SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the six month period ended June 30, 1999.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-11685-NY
RADYNE COMSTREAM INC.
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
11-2569467
(IRS EMPLOYER IDENTIFICATION NO.)
3138 E. Elwood Street, Phoenix, AZ 85034
(Address of principal executive offices)
602-437-9620
(Registrant's Telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements, for
the past 90 days.
YES [X] NO [_]
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. YES [X] NO [_]
The registrant had 5,959,878 shares of its common stock, par value $.002,
outstanding as of June 30, 1999.
1
<PAGE>
PART I - FINANCIAL INFORMATION
RADYNE COMSTREAM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
ITEM 1 Unaudited Audited
<S> <C> <C>
Current assets:
Cash & cash equivalents $ 1,143,737 $ 254,956
Accounts receivable - trade, net of allowance
for doubtful accounts of $784,958 and $632,815 6,490,048 7,270,732
Other receivable -- 1,265,000
Inventories, net 8,348,689 9,380,478
Prepaids and other current assets 838,465 590,161
---------------------------------------
Total current assets 16,820,939 18,761,327
---------------------------------------
Property and equipment - net 4,475,089 5,533,645
---------------------------------------
Other assets 4,591,361 4,895,742
---------------------------------------
Total assets $ 25,887,389 $ 29,190,714
=======================================
Liabilities and stockholders' capital deficiency
Current liabilities:
Notes payable under lines of credit agreement $ 6,000,000 $ 8,000,000
Note payable 7,000,000 7,000,000
Notes payable to affiliates 15,618,272 0
Current installments of obligations under capital leases 81,141 124,891
Accounts payable - trade 2,128,471 3,291,915
Accounts payable - affiliates -- 8,150
Accrued expenses 8,950,212 9,140,341
---------------------------------------
Total current liabilities 39,778,096 27,565,297
=======================================
Notes payable to affiliates 0 15,618,272
Obligations under capital leases, excluding current installments 61,185 88,588
Accrued stock option compensation 1,108,807 1,155,477
---------------------------------------
Total liabilities 40,948,088 44,427,634
=======================================
Stockholders' capital deficiency:
Common stock, $.002 par value, 20,000,000 shares authorized, Shares issued and
outstanding, 5,959,878 at June 30, 1999 and 5,931,346 at December 31, 1998 11,919 11,862
Additional paid-in capital 6,176,692 6,105,404
Accumulated deficit (21,249,310) (21,354,186)
---------------------------------------
Total stockholders' capital deficiency (15,060,699) (15,236,920)
---------------------------------------
Total $ 25,887,389 $ 29,190,714
=======================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
RADYNE COMSTREAM INC
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
<S> <C> <C> <C> <C>
Net sales $12,943,629 $ 2,717,965 $25,262,334 $ 6,666,465
Cost of sales 7,022,695 2,669,607 13,795,124 5,424,435
------------------------------------------------------------------
Gross profit 5,920,934 48,358 11,467,210 1,242,030
------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 2,748,038 868,070 5,748,728 1,737,556
Research and development 2,208,099 708,700 4,515,574 1,367,644
------------------------------------------------------------------
Total operating expenses 4,956,137 1,576,770 10,264,302 3,105,200
------------------------------------------------------------------
Income (loss) from operations 964,797 (1,528,412) 1,202,908 (1,863,170)
Interest expense, net 543,255 198,217 1,098,029 375,818
------------------------------------------------------------------
Net income (loss) $ 421,542 $(1,726,629) $ 104,879 $(2,238,988)
==================================================================
Basic net income (loss) per common share $ 0.07 $ (0.29) $ 0.02 $ (0.38)
==================================================================
Diluted net income (loss) per common share $ 0.06 $ (0.29) $ 0.02 $ (0.38)
==================================================================
Weighted average shares used in computation
Basic 5,944,574 5,931,340 5,938,303 5,931,340
==================================================================
Diluted 6,552,574 5,931,340 6,550,417 5,931,340
==================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
RADYNE COMSTREAM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 104,879 $(2,238,988)
Adjustments to reconcile net income/(loss) to cash flows used
in operating activities:
Depreciation and amortization 1,483,926 261,603
Changes in operating assets and liabilities:
Accounts and other receivable 2,045,684 738,128
Inventories 1,031,789 696,411
Prepaids and other current assets (248,304) 16,837
Other assets (1,918) --
Accounts payable - trade (1,163,444) 23,711
Accounts payable - affiliates (8,150) (16,062)
Accrued expenses (190,129) 162,614
Accrued stock option compensation (46,670) --
Taxes payable -- (34,223)
-----------------------------------
Net cash provided by (used in) operating activities 3,007,663 (389,969)
-----------------------------------
Cash flows from investing activities:
Capital Expenditures (119,074) (215,468)
-----------------------------------
Net cash used in investing activities (119,074) (215,468)
-----------------------------------
Cash flows from financing activities:
Net borrowing (payment) on notes payable under
Line of credit agreements (2,000,000) (4,500,000)
Proceeds from notes payable to affiliate -- 5,368,272
Notes receivable - employees -- 40,086
Net proceeds from sale of common stock 71,345 --
Principal payments on capital lease obligations (71,153) (58,965)
-----------------------------------
Net cash (used in) provided by financing activities (1,999,808) 849,393
-----------------------------------
Net increase in cash 888,781 243,956
Cash and cash equivalents, beginning of year 254,956 569,692
===================================
Cash and cash equivalents, end of period $ 1,143,737 $ 813,648
===================================
Supplemental disclosure of cash flow information:
Interest paid $ 378,145 $ 313,602
===================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
RADYNE COMSTREAM INC.
