 1997 (conclusion of the below described Rights Offering).
Subsequent to June 1997, Radyne will file separate federal income tax returns.
Income taxes have been computed as if the Company filed separate income tax
returns for each year.
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
consequences attributed to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Differences between income for financial and tax reporting
purposes arise primarily from amortization of certain designs and drawings
5
<PAGE>
and accruals for warranty reserves and compensated absences. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized as income in the period that includes the
enactment date.
(h) Earnings (Loss) Per Share
The Company presents earnings (loss) per share in accordance with
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
No. 128"). SFAS No. 128 prescribes a presentation of basic earnings per share,
which is calculated utilizing only weighted average common shares outstanding,
and a diluted earnings per share which gives effect to all dilutive potential
common shares outstanding during the reporting periods.
(i) Rights Offering
In November 1996 the Board of Directors approved the distribution to
stockholders, other than the Company's principal stockholder, ST, of
subscription rights for the purchase of up to 215,833 shares of the Company's
common stock at a price of $2.50 per share. The Board of Directors further
approved the distribution of subscription rights to an affiliate of ST to
purchase up to 2,040,000 shares of the Company's common stock at a price of
$2.50 per share. This Rights Offering became effective on May 12, 1997 and was
concluded in June. ST's affiliate exercised 1,976,000 of its rights and
individuals associated with such affiliate exercised another 34,000. 51,525
rights issued to stockholders other than ST were also exercised. In a related
offering under the Company's Incentive Stock Option Plan, 110,100 shares of the
Company's common stock were purchased by employees at $2.50 per share. Total
proceeds received from the Rights Offering were partially offset by $336,000 of
associated costs. The proceeds from the exercise of these rights were used, in
part, to satisfy notes payable to affiliates.
(j) Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130
Reporting Comprehensive Income, in the quarter ended March 31, 1998.
Comprehensive income is the same as net income for the quarter.
6
<PAGE>
Notes to Financial Statements
3 Inventories June 30, 1998 December 31, 1997
Unaudited Audited
Inventories consist of the following:
Raw materials and components $ 3,013,000 $ 2,605,397
Work in Process 1,178,007 1,124,929
Finished Goods 682,502 1,950,594
----------------------------
Subtotal 4,873,509 5,680,920
----------------------------
Less Valuation Allowance (180,000) (291,000)
----------------------------
Total $ 4,693,509 $ 5,389,920
============================
The Company expensed $911,000 to revalue inventory including revisions to
standard costs and a provision for obsolescence.
4 Property and Equipment June 30, 1998 December 31, 1997
Unaudited Audited
Property and Equipment consist of the
following:
Machinery and Equipment $ 1,480,340 $ 1,298,715
Furniture and Fixtures 407,391 373,548
----------------------------
Subtotal 1,887,731 1,672,263
----------------------------
Less: Accumulated depreciation (497,315) (349,712)
----------------------------
Total $ 1,390,416 $ 1,322,551
============================
5 Accrued Liabilities June 30, 1998 December 31, 1997
Unaudited Audited
Accrued liabilities consist of the
following:
Wages and related payroll taxes $ 392,970 $ 486,840
Interest Expense 246,185 183,968
Professional fees 81,000 85,500
Warranty Reserve 105,000 105,000
Other 238,491 39,724
----------------------------
Total $ 1,063,646 $ 901,032
============================
7
<PAGE>
6. Related Party Transactions
Sales to Engineering and Technical Services, Inc. and Agilis
Communication Technologies Pte Ltd, companies under common control with Radyne,
for the three months ended June 30, 1998 and 1997 were $111,575 and $121,160,
respectively. Cost of such sales for the same periods were $70,244 and $90,567,
respectively. For the six months ended June 30, 1998 and 1997 sales were
$149,756 and $466,210, respectively. Cost of such sales for the same periods
were $81,703 and $348,494, respectively.
Accounts Receivable from affiliates at June 30, 1998 and December
31,1997 was $52,260 and $19,505, respectively.
Notes payable to affiliate (ST) outstanding at June 30, 1998 and
December 31, 1997 were $5,368,272 and $ 0, respectively. These notes bear
interest at rates from 6.625% to 6.844% and mature at various dates between
January 4, 1999 and January 15, 1999.
Interest expense on notes payable to affiliates was $73,926 and $57,610
for the three months ended June 30, 1998 and 1997, respectively. For the six
months ended June 30, 1998 and 1997, interest expense on notes payable to
affiliates was $166,012 and $105,929, respectively.
Accrued interest on notes payable to affiliates was $166,012 at June
30, 1998 compared to $0 at December 31, 1997.
7. Notes Payable
The Company had a note payable under a line of credit agreement with a bank that
permitted borrowings of up to $4,500,000. At December 31, 1997, outstanding
borrowings against the line were $4,500,000 plus accrued interest. On January
15, 1998, the Company repaid the note and related accrued interest with the
proceeds from affiliated debt. The bank line was subsequently terminated.
