<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 15, 1998
------------------
RADYNE COMSTREAM INC.
(Exact name of registrant as specified in its charter)
-------------------------------------------------------
NEW YORK 0-11685-NY 11-2569467
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification)
3138 EAST ELWOOD STREET, PHOENIX, ARIZONA 85034
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 602-437-9620
-------------
5225 SOUTH 37TH STREET, PHOENIX, ARIZONA 85040
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF ASSETS
On August 28, 1998, Radyne Corp. (the "Company"), which has since
changed its name to Radyne ComStream, Inc., signed a definitive agreement to
acquire ComStream Holdings, Inc. ("Comstream") from Spar Aerospace Limited
("Spar"). On October 15, 1998 (the "Closing Date"), the Company acquired
Comstream (the "Acquisition"), with Comstream becoming a wholly owned
subsidiary of the Company.
On the Closing Date, the Company purchased all of the outstanding shares of
common stock of Comstream for an aggregate purchase price of $17,000,000, of
which $10 million was paid in cash at the closing, using funds borrowed from its
controlling shareholder, and $7 million will be payable up to nine months
thereafter pursuant to a note (the "Note") which is convertible into the
Company's common stock, par value $.002 per share (the "Common Stock"), under
certain circumstances. The Company and Spar will also enter into a registration
rights agreement providing Spar with piggyback and demand registration rights,
in the event that the Note is converted into Common Stock.
The Acquisition will be accounted for under the purchase method and is
expected to result in a one-time charge of approximately $3.9 million, which
represents the value assigned to purchased in-process research and
development.
The Company intends to finance the Acquisition and its ongoing working
capital needs through (i) a rights offering pursuant to which it will offer
Common Stock to its existing shareholders and (ii) the extension and
enhancement of an existing bank line of credit. Stetsys Pte Ltd, the
Company's controlling shareholder has committed to purchase approximately
$16,040,000 of Common Stock pursuant to the rights offering at a price of
$3.73 per share. This is also the conversion price of the Note provided to
Spar as part of the consideration for the Acquisition. In addition, the
Company's other shareholders will be offered approximately $1,660,000 of
shares of Common Stock at the same price per share, in amounts proportionate
to their shareholdings. This offering will be made strictly by means of a
prospectus which will be distributed to shareholders of record at a date
selected at the time of the Company's filing a registration statement for
such offering with the Securities and Exchange Commission.
The Company, with headquarters in Phoenix, Arizona and operations in San
Diego, California, designs, manufactures and sells satellite modems and earth
stations including digital video and high speed modems, and ancillary
products, as well as digital data, audio and video satellite broadcast
receivers, into primarily international markets.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
a. Financial Statements of Businesses Acquired
Audited consolidated balance sheets of Comstream as of December 31, 1997
and 1996 and the related consolidated statements of operations, stockholder's
equity (deficit) and cash flows for each of the three years in the period
ended December 31, 1997.
Unaudited condensed interim consolidated balance sheet of Comstream as of
September 30, 1998, and the related consolidated statements of operations and
cash flows for each of the nine-month periods ended September 30, 1998 and
September 30, 1997.
b. Pro Forma Financial Information.
The attached unaudited pro forma condensed combined balance sheet for
the nine months ended September 30, 1998 and statement of operations for the
nine months ended September 30, 1998 and year ended December 31, 1997 give
effect to the purchase by the Company of all of the outstanding shares of
common stock of Comstream as of the beginning of the periods presented for
the statements of operations, for an aggregate purchase price of
$17,000,000, of which $10 million was paid in cash at the closing, using
funds borrowed from the Company's controlling shareholder, and $7 million
will be payable up to nine months thereafter pursuant to a note which is
convertible into the Company's Common Stock under certain circumstances.
Accordingly, the acquired assets and liabilities were recorded at their
estimated fair market value at the date of acquisition. The pro forma
combined condensed statements of operations for the year ended December 31,
1997 and the nine months ended September 30, 1998 assume that the acquisition
took place effective January 1, 1997. The unaudited pro forma condensed
combined balance sheet combines the Company's balance sheet as of September
30, 1998 with Comstream's balance sheet as of September 30, 1998, giving
effect to the Acquisition as if it had occurred on September 30, 1998.
The pro forma condensed combined financial information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred had the Acquisition been
consummated at the beginning of the periods presented, nor is it necessarily
indicative of future operating results or financial position.
The pro forma condensed combined financial information should be read in
conjunction with the audited historical consolidated financial statements and
the related notes thereto of Radyne and the audited financial statements and
notes thereto of Comstream included herein.
c. Exhibits
4.1* Convertible Promissory Note between Spar and the Company dated
October 15, 1998, with the form of Registration Rights Agreement
included as Appendix A thereto.
23.0 Consent of Independent Auditors.
* Previously filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: May 5, 1999
RADYNE COMSTREAM INC.