Notes to Condensed Financial Statements
(Information for June 30, 1999 and June 30, 1998 is Unaudited)
1 Business
Radyne Comstream Inc. (the "Company") was incorporated on November 25, 1980
and commenced operations on May 22, 1981. On August 12, 1996 the Company became
a majority owned subsidiary of Singapore Technologies Pte Ltd ("STPL"), through
its wholly-owned subsidiary, Stetsys US, Inc. ("ST").
On October 15, 1998, Radyne purchased all of the outstanding shares of
common stock of Comstream Holdings, Inc. ("Comstream") for an aggregate purchase
price of $17 million, of which $10 million was paid in cash at the closing,
using funds borrowed from its controlling stockholder, and the balance of which
was in the form of a $7 million note (the "Note"), payable nine months from the
purchase date. The Note is convertible into Radyne ComStream common stock under
certain circumstances. This acquisition was recorded in accordance with the
"purchase method" of accounting. The excess of the purchase price over the net
assets acquired was approximately $8.7 million of which $3.9 million was
allocated to in-process research and development, $2.5 million was valued as
purchased technology, which is being amortized over 6.25 years, and $2.3 million
has been recorded as goodwill, which is being amortized over ten years.
Comstream operates primarily in North America in the satellite
communications industry. Comstream designs, markets and manufactures satellite
interactive modems and earth stations. Additionally, Comstream manufacturers and
markets full-transponder satellite digital audio receivers for music providers
and has designed and developed a PC broadband satellite receiver card which is
an Internet and high-speed data networking product.
In March 1999, Radyne Corp. changed its name to Radyne Comstream Inc. The
Company has locations in Phoenix, Arizona and San Diego, California. The Company
designs, manufactures, and sells products, systems and software used for the
transmission and reception of data over satellite and cable communication
networks.
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations (unaudited) as if the acquisition had taken
place on January 1, 1998. Such pro forma amounts are not necessarily indicative
of what the actual results of operations might have been if the acquisition had
been effective on January 1, 1998:
Three Months Ended Six Months Ended
June-30-1998 June-30-1998
(in thousands except per share data)
Net sales $ 12,690 25,431
====== ======
Gross profit 3,925 7,372
===== =====
Net loss (4,607) (9,481)
======= =======
Net loss per common share $ (0.78) (1.60)
====== ======
5
<PAGE>
2 Summary of Significant Accounting Policies
(a) Basis of Presentation
The interim unaudited condensed consolidated financial statements
furnished reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of financial position as
of June 30, 1999 and the results of operations for the three and six
months ended June 30, 1999 and 1998 and cash flows for the six months
ended June 30, 1999 and 1998. Such adjustments are of a normal
recurring nature. This information should be read in conjunction with
the restated consolidated financial statements included in the
Company's Form 10-K/A for the twelve month period ended December 31,
1998.
The results of operations for the interim period are not necessarily
indicative of the results to be expected for the full year.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the financial statement date and the reported amounts of revenue and
expenses during the reporting period. The industry in which the
Company operates is characterized by rapid technological change and
short product life cycles. As a result, estimates are required to
provide for product obsolescence and warranty returns as well as other
matters. Actual results could differ from those estimates.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany accounts and
transactions have been eliminated in the consolidation.
(d) Cash Equivalents
The Company considers all money market accounts with a maturity of 90
days or less to be cash equivalents.
(e) Revenue Recognition
The Company recognizes revenue upon shipment of product.
(f) Inventories
Inventories, consisting of satellite modems and related products, are
valued at the lower of cost (first-in, first-out) or market.
(g) Property and Equipment
Property and equipment are stated at cost. Equipment held under
capital leases is stated at the present value of future minimum lease
payments. Expenditures for repairs and maintenance are charged to
operations as incurred, and improvements which extend the useful lives
of the assets are capitalized. Depreciation and amortization of
machinery and equipment are computed using the straight-line method
over an estimated useful life of three to ten years. Equipment held
under capital leases and leasehold improvements is amortized on a
straight-line basis over the shorter of the lease term or estimated
useful lives of the assets.
(h) Goodwill
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line basis
over ten years.
(i) Purchased Technology
6
<PAGE>
In connection with the acquisition of Comstream, value was assigned to
purchased technology. Purchased technology is being amortized on a
straight-line basis over the expected period to be benefited of 6.25
years.