The Company has a $5,500,000 credit agreement with a bank that includes
$5,000,000 under an uncommitted line of credit facility and facilities for bank
guarantees and/or standby letters of credit of up to $500,000. An ST affiliate
has issued a nonbinding letter of awareness in connection with this credit
agreement. Borrowings under the line of credit bear interest at a fluctuating
rate equal to LIBOR or Citibank's Quoted Rate plus 1 percent per annum (6.688%
to 6.844% as of June 30, 1998). At June 30, 1998 and December 31, 1997,
outstanding borrowings against the line were $5,000,000. The credit agreement
requires that the Company maintain certain financial leverage ratios. The
Company is currently not in compliance with this requirement. This credit
facility is an uncommitted line of credit, which the bank may modify or cancel
without prior notice.
8
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Results of operations for the three month period ended June 30, 1998
compared to the three month period ended June 30, 1997, were as follows:
The Company's net sales decreased 3% to $2,717,965 during the period
ended June 30, 1998 from $2,811,596 during the period ended June 30, 1997.
Meager shipments to the Southeast Asian markets, due to the current economic
crisis in the region, as partially offset by increased sales to other regions,
was the primary reason for the sales decrease.
The Company's cost of sales increased to $2,669,607 (98% of sales)
during the period ended June 30, 1998 from $1,654,095 (59% of sales) during the
period ended June 30, 1997. Start-up costs associated with the delivery of new
products to the market place accounted for the high period costs. The Company
expensed $911,000 to revalue inventory including revisions to standard costs and
a provision for obsolescence.
Selling, general and administrative costs decreased to $868,070 (32% of
sales) during the current period from $926,780 (33% of sales) during the period
ended June 30, 1997. The decreased level of expenses for the period was, in
part, a result of lower commission expenses.
Research and development expenditures increased to $708,700 (26% of
sales) during the current period from $572,079 (20% of sales) during the period
ended June 30, 1997. The increased level of expenses for the period was a result
of the Company's redirection of efforts to marketing our newer lines of
products, the result of which was to raise the urgency for finishing the
development phase of the newer lines and to build improved features into current
lines.
Net interest expense increased from $162,961 in the period ended June
30, 1997 to $198,217 in the current period due mainly to an increase in the
Company's debt level.
Based on the decreases in margins and higher research and development
costs, the Company experienced a net loss of ($1,726,629) during the period
ended June 30, 1998 as compared with a net loss of ($504,319) during the period
ended June 30, 1997.
The Company's new-orders-booked (Bookings) decreased to $3,118,962 for
the current period from $5,341,368 for the period ended June 30, 1997.
The Company's level of unfilled-orders-to-ship (Backlog) increased 45%
to $6,202,307 for the current period from $4,269,002 at June 30, 1997 primarily
due to the record level of Bookings received during prior periods. Due to the
continuing nature of the economic crisis in Asia, the Company has eliminated
approximately $990,000 from its December 31, 1997 backlog associated with orders
from the region.
9
<PAGE>
RADYNE CORP
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Results of operations for the six month period ended June 30, 1998
compared to the six-month period ended June 30, 1997, were as follows:
The Company's net sales increased 20% to $6,666,465 during the period
ended June 30, 1998 from $5,552,264 during the six month period ended June 30,
1997 as a result of the Company's introduction of new products during and after
the prior period. A substantial portion of the sales increase (17% of sales)
came from the new "High-Speed" product lines that have enjoyed tremendous market
acceptance. Other products which contributed to the increase were the RCS-10 and
RCS-20 subsystems with their associated modems, the new DMD-2401 modem and the
RF product lines.
The Company's cost of sales as a percentage of net sales increased to
81% during the period ended June 30, 1998 from 60% during the six month period
ended June 30, 1997. Start-up costs associated with the delivery of new products
to the market accounted for the major portion of the increase in costs. The
Company expensed $911,000 to revalue inventory including revisions to standard
costs and a provision for obsolescence.
Selling, general and administrative costs decreased to $1,737,556 (26%
of sales) during the current period from $1,738,061 (31% of sales) during the
six month period ended June 30, 1997. The reduction as a percentage of sales was
primarily due to the increased level of sales for the period.
Research and development expenditures increased to $1,367,644 (21% of
sales) during the period ended June 30, 1998 from $1,123,721 (20% of sales)
during the six month period ended June 30, 1997. The increased level of expenses
for the period is a result of the Company's continued commitment to invest in
its' future through technological advances and its' efforts to improve our older
product lines for manufacturability and lower costs.
Net interest expense increased from $335,048 (6% of sales) in the six
month period ended June 30, 1997 to $375,819 (6% of sales) in the current period
due to an increase in the Company's debt level.
Based on the increases in costs and expenses as outlined above, the
Company experienced a net loss of ($2,238,989) during the period ended June 30,
1998 as compared with a net loss of ($978,472) during the six months ended June
30, 1997.
The Company's new-orders-booked (Bookings) increased 10% to $8,054,709
for the six month period ended June 30, 1998 from $7,348,001 for the period
ended June 30, 1997. This increase was primarily due to the successful
introduction of certain new product lines to the market during and after the
period ended June 30, 1997.
The Company's level of unfilled-orders-to-ship (Backlog) increased 45%
to $6,202,307 at June 30, 1998 from $4,269,002 at June 30, 1997 primarily due to
the increased Bookings referred to above and like increases in the previous six
months. Due to the continuing nature of the economic crisis in Asia, the Company
has eliminated approximately $990,000 from its December 31, 1997 backlog
associated with orders from the region.