---------------------
(Registrant)
By: /s/ Robert C. Fitting
----------------------
Its: President and CEO
<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 for
the year ended December 31, 1997 and the nine months ended September 30, 1998
assume that the acquisition took place effective January 1, 1997. 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 2,799
2,799 b
Purchased Technology 2,500 b 2,500
Other Assets 351 416 767
-----------------------------------------------------------------------
Total Other Assets 351 4,117 1,598 6,066
-----------------------------------------------------------------------
Total Assets $ 19,535 $ 22,781 $ (9,552) $ 32,764
-----------------------------------------------------------------------
-----------------------------------------------------------------------
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) (60,760) 60,760 a (13,514)
(3,909) c
-----------------------------------------------------------------------
Total Stockholders' Capital Deficiency (3,899) 11,868 (15,777) (7,808)
-----------------------------------------------------------------------
Total Liabilities and Stockholders' $ 19,535 $ 22,781 $ (9,552) $ 32,764
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 681
510 d
------------- ------------- ------------- -------------
Total Operating Expenses 4,489 17,099 (135) 21,453
------------- ------------- ------------- -------------
Operating income (loss) (2,220) (8,630) 135 (10,715)
Interest expense 569 3,240 (3,240) e 1,580
1,011 e
------------- ------------- ------------- -------------
Loss from continuing operations $ (2,789) $ (11,870) $ 2,364 $ (12,295)
------------- ---------- ----------- -------------
------------- ---------- ----------- -------------
Loss per share $ (0.47) f $ (2.07)
------------- -------------
------------- -------------
Weighted average number of common shares 5,931,346 f 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
------ --------- ----------- ----- ---------
<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 --
680 d 680
Restructuring costs 3,500 3,500
------------- ------------ ------------ -------------
Total Operating Expenses 6,504 27,223 (156) 33,571
------------- ------------ ------------ -------------
Operating income (loss) (1,080) (3,924) 156 (4,848)
Interest expense 677 3,632 (3,632) e 2,025
1,348 e
Other Expense 98 98
------------- ------------ ------------ -------------
Loss from continuing operations $ (1,757) $ (7,654) $ 2,440 $ (6,971)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Loss per share $ (0.35) f $ (1.39)
------------- -------------
------------- -------------
Weighted average number of common shares
outstanding 5,012,664 f 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, 1997.
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 not acquired and, therefore, were reduced by $1,400,000 and
$1,275,000, respectively, in the pro forma statement 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
$2,799,000. Management had the primary responsibility for
estimating the fair values of the purchased technology and the
in-process research and development, which were determined
utilizing the discounted
F-37
<PAGE>
cash flow method within the income approach, as more fully
described below. 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 3,909,000
---------------------------------------------------------------------------------
Assumed liabilities (8,538,000)
---------------------------------------------------------------------------------
Accrued severance costs (1,600,000)
--------------
---------------------------------------------------------------------------------
Total fair value 14,201,000
---------------------------------------------------------------------------------
Consideration exchanged 17,000,000
--------------
---------------------------------------------------------------------------------
Excess of purchase price over fair value of assets $ 2,799,000
acquired --------------
--------------
---------------------------------------------------------------------------------
</TABLE>
c) The fair value of acquired in-process research and development of
$3,909,000 has been expensed in the period in which the acquisition
was completed and the accumulated deficit was increased.
This allocation represents the estimated fair value based on
risk-adjusted future cash flows related to the incomplete projects. At the date
of the acquisition, the development of these projects had not yet reached
technological feasibility and the research and development in process had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date.
F-38
<PAGE>
There are three generally accepted valuation methodologies useful for
valuing intellectual property and intangible assets: market approach, cost
approach, and income approach. The market approach is the most direct and easily
understood appraisal technique, utilizing data on comparable assets. The cost
approach seeks to measure the future benefits of ownership by quantifying the
amount of money that would be required to replace the future service capability
of the subject property. The income approach steps away from the cost of
constructing or creating a new asset and focuses on a consideration of the
income-producing capability of the asset.
The assets appraised in the valuation analysis included in-process
technology, developed technology and assembled workforce. Based upon the nature
of the assets, the income approach was considered most appropriate for analyzing
both the developed and in-process technologies. This valuation approach
considers the commercial profits and growth prospects of the products as well as
the relative investment risk of the required complementary assets.
Products-in-development at ComStream at the time of the acquisition
were classified as in-process technology. These include the following products
with their respective estimated completion dates:
Description Estimated Completion Date
----------- -------------------------
o A 2MB card Jan-99
o "CM601" modem modifications Mar-99
o "DT 8000" - a Ku-band 2 Watt earth station Dec-98
o "DBR 2000" - a new data broadcast receiver Jun-99
o "ABR 202" - a new audio receiver Nov-98
o Set Top Box Jun-99
o MediaCast Card Receiver Mar-99
Revenue streams associated with these products-in-development were used
to estimate fair value using the discounted cash flow method within the income
approach. In the classification of these assets as in-process, the following
were considered:
The products in development at ComStream had not attained
"technological feasibility", as that term is defined in FINANCIAL ACCOUNTING
STATEMENT NO. 86, as of the acquisition date. In other words, either the
research projects were incomplete or major technical uncertainties remained.