(j) Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
(k) Warranty Costs
The Company provides limited warranties on certain of its products and
systems for periods generally not exceeding two years. The Company
accrues estimated warranty costs for potential product liability and
warranty claims based on the Company's claim experience. Such costs
are accrued as cost of sales at the time revenue is recognized.
(l) Research and Development
The cost of research and development is charged to expense as
incurred.
(m) Income Taxes
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future consequences attributed to differences between the consolidated
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Differences between income
for financial and tax reporting purposes arise primarily from accruals
for warranty reserves and compensated absences. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(n) Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are principally accounts receivable.
The Company maintains ongoing credit evaluations of its customers and
generally does not require collateral. The Company provides reserves
for potential credit losses and such losses have not exceeded
management's expectations.
(o) Net Income/(Loss) Per Common Share
Basic income/(loss) per share is computed by dividing income/(loss)
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted income/(loss) per
share reflects the potential dilution that could occur if securities
or contracts to issue common stock were exercised or converted to
common stock or resulted in the issuance of common stock that then
shared in the earnings or income/(loss) of the Company. Assumed
exercise of outstanding stock options and warrants for the three and
six months ended June 30, 1998 have been excluded from the
calculations of diluted net income/(loss) per common share as their
effect is antidilutive.
(p) Fair Value of Financial Instruments
The fair value of accounts receivable, accounts payable and accrued
expenses approximates the carrying value due to the short-term nature
of these instruments. Management has estimated that the fair values of
the notes payable, approximate the current balances outstanding, based
on currently available rates for debt with similar terms.
7
<PAGE>
(q) Employee Stock Options
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options and to
adopt the "disclosure only" alternative treatment under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123 requires the use of fair value
option valuation models that were not developed for use in valuing
employee stock options. Under SFAS No. 123, deferred compensation is
recorded for the excess of the fair value of the stock on the date of
the option grant, over the exercise price of the option. The deferred
compensation is amortized over the vesting period of the option.
(r) Segment Reporting
The Company has only one operating business segment, the sale of
equipment for satellite and cable communications networks.
(s) Rights Offering (1999)
In October 1998 the Board of Directors approved the distribution to
stockholders, other than the Company's principal stockholders, ST and
Stetsys Pte Ltd, of subscription rights for the purchase of up to
444,276 shares of the Company's common stock at a price of $3.73 per
share. The Board of Directors further approved the distribution of
subscription rights to Stetsys Pte Ltd to purchase up to 4,300,800
shares of the Company's common stock at a price of $3.73 per share.
This Rights Offering will become effective upon approval by the
Securities Exchange Commission of the amended Form S-2 Registration
Statement which was filed on May 5, 1999 or an amendment to the Form
S-2 Registration Statement to be filed in the future. Stetsys Pte Ltd
has given assurances to the Company that it will fully exercise its
rights under the Rights Offering.
(t) Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS No. 130) which became effective for the
Company January 1, 1998. SFAS No. 130 established standards for
reporting and displaying comprehensive income and its components in a
full set of general-purpose financial statements. The Company had no
items of comprehensive income. Therefore, the adoption of SFAS No. 130
had no effect on the Company.
8
<PAGE>
<TABLE>
<CAPTION>
3 Inventories June 30, 1999 December 31, 1998
Unaudited Audited
<S> <C> <C>
Inventories consist of the following:
Raw materials and components $ 5,545,263 $ 6,065,751
Work in process 3,088,764 4,319,338
Finished goods 1,229,922 546,858
-------------------------------------
9,863,949 10,931,947
-------------------------------------
Obsolescence reserve (1,515,260) (1,551,469)
-------------------------------------
Total $ 8,348,689 $ 9,380,478
=====================================
4 Property and Equipment June 30, 1999 December 31, 1998
Unaudited Audited
Property and equipment consist of the following:
Machinery and equipment $ 3,702,558 $ 3,598,732
Furniture and fixtures 2,408,302 2,661,195
Leasehold improvements 445,127 312,425
-------------------------------------
6,555,987 6,572,352
-------------------------------------
Less accumulated depreciation & amortization (2,080,898) (1,038,707)
-------------------------------------
Total $ 4,475,089 $ 5,533,645
=====================================
</TABLE>
5. Restructuring Cost
The accrued restructuring costs in the accompanying condensed consolidated
balance sheet at June 30, 1999 which are included in the accrued liabilities
include the cost of involuntary employee termination benefits for certain
employees of the Company and costs associated with the lease buyout of a
building located in San Diego, California.
These accrued restructuring costs at June 30, 1999 principally consist of the
following;
Total Accrued Restructuring Costs
---------------------------------
Balance at December 31, 1998 $ 3,130,166
Cash paid for lease buyout (1,312,239)
Cash paid for employee termination benefits (508,174)
-----------
Unaudited balance at June 30, 1999 $ 1,309,753
===========
Of the $1,310,000 accrued restructuring charge remaining at June 30, 1999,
approximately $179,000 consists of severance costs (termination of 38 of the
technical, sales and administrative staff completed in December 1998) and
$1,131,000 consists of lease buyout costs, all of which the Company expects to
be paid out by the fourth quarter of 1999.