Year 2000 Issue
The Company is in the process of performing a comprehensive review of
its Year 2000 issues and has completed its review of internal systems. The
majority of the Company's application software programs are purchased from and
maintained by vendors. Therefore, the Company is working with these software
vendors to verify these applications become Year 2000 compliant.
The Company presently believes that with modifications and updates to
existing software, the cost of which is not expected to be material, the Year
2000 problem will not pose significant operational problems for the Company's
internal systems.
As part of the Company's comprehensive review, it is continuing to verify the
Year 2000 readiness of third parties (vendors and customers) with whom the
Company has material relationships. The Company is not able to determine the
effect on the Company's results of operations, liquidity and financial condition
in the event the Company's material vendors and customers are not Year 2000
compliant. The Company will continue to monitor
10
<PAGE>
the progress of its material vendors and customers and formulate a contingency
plan at that point in time when the Company does not believe a material vendor
or customer will be compliant.
Liquidity and Capital Resources
The Company's working capital deficit was ($5,063,050) at June 30,
1998, a decrease in working capital of ($6,717,907) from $1,654,857 at December
31, 1997. The proceeds of a $5,368,272 short term loan from affiliate ST, were
used, in part, to satisfy the $4,500,000 long term debt to a bank. This action
and the current period loss are the primary reasons for the reduction in working
capital.
Net cash used in operating activities was $389,969 for the current
period, as compared to $2,617,733 used in the six-month period ended June 30,
1997. The primary reason for the reduction of cash used for operating activities
during the current period was changes in inventory levels and accounts payable
to affiliates.
Cash used in investing activities, consisting of additions to
equipment, was $215,468 for the current period as compared to the prior period
amount of $356,282.
The Company derived net cash from financing activities of $849,393 and
$3,954,324 during the periods ended June 30, 1998 and 1997, respectively. The
primary reason for the difference in cash generated from financing activities
during the respective periods was the sale of common stock in 1997.
As a result of the foregoing, the Company increased its cash balances
by $243,956 during the current period, compared to an increase in cash balance
of $980,309 for the six-month period ended June 30, 1997.
The Company believes that its working capital, along with borrowings
available from its bank and other commitments from its affiliates, and
anticipated cash flow from operations will provide adequate sources to fund
operations for at least the next twelve months.
Item 4 - Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders was held on May 5, 1998. Proxies
were neither solicited nor given. 5,378,000 shares were represented at the
meeting. The following matters were voted on at the meeting:
(1) The board of directors was reelected in its entirety by all
5,378,000 shares represented at the meeting.
(2) Amendment of the Company's Certificate of Incorporation (A)
prescribing a majority vote of outstanding shares for the
adoption or approval of a plan of merger or consolidation, the
sale, lease, exchange or other disposition of all or
substantially all of the assets of the Company, or a plan of
binding share exchanges, and (B) permitting the shareholders
to act without a meeting by written consent of the holders of
less than all of the outstanding shares. All 5,378,000 shares
represented at he meeting were voted in favor of both
amendments.
(3) Ratification of the selection of Deloitte & Touche LLP as the
Company's independent accountants for the fiscal year ended
December 31, 1997. All 5,378,000 shares represented at the
meeting were voted in favor of ratification.
11
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibit Description
------- -----------
3.1 Restated Certificate of Incorporation
3.2* Bylaws, as amended and restated
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
covered by this report.
* Incorporated by reference from Registrant's report on
Form 10-Q, filed March 11, 1997.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: August 13, 1998 RADYNE CORP.
By: /s/ Robert C. Fitting
---------------------------------
Robert C. Fitting
President
By: /s/ Garry D. Kline
---------------------------------
Garry D. Kline
Chief Financial Officer
13
<PAGE>
EXHIBIT 13.4
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended September 30, 1998.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-11685-NY
RADYNE CORP.
------------
(Exact name of registrant as specified in its charter)
NEW YORK
--------
(State or other jurisdiction of incorporation or organization)
11-2569467
----------
(IRS EMPLOYER IDENTIFICATION NO.)
3138 East Elwood Street, Phoenix, AZ 85034
------------------------------------------
(Address of principal executive offices)
602-437-9620
------------
(Registrant's Telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements, for
the past 90 days.
YES |X| NO |_|
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
YES |X| NO |_|
The registrant had 5,931,346 shares of its common stock, par value $.002,
outstanding as of September 30, 1998.
1
<PAGE>
PART I - FINANCIAL INFORMATION
RADYNE CORP.
CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
Item 1 Unaudited Audited
<S> <C> <C>
Current Assets:
Cash & Cash Equvalents $ 775,832 $ 569,692
Restricted Cash 10,000,000 0
Account Receivable, less allowance
for doubtful accounts of $23,000 and $15,000 respectively 2,198,026 2,359,443
Inventories 4,269,540 5,389,920
Prepaids and Other Current Assets 452,889 68,076
------------ ------------
Total Current Assets 17,696,287 8,387,131
------------ ------------
Property and Equipment - Net 1,487,996 1,322,551
------------ ------------
Other Assets:
Designs and Drawings - Net of accumulated amortization
of $876,404 and $705,404 respectively 300,935 471,935
Deposits 50,000 50,000
------------ ------------
Total Assets $ 19,535,218 $ 10,231,617
============ ============
Liabilities and Stockholders' Capital Deficiency
Current Liabilities:
Notes payable under lines of credit $ 5,500,000 $ 5,000,000
Notes payable to parent 15,618,272 0
Obligations under capital leases 78,145 109,258
Accounts Payable - trade 1,021,948 667,202
Accounts Payable - affiliates 0 16,062
Accrued Liabilities 1,124,102 901,032
Taxes payable 53,845 38,720
------------ ------------
Total Current Liabilities 23,396,312 6,732,274
------------ ------------
Long Term Liabilities:
Notes payable under lines of credit 0 4,500,000
Obligation under Capital Leases 37,513 93,543
Taxes Payable 0 55,861
------------ ------------
Total Long Term Liabilities: 37,513 4,649,404
------------ ------------
Total Liabilities 23,433,825 11,381,678
Stockholders' Capital Deficiency
Common Stock, $0.002 par value, 20,000,000 shares authorized,
shares issued and outstanding, 5,931,346 at September 30, 1998
and December 31, 1997, respectively 11,862 11,862
Additional Paid-In Capital 5,694,806 5,694,806
Accumulated Deficit (9,605,275) (6,816,643)
Notes Receivable - employees 0 (40,086)
------------ ------------
Total Stockholders' Capital Deficiency (3,898,607) (1,150,061)
------------ ------------
Total $ 19,535,218 $ 10,231,617
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
2
<PAGE>
PART I - FINANCIAL INFORMATION
RADYNE CORP.
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Sales $ 3,307,146 $ 4,434,112 $ 9,973,611 $ 9,986,377
Cost of Sales 2,280,421 2,397,597 7,704,856 5,529,267
--------------------------------------------------------
Gross Profit 1,026,725 2,036,515 2,268,755 4,457,110
--------------------------------------------------------
Operating Expenses:
Selling, general and
administrative 806,430 1,219,255 2,543,986 3,159,553
Research and
development 577,166 569,177 1,944,809 1,692,899
--------------------------------------------------------
Total Operating 1,383,596 1,788,432 4,488,795 4,852,452
Expenses --------------------------------------------------------
Income (loss) from operations
before interest expense (356,871) 248,083 (2,220,040) (395,342)
Interest Expense - Net 192,773 162,270 568,592 497,318
--------------------------------------------------------
Net Income (loss) before
provision for Income Taxes (549,644) 85,813 (2,788,632) (892,660)
Provision for Income Taxes 0 0 0 0
--------------------------------------------------------
Net Income (loss) available
to common stockholders $ (549,644) $ 85,813 $(2,788,632) $ (892,660)
========================================================
Earnings (loss) per common
share - basic $ (0.09) $ 0.01 $ (0.47) $ (0.19)
========================================================
Earnings (loss) per common
share - diluted $ (0.09) $ 0.01 $ (0.47) $ (0.19)
========================================================
Weighted average common and
equivilent shares - basic 5,931,346 6,432,854 5,931,346 4,734,185
========================================================
Weighted average common and
equivilent shares - diluted 5,931,346 6,432,854 5,931,346 4,734,185
========================================================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE>
PART I - FINANCIAL INFORMATION
RADYNE CORP.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $ (2,788,632) $ (892,660)
Adjustments to reconcile net loss to cash flows used
in operating activities:
Depreciation and Amortization 395,653 347,202
Changes in operating assets and liabilities:
Accounts Receivable 161,417 (850,970)
Inventories 1,120,380 (3,258,394)
Prepaid and Other Current Assets (384,813) 60,307
Accounts Payable - Trade 354,746 414,821
Accounts Payable - Affiliates (16,062) (436,362)
Accrued Liabilities 223,070 (122,372)
Taxes Payable (40,736) (21,232)
----------------------------------------
Net Cash used in Operating Activities (974,977) (4,759,660)
----------------------------------------
Cash flows from investing activities:
Investment in Restricted Cash (10,000,000) 0
Capital Expenditures (390,098) (555,544)
----------------------------------------
Net Cash flows from investing activities: (10,390,098) (555,544)
----------------------------------------
Cash flows from financing activities:
Net borrowing from or (payment on) Notes
Payable under Line of Credit Agreements (4,000,000) 6,706,180
Proceeds from Notes Payable to Affiliates 15,618,272 0
Payments on Notes Payable to Affiliates 0 (6,600,000)
Net Proceeds from sale of common stock 0 5,093,367
Notes Receivable - employees 40,086 (59,228)
Principal payments on capital lease obligations (87,143) (11,520)
----------------------------------------
Net Cash provided by financing activites 11,571,215 5,128,799
----------------------------------------
Net increase (decease) in Cash 206,140 (186,405)
Cash, Beginning of Year 569,692 186,488
----------------------------------------
Cash, End of Period $ 775,832 $ 83
========================================
Supplemental Disclosure of cash flow information:
Interest paid $ 698,201 $ 622,738
========================================
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
RADYNE CORP.