Technological feasibility was expected to be achieved, for a few of the products
in the fourth quarter of 1998 and the remaining products within 1999. The
nature, amount, and timing of the costs required to complete the in-process
technology are presented in the following chart:
F-39
<PAGE>
<TABLE>
<CAPTION>
------------------------------------
Estimated Estimated TotalCosts
Base Product Started Completion Cost To Cost To at
Description Technology Line (Month - Date Date Complete Completion
Applicability Year) $000's $000's $000's
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2 MB Card QPSK,FEC Modems 01-98 01-99 $ 1,100 $ 700 $ 1,800
Coding
"CM 601" Low Cost Mod Coding Modems 05-97 03-99 600 900 1,500
Modulation
"DT8000" Ku-band Modulation Earth Stations 03-97 12-98 1,950 800 2,750
2 Watt Earth Station Coding
Transmission
"DBR 2000" Data L-Band Broadcast 06-98 06-99 100 300 400
Broadcast Receiver Receivers Data
Packet
Protocol
"ABR 202" Audio Receiver L-Band Broadcast 11-98 600 150 750
Receivers Audio
Multiplexing
Set Top Box Receiver DTH TV - Satellite TV - 03-97 06-99 1,400 200 1,600
Cable TV - Cable TV
Proprietary
IC's - MPEG
Decoders
MediaCast Card Receiver Proprietary Internet 03-97 03-99 1,600 300 1,900
IC's - Internet Receiver -
Protocol - Video
DVB MPEG - Receiver
Decoders $ 7,350 $ 3,350 $10,700
======= ======= =======
</TABLE>
It was determined that there was no alternative future use for the
in-process technology as of the acquisition date. Consideration was given to
possible other projects in which the hardware and software products could have
been put to use, but none of these projects had yet attained "technological
feasibility", and so they themselves were considered to be in-process
technology.
The discounted cash flow method began with estimates of future cash
flow using ComStream management's forecasts. In deriving these cash flows,
revenues, cost of goods sold, sales and marketing, general and administrative,
and research and development expenses were used to estimate a baseline measure
of earnings attributable to the products. These earnings represent the expected
income the products would produce once ComStream's technology was integrated
with the resources of Radyne. By adding back non-cash charges and deducting
projected capital expenditures, a measure of debt-free cash flow, useful for
valuing ComStream's in-process technology, was derived.
From the debt-free cash flow forecasts, which represent the cash flow
return on all of ComStream's assets, returns were deducted for the use of
certain other assets: developed technology, net fixed assets, working capital,
and assembled workforce and goodwill.
The fair value of ComStream's total assets reflects an investment of
capital, which requires a return to its investors; in addition the Company's
firm-wide cash flows need to satisfy requirements on all of ComStream's assets,
and not just its technology. Overall, a 28% rate of return was employed as
representing ComStream's weighted average cost of capital. The weighted average
cost of capital was allocated among all the assets of the Company, based upon
the relative risk associated with each asset. By allocating the return
requirements for the entire firm to its assets, values can be established based
upon an asset's relative risk and discrete return capability.
F-40
<PAGE>
Accordingly, the procedure used to value ComStream's in-process
technology was "residual" in nature. The cash flow returns attributable to the
products (debt-free cash flow) were reduced by the return requirement for each
of the other assets employed, with the remaining cash flow used to value the
in-process technology. This is the cash flow that would be available to satisfy
the return requirement on the amount of money invested in the in-process
technology.
The Company believes that the assumptions used in the forecasts were
reasonable at the time of the acquisition. No assurance can be given, however,
that the underlying assumptions used to estimate expected product sales,
development costs or profitability, or the events associated with such projects,
will transpire as estimated. For these reasons, actual results may vary from the
projected results. Within the satellite communications equipment industry, there
are several specific technologies incorporated within a single product. It is
therefore difficult to relate specific revenue streams to individual
technologies or projects. As a result, instead of attempting to model each
individual project or technology, the cash flow generated by ComStream's
products in the aggregate was examined. We allocated the aggregate revenues to
developed, in-process and future technology, in a manner which we believe is
reasonable.
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 10 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) Giving effect to the use of proceeds of the previously announced
rights offering, where the Company will capitalize approximately
$15.6 million of debt now owed to its majority stockholder and
issue 4,300,800 additional shares of common stock to that
stockholder, at September 30, 1998 pro forma loss per share would
have been $1.19 and at December 31, 1997 pro forma loss per share
would have been $0.73.
F-41
<PAGE>
Exhibit 23.0
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-23159 and No. 333-67469) pertaining to the 1996 Incentive
Stock Option Plan of Radyne ComStream Inc. (formerly Radyne Corp.) of our
report dated February 16, 1998 (except for Note 11, as to which the date is
April 16, 1998) with respect to the consolidated financial statements of
ComStream Holdings, Inc. included in Radyne ComStream Inc's Form 8-K/A to be
filed on or about May 5, 1999 related to Radyne Corp.'s acquisition of
ComStream Holdings, Inc.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
San Diego, California
May 3, 1999