9
<PAGE>
6. Accrued Liabilities June 30, 1999 December 31, 1998
Unaudited Audited
Accrued liabilities consist of the following:
Wages and related payroll taxes $1,288,836 $1,355,316
Interest expense 1,619,441 803,929
Professional fees 355,208 378,817
Warranty reserve 732,930 679,964
Severance 355,689 1,282,761
Lease buyout 1,130,871 2,443,110
Customer deposits 939,764 306,462
Other 2,527,468 1,889,982
---------------------------
Total $8,950,212 $9,190,341
===========================
The severance balance included in accrued expenses at June 30, 1999
consists of approximately $179,000 associated with the restructuring charge in
the fourth quarter of 1998, discussed in Note 5, and the remaining $177,000 of
severance (for 16 technical staff and management) related to the Company's
acquisition of ComStream in October 1998. This $179,000 is part of a termination
benefits cost totaling $1,600,000; the Company paid $1,005,000 of these
termination benefits prior to December 31, 1998 and $418,000 prior to June 30,
1999.
7. Related Party Transactions
Sales to Agilis Communication Technologies Pte Ltd, a company under common
control with Radyne ComStream, for the three months ended June 30, 1999 and 1998
were $88,000 and $112,000, respectively. Cost of such sales for the same periods
were $31,000 and $70,000, respectively. For the six months ended June 30, 1999
and 1998 sales were $89,000 and $150,000, respectively. Cost of such sales for
the same periods were $32,000 and $82,000, respectively.
Accounts receivable from affiliates at June 30, 1999 and December 31,1998
was $36,000 and $52,000, respectively.
Notes payable to ST and affiliates outstanding at June 30, 1999 and
December 31, 1998 were $15,618,000. These notes bear interest at rates from
6.375% to 6.844% and mature on March 31, 2000.
Interest expense on notes payable to affiliates was $284,000 and $74,000
for the three months ended June 30, 1999 and 1998, respectively. For the six
months ended June 30, 1999 and 1998, interest expense on notes payable to
affiliates was $513,000 and $166,000, respectively.
Accrued interest on notes payable to affiliates was $1,095,000 at June 30,
1999 compared to $581,000 at December 31, 1998.
8. Notes Payable
The Company has a $20,500,000 credit agreement with Citibank, N.A. that includes
$20,000,000 available under an uncommitted line of credit facility and
facilities for bank guarantees and/or standby letters of credit up to $500,000.
An affiliate of ST has issued a nonbinding letter of awareness in connection
with this credit agreement. Borrowings under the line of credit bear interest at
a fluctuating rate equal to LIBOR plus 1% per annum or an alternative Citibank
Quoted Rate plus 1% per annum (rates varied from 5.97 % to 6.06% on balances
owed at June 30, 1999). The credit agreement requires the Company to maintain
certain financial leverage ratios. At June 30, 1999, the Company was in
violation of one such covenant, pending the closing of the rights offering
described below. The availability of additional borrowings under the credit
agreement expires September 29, 1999 and is renewable annually at the option of
the bank. The Company owed
10
<PAGE>
principal of $6,000,000 under the line of credit as of June 30, 1999 and
$8,000,000 as of December 31, 1998. Subsequent to June 30, 1999, the Company
borrowed an additional $2,920,000 on this line of credit.
Notes payable to parent (ST) outstanding at June 30, 1999 and December 31, 1998
were $15,618,272. These notes bear interest at rates from 6.375% to 6.844% and
mature on March 31, 2000. Of this amount, $10,000,000 was borrowed in September
1998 for the acquisition of ComStream Holdings, Inc. Stetsys Pte Ltd has
committed to purchase approximately $16,000,000 of the Company's Common Stock in
the below described rights offering, the proceeds of which will be used to
retire these notes.
The Company also had a note payable to Spar Aerospace Limited in the amount of
$7,000,000. This note was issued on October 15, 1998 as partial consideration
for the acquisition of ComStream Holdings, Inc. The note matured on July 15,
1999 with interest at 8% per annum. Prior to payment in full, the holder of the
note has the option to convert the outstanding balance into shares of the
Company,s common stock at $3.73 per share. Subsequent to June 30, 1999, the
Company paid to Spar $3,591,644, which included $205,431 of accrued interest.
The balance of the note remains outstanding, in accordance with the terms of the
Comstream Holdings Purchase Agreement, pending discussions regarding a potential
purchase price adjustment. The Company has proposed (i) a $400,000 reduction in
the amount due to Spar in exchange for the Company's assumption of Spar's
obligation to indemnify the Company against a $400,000 claim by a product
assembly contractor for costs incurred on ComStream's behalf prior to the
acquisition, and (ii) a $900,000 reduction in exchange for any claims the
Company might have related to certain of Spar's warranties under the Purchase
Agreement. This $900,000 reduction would compensate the Company for
approximately $385,000 of excess and obsolete inventory and approximately
$515,000 of obsolete and previously disposed of furniture and equipment
allegedly carried on ComStream's pre-closing balance sheet. Because these items
were identified prior to the purchase price allocation, no portion of the
Company's purchase price for ComStream was allocated to such inventory,
furniture and equipment. Therefore, this $900,000 reduction would result in a
reduction in goodwill.