Notes to Condensed Financial Statements
(Information for SEPTEMBER 30, 1998 and SEPTEMBER 30, 1997 is Unaudited)
1. Business
Radyne Corp. (the "Company") was incorporated on November 25, 1980 and
commenced operations on May 22, 1981. On August 12, 1996 the Company became a
majority owned subsidiary of Stetsys US, Inc ("ST"). The Company designs,
manufactures and sells products, systems and software used for the transmission
and reception of data over satellite and cable communications networks.
2. Summary of Significant Accounting Policies
(a) Basis of presentation
The interim unaudited condensed financial statements furnished reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of financial position as of September 30, 1998 and the results of
operations for the three and nine months ended September 30, 1998 and 1997, and
cash flows for the nine months ended September 30, 1998 and 1997. Such
adjustments are of a normal recurring nature. The financial statements and notes
have been prepared in accordance with the requirements of Form 10-Q and
consequently do not include all of the disclosure normally required by generally
accepted accounting principles. This information should be read in conjunction
with the financial statements included in the Company's Form 10-K for the year
ended December 31, 1997.
The results of operations for the interim period are not necessarily
indicative of the results to be expected for the full year.
(b) Revenue Recognition
The Company recognizes revenue upon shipment of products.
(c) Restricted Cash
Restricted cash consists of $10,000,000 derived from a loan from an
affiliate. This loan is restricted for the purpose of funding the purchase of
Comstream Holdings, Inc. (See Note 8, Subsequent Event.)
(d) Inventories
Inventories, consisting of satellite modems, converters and related
products, are valued at the lower of cost (first-in, first-out) or market value
including material, direct labor and overhead costs.
(e) Property and Equipment
Property and equipment is stated at cost. Expenditures for repairs and
maintenance are charged to operations as incurred, and improvements that extend
the useful lives of assets are capitalized. Depreciation and amortization of
machinery and equipment are computed using the straight-line method over the
estimated useful life of four to seven years.
5
<PAGE>
RADYNE CORP.
Notes to Condensed Financial Statements
(Information for SEPTEMBER 30, 1998 and SEPTEMBER 30, 1997 is Unaudited)
(f) Designs and Drawings
The valuation of designs and drawings is the result of adjustments made by
the Company to adopt Fresh Start reporting in accordance with AICPA Statement of
Position 90-7, `Financial Reporting By Entities in Reorganization Under the
Bankruptcy Code,' and represents the excess reorganization value that has been
applied to the acquired technology supporting the Company's products.
Amortization of designs and drawings is computed using the straight-line method
over an estimated useful life of four to seven years.
(g) Research and Development
The cost of research and development is charged to expense as incurred.
(h) Taxes on Income
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
consequences attributed to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Differences between income for financial and tax reporting purposes arise
primarily from amortization of certain designs and drawings and accruals for
warranty reserves and compensated absences. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rate is recognized as income in the period that includes the enactment date.
(i) Earnings (Loss) Per Share
The Company presents earnings (loss) per share in accordance with
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
No. 128"). SFAS No. 128 prescribes a presentation of basic earnings per share,
which is calculated utilizing only weighted average common shares outstanding,
and a diluted earnings per share which gives effect to all dilutive potential
common shares outstanding during the reporting periods.
(j) Rights Offering
In November 1996 the Board of Directors approved the distribution to
stockholders, other than the Company's principal stockholder, ST, of
subscription rights for the purchase of up to 215,833 shares of the Company's
common stock at a price of $2.50 per share. The Board of Directors further
approved the distribution of subscription rights to an affiliate of ST to
purchase up to 2,040,000 shares of the Company's common stock at a price of
$2.50 per share. This Rights Offering became effective on May 12, 1997 and was
concluded in June 1997. ST's affiliate exercised 1,976,000 of its rights and
individuals associated with such affiliate exercised another 34,000. 51,525
rights issued to stockholders other than ST were also exercised. In a related
offering under the Company's Incentive Stock Option Plan, 110,100 shares of the
Company's common stock were purchased by employees at $2.50 per share. Total
proceeds received from the Rights Offering were partially offset by $336,000 of
associated costs. The proceeds from the exercise of these rights were used, in
part, to satisfy notes payable to affiliates.
(k) Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130
Reporting Comprehensive Income, in the quarter ended March 31, 1998.
Comprehensive income is the same as net income for the quarter and nine months
ended September 30, 1998.
6
<PAGE>
PART I - FINANCIAL INFORMATION
RADYNE CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
3 Inventories September 30, December 31,
1998 1997
(Unaudited) (Audited)
<S> <C> <C>
Inventories consist of the following:
Raw materials and components $ 1,824,723 $2,605,397
Work in Process 2,261,352 1,124,929
Finished Goods 363,465 1,950,594
---------------------------------
Subtotal 4,449,540 5,680,920
---------------------------------
Less Valuation Allowance (180,000) (291,000)
---------------------------------
Total $ 4,269,540 $5,389,920
=================================
</TABLE>
<TABLE>
<CAPTION>
4 Accrued Liabilities September 30, December 31,
1998 1997
(Unaudited) (Audited)
<S> <C> <C>
Accrued liabilities consist of the
following:
Wages and related payroll taxes $356,068 $ 486,840
Interest expense 313,902 183,968
Warranty reserve 140,000 85,500
Professional fees 140,500 105,000
Other 173,632 39,724
---------------------------------
Total $ 1,124,102 $ 901,032
==================================
</TABLE>
5 Earnings (Loss) per Share
A summary of the reconciliation from basic earnings (loss) per share
to diluted earnings (loss) per share for the nine month periods ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Net (loss) $(2,788,632) $ (892,660)
----------------------------------
Basic EPS - weighted average shares
outstanding 5,931,346 4,734,185
----------------------------------
Basic earnings (loss) per share $ (0.47) $ (0.19)
----------------------------------
Diluted EPS - weighted average shares
outstanding 5,931,346 4,734,185
Diluted earnings (loss) per share $ (0.47) $ (0.19)
</TABLE>
7
<PAGE>
RADYNE CORP.