The Company intends to finance the repayment of debt incurred for the ComStream
acquisition and its ongoing working capital needs through (i) a rights offering
pursuant to which it will offer approximately $17,700,000 of Common Stock to its
existing stockholders and (ii) the existing bank line of credit. This offering
will be made strictly by means of a prospectus which will be distributed to
stockholders of record as of April 16, 1999.
The purpose of all of the above described loans has been to finance or refinance
the capital needs associated with the Company's acquisition of ComStream
Holdings, Inc., recent rapid sales and backlog growth and the cost of research
and development. To date, the Company's capital resources (as supplemented by
loans from ST and its affiliates) have been sufficient to fund its operations
and increased level of business. Stetsys Pte Ltd has confirmed its ability and
intent to provide working capital necessary to ensure that Radyne ComStream
remains a going concern. With this support, the Company believes that its bank
credit lines and cash from operations are likely to be sufficient to fund its
planned future operations and capital requirements for continued growth through
the end of 1999, as well as repayment of the above described notes.
9. Income/(loss) Per Share
A summary of the reconciliation from basic income/ (loss) per share to diluted
income/ (loss) per share follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30 June 30
--------------------------------------------------------------
1999 1998 1999 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Earnings (Loss) $ 421,542 (1,726,629) 104,879 (2,238,988)
--------------------------------------------------------------
Basic EPS- Weighted Average Shares Outstanding 5,944,574 5,931,340 5,938,303 5,931,340
--------------------------------------------------------------
Basic Earnings (Loss) Per Share $ 0.07 (0.29) 0.02 (0.38)
--------------------------------------------------------------
Basic Weighted Average Shares 5,944,574 5,931,340 5,938,303 5,931,340
Effect of diluted stock options 608,000 -- 612,114 --
--------------------------------------------------------------
Diluted EPS-Weighted Average Shares Outstanding 6,552,574 5,931,340 6,550,417 5,931,340
--------------------------------------------------------------
Diluted Earnings (Loss) Per Share $ 0.06 (0.29) 0.02 (0.38)
==============================================================
Stock Options not included in Diluted EPS
Since Antidilutive 634,000 206,014 634,500 246,991
--------------------------------------------------------------
</TABLE>
11
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This information should be read in conjunction with the condensed
consolidated financial statements and the notes thereto included in Item 1 of
Part I of this Quarterly Report and the audited restated consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1998 contained in the Company's 1998 Annual Report on Form 10-K/A.
Except for the historical information contained herein, the following
discussion contains "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of Radyne
ComStream Inc., or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
loss of, and failure to replace, any significant customers;
timing and success of new product introductions;
product developments, introductions and pricing of competitors;
timing of substantial customer orders;
availability of qualified personnel;
the impact of local political and economic conditions and foreign
exchange fluctuations on international sales;
performance of suppliers and subcontractors;
market demand and industry and general economic or business
conditions;
availability, cost and terms of capital;
other factors to which this report refers or to which the
Company's 1998 Annual Report on Form 10-K/A refers.
Year 2000 readiness
Results of Operations
Results of operations for the three month period ended June 30, 1999
compared to the three month period ended June 30, 1998, were as follows:
The Company's net sales increased 376% to $12,944,000 during the period
ended June 30, 1999 from $2,718,000 during the period ended June 30, 1998,
primarily as a result of the Company's acquisition and integration of Comstream
Holdings into the operations of the Company.
The Company's cost of sales increased to $7,023,000 (54% of sales) during
the period ended June 30, 1999 from $2,670,000 (98% of sales) during the period
ended June 30, 1998. Start-up costs associated with the delivery of new products
to the market place accounted for the high period costs in 1998. The Company
expensed
12
<PAGE>
$911,000 during the three months ended June 30, 1998 to write off these start-up
costs and to increase the obsolescence reserve for slow-moving and obsolescent
parts. The Company expenses start-up costs in the period in which they occur.
Selling, general and administrative costs increased to $2,748,000 (21% of
sales) during the current period from $868,000 (32% of sales) during the period
ended June 30, 1998. The increase in terms of real dollars was primarily due to
the Company's acquisition and integration of Comstream Holdings into the
operations of the Company. The decrease in terms of percentage of expense to
sales was due to the successful company-wide cost reduction efforts.
Research and development expenditures increased to $2,208,000 (17% of
sales) during the current period from $709,000 (26% of sales) during the period
ended June 30, 1998. The increase was primarily due to the Company's acquisition
and integration of Comstream Holdings into the operations of the Company.
In connection with the acquisition of ComStream Holdings, Inc., Radyne
allocated $3,909,000 of the purchase price to seven in-process research and
development projects. This allocation represents the estimated fair value based
on risk-adjusted future cash flows related to the incomplete projects. At the
date of the acquisition, the development of these projects had not yet reached
technological feasibility and the research and development in process had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date.