Notes to Condensed Financial Statements
(Information for SEPTEMBER 30, 1998 and SEPTEMBER 30, 1997 is Unaudited)
6. Related Party Transactions
Sales to Engineering and Technical Services, Inc. and Agilis Communication
Technologies Pte Ltd, companies under common control with Radyne, for the three
months ended September 30, 1998 and 1997 were $13,589 and $199,800,
respectively. Cost of such sales for the same periods were $5,336 and $151,492,
respectively. For the nine months ended September 30, 1998 and 1997 sales to
these companies were $163,345 and $666,010, respectively. Cost of such sales for
the same periods were $87,039 and $499,986, respectively.
Accounts Receivable from affiliates at September 30, 1998 and December 31,
1997 was $59,221 and $281,775, respectively.
Notes payable to parent (ST) outstanding at September 30, 1998 and
December 31, 1997 were $15,618,272 and $ 0, respectively. These notes bear
interest at rates from 6.388% to 6.844% and mature during 1999. Of this amount,
$10,000,000 was borrowed in September 1998 for the acquisition of Comstream
Holdings, Inc ("Comstream") (See Note 8).
Interest expense on notes payable to parent was $99,916 and $0 for the
three month period ended September 30, 1998 and 1997, respectively. For the nine
month periods, which ended September 30, 1998 and 1997, interest expense on
notes payable to parent was $265,928 and $147,929 respectively.
7. Notes Payable
The Company had a note payable under a line of credit agreement with a
bank that permitted borrowings of up to $4,500,000. At December 31, 1997,
outstanding borrowings against the line were $4,500,000 plus accrued interest.
On January 15, 1998, the Company repaid the note and related accrued interest
with the proceeds from affiliated debt. The bank line was subsequently
terminated.
The Company has a $20,500,000 credit agreement with Citibank, N.A. that
includes $20,000,000 available under an uncommitted line of credit facility and
facilities for bank guarantees and/or standby letters of credit up to $500,000.
An affiliate of ST has issued a nonbinding letter of awareness in connection
with this credit agreement. Borrowings under the line of credit bear interest at
a fluctuating rate equal to LIBOR plus 1% per annum or alternative Citibank's
Quoted Rate plus 1% per annum (rates varied from 6.4063% to 6.75% on balances
owed at September 30, 1998). The credit agreement requires the Company to
maintain certain financial leverage ratios. The availability of additional
borrowings under the credit agreement expires September 29, 1999 and is
renewable annually at the option of the Bank. The Company owed principal of
$5,500,000 under the line of credit as of September 30, 1998. Subsequent to the
end of the period reported on herein, the Company borrowed another $500,000
under the credit agreement at 6.1563%.
8. Subsequent event
On August 28, 1998, Radyne Corporation signed a definitive agreement (the
"Agreement") to acquire ComStream from Spar Aerospace Limited ("Spar"). On
October 15, 1998 (the "Closing Date"), Radyne acquired Comstream (the
"Acquisition"), with Comstream becoming a wholly owned subsidiary of Radyne.
On the Closing Date, Radyne purchased all of the outstanding shares of common
stock of ComStream for an aggregate purchase price of $17 million, of which $10
million was paid in cash at the closing and $7 million will be payable up to
nine months thereafter pursuant to a note (the "Note") which is convertible into
Radyne common stock, par value $.002 per share (the "Common Stock"), under
certain circumstances. A Registration Rights Agreement would provide Spar with
piggy-back and demand registration rights in the event that the Note is
converted into Common Stock.
The Acquisition will be accounted for under the purchase method and will result
in a one-time charge, which represents the value assigned to purchased
8
<PAGE>
"in-process-research-and-development" ("IPR&D"). The amounts of these charges
are dependent upon the valuation analysis, which is underway, by an independent
valuation consulting firm. In addition, Radyne expects to incur a charge for
restructuring costs related to employee severance and a lease termination.
Radyne intends to finance the repayment of debt incurred for the Acquisition,
certain planned restructuring costs and its ongoing working capital needs
through (i) a rights offering pursuant to which it will offer approximately
$17,700,000 of Common Stock to its existing shareholders and (ii) the existing
bank line of credit. This offering will be made strictly by means of a
prospectus which will be distributed to shareholders of record at a date
selected at the time of Radyne's filing a registration statement for such
offering with the Securities and Exchange Commission.