This allocation was based on a number of assumptions, including those
regarding estimated project completion dates and costs. As of July 31, 1999, six
of those projects have been completed and the other remains essentially on
schedule. The original cost estimates remain essentially accurate and no other
material variations in the assumptions have appeared. Therefore, management
continues to regard the $3,909,000 valuation as correct.
13
<PAGE>
The nature, amount, and timing of the costs required to complete the
in-process technology are presented in the following chart:
<TABLE>
<CAPTION>
-------------------------------------
Estimated Estimated
Base Product Started Cost To Cost To Costs at
Description Technology Line (Month Completion Date Complete Completion
Applicability -Year) Date $000's $000's $000's
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2 MB Card QPSK,FEC Modems 01-98 08-99 $ 1,780 $ 20 $ 1,800
Coding
"CM 601" Low Cost Modem Coding Modems 05-97 03-99 1,400 0 1,400*
Modulation
"DT8000" Ku-band Modulation Earth 03-97 12-98 2,850 0 2,850**
2 Watt Earth Station Coding Stations
Transmission
"DBR 2000" Data L-Band Broadcast 06-98 06-99 400 0 400
Broadcast Receiver Receivers Data
Packet
Protocol
"ABR 202" Audio Receiver L-Band Broadcast 12-98 750 0 750
Receivers Audio
Multiplexing
Set Top Box Receiver DTH TV Satellite TV 03-97 07-99 1,600 0 1,600
Cable TV Cable TV
Proprietary
IC's - MPEG
Decoders
MediaCast Card Receiver Proprietary Internet 03-97 03-99 1,900 0 1,900
IC's - Receiver
Internet Video
Protocol Receiver
DVB MPEG
Decoders
$ 10,680 $ 20 $ 10,700
=======================================
</TABLE>
* Estimated at $1,500 in the Company's Form 10-K/A for the year ended
12/31/98.
** Estimated at $2,750 in the Company's Form 10-K/A for the year ended
12/31/98.
Net interest expense increased from $198,000 in the period ended June 30,
1998 to $543,000 in the current period due mainly to an increase in the
Company's debt level.
Based on the increases in margins and lower operating costs as a percentage
of sales, the Company recorded net income of $422,000 during the period ended
June 30, 1999 as compared with a net loss of ($1,727,000) during the period
ended June 30, 1998.
14
<PAGE>
The Company's new-orders-booked (Bookings) increased 280% to $11,860,000
for the current period from $3,119,000 for the period ended June 30, 1998, due
primarily to the integration of ComStream Holdings into the operations of the
Company.
The Company's level of unfilled-orders-to-ship (Backlog) increased 78% to
$11,036,000 for the current period from $6,202,000 at June 30, 1998 primarily
due to the record level of Bookings received during prior periods.
Results of operations for the six month period ended June 30, 1999 compared
to the six-month period ended June 30, 1998, were as follows:
The Company's net sales increased 279% to $25,262,000 during the period
ended June 30, 1999 from $6,666,000 during the six month period ended June 30,
1998 primarily as a result of the Company's acquisition and integration of
Comstream Holdings into the operations of the Company.
The Company's cost of sales as a percentage of net sales decreased to 55%
during the period ended June 30, 1999 from 81% during the six month period ended
June 30, 1998. Start-up costs associated with the delivery of new products to
the market place accounted for the high period costs in 1998. The Company
expensed $911,000 during the six months ended June 30, 1998 to write off these
start-up costs and to set up a provision for obsolescence. The Company expenses
start-up costs in the period in which they occur.
Selling, general and administrative costs increased to $5,749,000 (23% of
sales) during the current period from $1,738,000 (26% of sales) during the six
month period ended June 30, 1998. The increase in real costs and the reduction,
in terms of percentage of sales, is primarily a result of the higher expense
levels and sales amounts due to the Company's acquisition and integration of
Comstream Holdings into the operations of the Company.
Research and development expenditures increased to $4,516,000 (18% of
sales) during the period ended June 30, 1999 from $1,368,000 (21% of sales)
during the six month period ended June 30, 1998. These expenses reflect the
Company's continued commitment to invest in its future through technological
advances and its efforts to improve our older product lines for
manufacturability and lower costs. The increase in real costs and the reduction,
in terms of percentage of sales, is primarily a result of the higher expense
levels and sales amounts due to the Company's acquisition and integration of
Comstream Holdings into the operations of the Company.
Net interest expense increased from $376,000 (6% of sales) in the six month
period ended June 30, 1998 to $1,098,000 (4% of sales) in the current period due
to an increase in the Company's debt level.
Based on the decreases in costs and expenses as a percentage of sales,
outlined above, the Company recorded net income of $105,000 during the period
ended June 30, 1999 as compared with a net loss of ($2,239,000) during the six
month ended June 30, 1998.