9
<PAGE>
RADYNE CORP
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
This form 10-Q may contain forward-looking statements that involve risks
and uncertainties, including, but not limited to, the impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources, product development and
commercialization risks, costs associated with the integration and
administration of acquired operations, capacity and supply constraints or
difficulties, the results of financing efforts, Year 2000 issues and other risks
detailed from time to time in the Company's Securities and Exchange Commission
filings. The Company filed it 1997 Form 10-K in March, 1998. Please refer to
this document for a more detailed discussion of the risks and uncertainties
associated with the Company's future operations.
Results of Operations
The Company's assets have increased from $10,231,617 at December 31, 1997
to $19,535,218 at September 30, 1998, while the Company's liabilities have
increased from $11,381,678 at December 31, 1997 to $23,433,825 at September 30,
1998. This increase was due primarily to an increase in restricted cash of
$10,000,000 derived from a loan from an affiliate (See Note 6, Related Party
Transactions). The purpose of this loan was to have sufficient cash on hand to
fund the purchase of Comstream Holdings, Inc. from Spar Aerospace Limited, a
Canadian company, which closed on October 15, 1998 (See Note 8, Subsequent
Event).
Results of operations for the three month period ended September 30, 1998
compared to the three month period ended September 30, 1997, were as follows:
The Company's net sales decreased 25% to $3,307,146 during the period
ended September 30, 1998 from $4,434,112 during the period ended September 30,
1997 primarily as a result of a decline in sales into the Asian Market, due to
the continued unfavorable economic conditions in that market, during the current
period compared to the prior period.
The Company's cost of sales as a percentage of net sales increased to 69%
during the period ended September 30, 1998 from 54% during the period ended
September 30, 1997. Start-up costs associated with the delivery of new products
to the market place during the current period accounted for the increased costs.
Selling, general and administrative costs decreased to $806,430 (24% of
sales) during the current period from $1,219,255 (27% of sales) during the three
month period ended September 30, 1997. The decreased level of expenses was, in
part, due to the reduced sales commissions as a result of the lower sales output
during the current period as compared to the prior period.
Research and development expenditures increased to $577,166 during the
period ended September 30, 1998 from $569,177 during the period ended September
30, 1997. The increased level of expenses coincides with the Company's goals to
bring newer product lines to market.
Net interest expense increased from $162,270 in the period ended September
30, 1997 to $192,773 in the current period due to an increase in the Company's
debt level.
Based on the decrease in margins (higher costs in terms of percentage of
sales) as outlined above, the Company experienced a net loss of $549,644 during
the period ended September 30, 1998 as compared with net income of $85,813
during the period ended September 30, 1997.
The Company's new-orders-booked (Bookings) increased by 88% to $3,930,265
for the quarter ended September 30, 1998 from $2,094,061 for the period ended
September 30, 1997. This increase is primarily due to new product orders within
the quarter.
The Company's level of unfilled-orders-to-ship (Backlog) increased 35% to
$6,253,075 at September 30, 1998 from $4,621,790 at September 30, 1997 primarily
due to the level of Bookings received during the current quarter. About 70% of
the backlog is scheduled to be shipped by the end of the current calendar year.
10
<PAGE>
RADYNE CORP
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Results of operations for the nine month period ended September 30, 1998
compared to the nine month period ended September 30, 1997, were as follows:
The Company's net sales decreased slightly to $9,973,611 during the period
ended September 30, 1998 from $9,986,377 during the nine month period ended
September 30, 1997 as a result of the decline in sales to the Asian Market due
to its deteriorated economic situation. However, the market acceptance of the
Company's newer products is demonstrated by sales remaining level over the nine
month comparison in spite of the impact of the Asian economic situation. A
substantial portion of current period sales came from the new DMD-2401 modem
that has enjoyed positive market acceptance. Other products which contributed
were the RCS-10 and RCS-20 subsystems with associated modems, the RF product
lines, the new digital video products and the new lines of high-speed modems and
peripherals.
The Company's cost of sales as a percentage of net sales increased to 77%
during the nine months ended September 30, 1998 from 55% during the nine month
period ended September 30, 1997. An increase in start-up costs associated with
the delivery of new products to the market place during the current period
accounted for the major portion of the increase in costs. In June of 1998, the
Company expensed $911,000 to revalue inventory including revisions to standard
costs and a provision for obsolescence.
Selling, general and administrative costs decreased to $2,543,986 (26% of
sales) during the current period from $3,159,553 (32% of sales) during the nine
month period ended September 30, 1997. The decreased level of expenses for the
period (and the related reduction in costs in terms of percentage of sales) was,
in part, a result of the Company's cost containment measures. However the
Company's marketing expenses remain high as the Company has attempted to
position itself in the marketplace to compete head-to-head with larger
competitors without giving up margin advantages. Additionally, the Company has
embarked on a full-scale marketing effort to seek out new product opportunities,
which will enhance our current product lines and provide a full array of product
options for our customers.
Research and development expenditures increased to $1,944,809 (19% of
sales) during the nine months ended September 30, 1998 from $1,692,899 (17% of
sales) during the nine months ended September 30, 1997. The increased level of
expenses for the period was, in part, a result of new product development and
research to lower older product lines' manufacturing costs.
Net interest expense increased from $497,318 in the period ended September
30, 1997 to $568,592 in the current period due to an increase in the Company's
debt level.
Based mainly on lower gross margins as outlined above, the Company
experienced a net loss of ($2,788,632) during the period ended September 30,
1998 as compared with a net loss of ($892,660) during the nine month period
ended September 30, 1997.
The Company's new-orders-booked (Bookings) increased 22% to $11,489,973
for the nine months ended September 30, 1998 from $9,442,062 for the period
ended September 30, 1997. This increase was primarily due to the successful
introduction of certain new product lines to the market during the current
period.
The Company's level of unfilled-orders-to-ship (Backlog) increased 35% to
$6,253,075 at September 30, 1998 from $4,621,790 at September 30, 1997 primarily
due to the level of Bookings received during the current period. About 70% of
the above backlog is scheduled to be shipped by the end of the current calendar
year.
Year 2000 Issue
The Company recognizes the potential business impacts related to the Year
2000 computer system issue and is implementing a plan to assess and improve the
Company's state of readiness with respect to such issues. The year 2000 issue is
one where computer systems may recognize the designation "00" as the year 1900
when it is intended to mean the year 2000, resulting in system failure or
miscalculations.
Commencing in 1997, the Company began a comprehensive review of its
information technology systems, which the Company is dependent upon for the
conduct of day to day business operations, in order to determine the adequacy of
those systems in light of future business requirements. Year 2000 readiness was
one of the factors considered in the review process.
11
<PAGE>
The Company has completed its review of internal systems. The majority of
the Company's application software programs are purchased from and maintained by
vendors. Therefore, the Company is working with these software vendors to verify
these applications are, or will become, Year 2000 compliant.
The Company presently believes that all mission critical systems are Year
2000 compliant and therefore the Year 2000 issue will not pose significant
operational problems for the Company's internal systems. All Year 2000 costs to
date have been expensed and the Company does not expect to incur any significant
future costs related to the Year 2000 issue. However, the Company may choose to
upgrade certain existing software that is already Year 2000 compliant and, if it
does, the costs related to those upgrades will be capitalized in the normal
coarse of business.
As part of the Company's comprehensive review, it is continuing to verify
the Year 2000 readiness of third parties (vendors and customers) with whom the
Company has material relationships. The Company is not able to determine the
effect on the Company's results of operations, liquidity and financial condition
in the event the Company's material vendors and customers are not Year 2000
compliant. The Company will continue to monitor the progress of its material
vendors and customers and formulate a contingency plan if and when the Company
concludes that a material vendor or customer may not be compliant.
During the current period a Year 2000 readiness survey was sent to all of
the Company's material vendors and customers. The readiness surveys are
currently being collected for review and analysis. The Company has also started
to generate a formal Year 2000 plan. This plan document should be completed by
March 31, 1999.
Liquidity and Capital Resources
The Company's working capital deficit was ($5,700,025) at September 30,
1998, compared to working capital of $1,654,857 at December 31, 1997. The
decrease in working capital is primarily due to the maturation of $4,500,000 in
debt which was classified as long-term as of December 31, 1997 and has been
replaced with short term loans and losses incurred by the Company during the
period.
Net cash used in operating activities was $974,977 for the nine month
period ended September 30, 1998, as compared to $4,759,660 used in the nine
month period ended September 30, 1997, mainly due to decreased inventory and
account receivable levels and increases in accounts payable and accrued
liability levels.
Cash used in investing activities, consisting of additions to equipment,
amounting to $390,098 for the nine month period ended September 30, 1998 was
comparable to the prior period amount of $555,544.
The Company derived net cash from financing activities of $11,571,215 and
$5,128,799 during the nine month periods ended September 30, 1998 and September
30, 1997, respectively. A $10,000,000 loan was taken for the acquisition of
Comstream during the quarter ended September 30, 1998.
As a result of the foregoing, the Company increased its cash balance by
$10,206,140 for the nine month period ended September 30, 1998, as compared to a
decrease in its cash balance by $186,405 for the nine month period ended
September 30, 1997.
The Company believes that it will be able to satisfy its working capital
and capital expenditure requirements for the foreseeable future from existing
cash balances, from anticipated cash flow from operating activities, from funds
advanced under the line of credit agreement and from funds advanced from the
Company's parent. In this connection, the parent company has committed to
purchase approximately $16,000,000 worth of the Company's common stock in order
to enable the Company to retire a like amount of short term debt to the parent.
12
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibit Description
------- -----------
3.1* Restated Certificate of Incorporation
3.2** Bylaws, as amended and restated
27 Financial Data Schedule
(b) 1. A report on Form 8-K was filed with regard to Item 4,
Changes in Registrant's Certifying Accountant, on July 23,
1998.
2. An amended report on Form 8-K was filed with regard to Item
4, Changes in Registrant's Certifying Accountant, on July 31,
1998.
3. A report was filed on form 8-K with regard to Item 5, Other
Events (relating to Registrant's agreement to acquire the
shares of Comstream Holdings, Inc.) on August 28, 1998.
* Incorporated by reference from Registrant's report on Form
10-Q, filed August 14, 1998.
** Incorporated by reference from Registrant's report on Form
10-Q, filed March 11, 1997
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: November 12, 1998 RADYNE CORP.
-------------------
By: /s/ Robert C. Fitting
------------------------------
Robert C. Fitting
President
By: /s/ Garry D. Kline
------------------------------
Garry D. Kline
Chief Financial Officer
14