The Company's new-orders-booked (Bookings) increased 216% to $25,467,000
for the six month period ended June 30, 1999 from $8,055,000 for the period
ended June 30, 1998. This increase was primarily a result of the Company's
acquisition and integration of Comstream Holdings into the operations of the
Company.
The Company's level of unfilled-orders-to-ship (Backlog) increased 78% to
$11,036,000 at June 30, 1999 from $6,202,000 at June 30, 1998 primarily due to
the Company's acquisition and integration of Comstream Holdings into the
operations of the Company.
Liquidity and Capital Resources
The Company's working capital deficit was ($22,957,000) at June 30, 1999, a
decrease in the working capital of $14,153,000 from ($8,804,000) at December 31,
1998. This change was primarily a result of a change in notes due to affiliates
of $15,618,000 (previously classified as a long term liability) and was further
affected by reductions in current assets of ($1,940,000), primarily made up of
an increase in cash of $889,000 and prepaids of $248,000 as offset by decreases
in accounts and other receivables of ($2,046,000) and a reduction in inventories
of ($1,032,000), notes payable of ($2,000,000) and accounts payable of
($1,163,000).
The Company believes that its bank credit lines, support from Stetsys Ptc
Ltd and cash from operations are likely to be sufficient to fund its planned
future operations and capital requirements for continued growth through the end
of 1999.
15
<PAGE>
Net cash supplied by operating activities was $3,008,000 for the current
period, as compared to ($390,000) used in the six month period ended June 30,
1998.
Cash used in investing activities, consisting of additions to equipment,
was $119,000 for the current period as compared to the prior period amount of
$215,000.
The Company's net cash from financing activities was ($2,000,000) and
$849,000 during the periods ended June 30, 1999 and June 30, 1998, respectively.
As a result of the foregoing, the Company increased its cash balances by
$889,000 during the current period, compared to an increase in cash balances of
$244,000 for the six month period ended June 30, 1998.
Year 2000 Compliance
The Year 2000 issue concerns the fact that certain computer systems and
processors may recognize the designation "00" as the year 1900 when it is
intended to mean the Year 2000, resulting in system failure or miscalculations.
Other potential date related errors may result from computer systems' inability
to recognize the year 2000 as a "leap year" and such dates as 9 September 1999
(9-9-99), 1 January 2001 (1-1-01) may cause errors. All of these "date related
issues" are commonly referred to as the "Year 2000 Issue", the "Y2K problem" or
the "Millenium Bug". Commencing in 1997, we began a comprehensive review of our
information technology systems, upon which our day to day business operations
depend, in order to determine the adequacy of those systems in light of future
business requirements. Year 2000 readiness was one of the factors considered in
the review process. We have completed that review and believe that all mission
critical systems at our Phoenix facility are Year 2000 compliant, whereas
certain systems used at our San Diego facility require upgrading. We purchased
and expensed the upgrades in 1998 and expect their installation to be completed
in the third quarter of this year.
Our Year 2000 readiness plan also involves the review of our
non-information technology systems, a review which we consider to be complete.
The only noncompliance which we discovered relates to certain date functions in
diagnostic equipment, which functions we do not employ. However, it is possible
that the scope of the Year 2000 problem could be greater than originally
believed and that our efforts could prove inadequate.
As part of our comprehensive review, we are continuing to verify the Year
2000 readiness of third parties (vendors and customers) with whom Radyne
ComStream has material relationships. This is a particular concern in light of
our reliance on overseas assembly operations. A Year 2000 readiness survey was
sent to all of our material vendors and customers. We have received acceptable
responses from all of our mission critical vendors. We expect to receive
responses from 70% to 80% of our non-critical vendors. Efforts continue to
obtain as many replies as possible. In any event, we plan to increase some
inventory levels to mitigate any risk of inventory supply problems. We have also
created a database to track responses, problems and follow-up plans. While our
assessments of the readiness of our vendors are necessarily dependent upon their
survey responses, we intend to test their stated compliance where we determine
that to be a necessary and feasible step.
In evaluating the potential impact of vendor Y2K noncompliance, we believe
that the two worst case scenarios would likely be as follows. First, if the
electric utility at either of our principal facilities were to black out,
operations at that facility could essentially cease for the duration of the
problem. At this point those utilities have provided reasonable assurances of
their own Y2K compliance, although they are not in a position to rule out
potentially relevant problems elsewhere on the power grid. Second, if one of our
major circuit board suppliers were to report Y2K compliance, but then surprise
us with a shutdown, our delivery schedule would be adversely affected. However,
since our contingency plan includes maintenance of a three-month inventory of
critical parts, we would expect to be able to replace the noncompliant vendor in
a timely enough manner to avoid a product delivery delay of more than 30 days.
However, we are not able to precisely determine the effect on results of
operations, liquidity
16
<PAGE>
and financial condition in the event our material vendors and customers are not
Year 2000 compliant. Our inability to accurately forecast such effects may
prevent Radyne ComStream from taking necessary steps to rectify any Year 2000
problems in advance. Moreover it is impossible to predict the extent, if any, to
which customers may allocate funds to the solution of their own Year 2000
problems instead of purchasing our products. We will continue to monitor the
progress of our material vendors and customers and formulate a contingency plan
if and when we conclude that a material vendor or customer may not be compliant.
We have completed a review of our products and determined that all but one
older ComStream product are Year 2000 ready. We are notifying purchasers and
potential purchasers of this product, relatively few of which have been sold.
While we believe our efforts to date are adequate to prevent any Year 2000
problem from having a material adverse effect on Radyne ComStream, our
assessment may turn out to be inaccurate.
Year 2000 Readiness Costs
Project Statistics:
Cost to date (labor) $ 80,000
Estimated cost to completion $ 75,000 to $125,000
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Inventory Assessment Remediation Unit Testing System Testing
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Percentage 100% 100% 90% 50% 50%
Completed
Completion Date 4/30/99 6/30/99 7/31/99 8/31/99 9/30/99
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk on our financial instruments from changes in
interest rates. We do not use financial instruments for trading purposes or to
manage interest rate risk. Increases in market interest rates would not have a
substantial adverse effect on profitability.
Our financial instruments consist primarily of short-term variable rate
revolving credit lines, and fixed rate debt. Our debt at June 30, 1999 consisted
of notes payable to affiliates, notes payable under a line of credit agreement
and a note payable.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on June 15, 1999. Proxies were
neither solicited nor given. 5,377,500 shares were represented at the meeting.
The following matters were voted on at the meeting:
(1) The board of directors was elected in its entirety by all 5,377,500
shares represented at the meeting.
(2) Ratification of the selection of KPMG LLP as the Company's independent
accountants for the fiscal years ended December 31, 1998 and December
31, 1999. All 5,377,500 shares represented at the meeting were voted
in favor of ratification.
17
<PAGE>
Pursuant to written consents, dated as of April 30, 1999 and June 30,
1999, the majority holders of the Company's common stock agreed to amend
the Company's 1996 Incentive Stock Option Plan to make non-employee
directors eligible to receive options under that plan and to adopt the
Company's 1999 Employee Stock Purchase Plan, which provides for the
purchase of up to 1,000,000 shares of the Company's common stock by
employees.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibit Description
3.1* Restated Certificate of Incorporation
3.2** Bylaws, as amended and restated
27 Financial Data Schedule
(b) Registrant filed the following report on Form 8-K during the period of
April 1 through June 30, 1999.
Current Report on Form 8-K/A dated October 15, 1998, Item 2, as amended on
May 6, 1999. Financial Statements included with respect to ComStream Holdings,
Inc.'s Consolidated Balance Sheets for the Years ended December 31, 1997 and
1996, and Consolidated Statements of Operations Stockholders Equity (Deficits)
and Cash Flows for the Years ended December 31, 1997, 1996 and 1995; ComStream
Holdings, Inc.'s Unaudited Condensed Interim Balance Sheet for the Nine Months
ended September 30, 1998, Unaudited Condensed Consolidated Statements of
Operations for the Nine Months ended September 30, 1998 and 1997 and Unaudited
Condensed Consolidated Statement of Cash Flows for the Nine Months ended
September 30, 1998 and 1997; and Radyne Corp.'s Pro Forma Condensed Combined
Balance Sheet as of September 30, 1998, Pro Forma Condensed Combined Statement
of Operations for the Nine Months ended September 30, 1998 and Pro Forma
Condensed Combined Statement of Operations for the Year ended December 31, 1997.
* Incorporated by reference from Registrant's report on Form 10-Q, filed
March 11, 1997.
** Incorporated by reference from Registrant's Form 10-K, filed April 15,
1999.
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: September 24, 1999 RADYNE COMSTREAM INC.
By: /s/ Robert C. Fitting
------------------------------------------
Robert C. Fitting
Chief Executive Officer and President
By: /s/ Garry D. Kline
------------------------------------------
Garry D. Kline
Vice President, Finance
(Chief Financial Officer and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-Q FOR THE PERIOD ENDED 6-30-99 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Apr-01-1999
<PERIOD-END> Jun-30-1999
<CASH> 1,143,737
<SECURITIES> 0
<RECEIVABLES> 7,275,006
<ALLOWANCES> (784,958)
<INVENTORY> 8,348,689
<CURRENT-ASSETS> 16,820,939
<PP&E> 6,555,987
<DEPRECIATION> (2,080,898)
<TOTAL-ASSETS> 25,887,389
<CURRENT-LIABILITIES> 39,778,096
<BONDS> 0
0
0
<COMMON> 11,919
<OTHER-SE> (15,060,699)
<TOTAL-LIABILITY-AND-EQUITY> 25,887,389
<SALES> 25,262,334
<TOTAL-REVENUES> 25,262,334
<CGS> 13,795,124
<TOTAL-COSTS> 13,795,124
<OTHER-EXPENSES> 10,264,302
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,098,029
<INCOME-PRETAX> 104,879
<INCOME-TAX> 0
<INCOME-CONTINUING> 104,879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104,879
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
