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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File
December 31, 1999 Number 0-11685
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RADYNE COMSTREAM INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 11-2569467
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3138 East Elwood Street, Phoenix, Arizona 85034
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (602) 437-9620
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $.002 Par Value
Common Stock Purchase Warrants
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
(deemed by the registrant to be persons, along with members of their families,
known to the registrant to beneficially own, exclusive of shares subject to
options, less than 5% of the outstanding shares of the registrant's common
stock) of the registrant as of February 22, 2000 was approximately $67,800,000
As of February 22, 2000, there were 13,552,496 shares of the registrant's
common stock outstanding.
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PART I
DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
constitute "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors, which may
cause the actual results, performance or achievements of Radyne ComStream Inc.,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following:
o loss of, and failure to replace, any significant customers;
o timing and success of new product introductions;
o product developments, introductions and pricing of competitors;
o timing of substantial customer orders;
o availability of qualified personnel;
o the impact of local political and economic conditions and foreign
exchange fluctuations on international sales;
o performance of suppliers and subcontractors;
o market demand and industry and general economic or business
conditions;
o availability, cost and terms of capital;
o the "Risk Factors" set forth in our Registration Statement on Form S-2
(No. 333-90731), dated February 7, 2000;
o other factors to which this report refers.
ITEM 1. BUSINESS
Overview
We design, manufacture, and sell equipment used in the ground-based portion
of satellite communication systems to receive, and transmit data, video, audio
and Internet over satellite communications links. We also design, manufacture,
and sell equipment used in cable television systems. Our products are used in
applications for telephone, data, video and audio broadcast communications,
private and corporate data networks, Internet applications, and digital
television for cable. We serve customers in over 80 countries, including
customers in the television broadcast industry, international telecommunications
companies, Internet service providers, private communications networks, and the
United States government.
Our products have been utilized in major communications systems worldwide,
including the following:
o The world's highest capacity domestic, digital satellite telephone
network -- PT Telkom, Indonesia.
o Italy's first digital telephone/data network -- Telespacio, Italian
Railways.
o Colombia's first alternate telecommunications network -- Americatel.
o Earth stations for the first international satellite links in China,
India, Pakistan, Brazil, Haiti and Zambia.
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o The world's largest private satellite broadcast network -- Reuters.
o International Cablecasting Technologies -- utilizing 40,000 digital
audio broadcast receivers.
Industry Overview
Satellite technology has been established as a key element in the growth of
communications systems. Satellites enable high-speed communications service
where there is no suitable alternative available. Unlike the cost of land-based
networks, such as microwave and fiber cable, the cost to provide services via
satellite does not increase with the distance between sending and receiving
stations. Satellite networks can be rapidly installed, upgraded, and
reconfigured as compared with land-based networks, which require rights-of-way
and are expensive and time consuming to install and upgrade. The three principal
categories of satellite communications service applications are fixed satellite
services, mobile satellite services, and direct broadcast services.
Fixed Satellite Services. Fixed satellite services provide point-to-point
and point-to-multipoint satellite communication of voice, data, and video
between fixed ground-based earth stations. The introduction of high-power
satellites has created additional growth within the fixed satellite services
segment by enabling the use of smaller, less costly earth stations for
applications such as corporate data networks, intranet access, and rural
telephony.
Mobile Satellite Services. Mobile satellite services operate between fixed
earth stations and mobile user earth stations, or terminals. These services
provide mobile voice and data transmission capability on land, sea, and air. New
mobile satellite services are being developed to bring more extensive coverage
and circuit reliability for mobile telephone and data services to underserved
populations throughout the world.
Direct Broadcast Services. Direct broadcast satellite services provide a
direct transmission link from high-power satellites to customers over a wide
geographic area. This includes direct-to-home television services, direct
broadcast data services, and Internet access.
Satellite communication systems used to provide these services consist of
two elements: satellites (the "space segment") and ground-based transmission and
reception systems (the "ground segment"). The space segment consists of a single
satellite or a constellation of satellites in earth orbit, which typically
provide continuous communications coverage over a wide geographic area. These
satellites typically contain multiple transponders, each of which is capable of
simultaneously receiving and transmitting one or more signals to or from
multiple users. The satellite ground segment consists principally of one or more
earth stations. An earth station is an integrated system consisting of antennae,
radio signal transmitting and receiving equipment, a satellite modem, a
frequency controller, and voice, data, and video network interface equipment.
Earth stations provide a communications link to the end user either directly or
through land-based networks.
We have participated principally in the ground segment products, systems,
and networks portion of the market. The Satellite Industry Association estimates
the global market for satellite ground equipment and integration services was
$15.2 billion in 1998, of which our management estimates $800 million was for
the type of equipment we develop, manufacture, and market.
Industry Growth
We believe that growth in demand for satellite system ground-based
equipment has been and will continue to be driven by, among other things, the
growth of satellite-delivered communications services such as the fixed, mobile,
and direct broadcast services described above. According to the Satellite
Industry Indicators Survey: Selected 1998 Survey Results conducted by the
Satellite Industry Association and Futron Corporation, total revenues for
providers of satellite communications services grew at an 18% compound growth
rate to $26.2 billion in 1998, from $21.2 billion in 1997 and $15.9 billion in
1996.
We believe that future growth in satellite communications services will be
driven principally by the following major factors:
o Global deregulation and privatization of government-monopolized
telecommunications carriers, which will stimulate growth in the
communications industry in general.
o Growing worldwide demand for communications services in general,
including data communications services over the Internet and corporate
Intranets.
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o The relative cost-effectiveness of satellite communications for many
applications, such as digital television delivery.
o Technological advancements that broaden applications for and increase
the capacity in satellite networks.
Deregulation and Privatization. Many developing countries that had
previously not committed significant resources to or placed a high priority on
developing and upgrading their communications systems are now doing so,
primarily through deregulation and privatization. A significant number of these
countries do not have the resources, or have large geographic areas or terrain
that make it difficult, to install extensive land-based networks on a
cost-effective basis. This provides an opportunity for satellite communications
services systems to meet the requirement for communications services in these
countries.
Growing Worldwide Demand for Communications Services. Factors contributing
to the growing demand for communications services include worldwide economic
development and the increasing globalization of commerce. Businesses have a
growing need for higher bandwidth services to communicate with their customers
and employees around the world and are increasingly reliant upon Internet and
multimedia applications. We expect demand for these kinds of higher bandwidth
services to grow in both developed and developing countries.
Cost-Effectiveness of Satellite Communications. The relative
cost-effectiveness of satellite communications services is a major factor
driving the growth of satellite communications services in areas with rapidly
growing telecommunications infrastructures. Large geographic areas, where
population concentrations are separated by significant distances, require a
technology whose cost and speed of implementation is relatively insensitive to
distance. Unlike the cost of land-based networks, the cost to provide services
via satellite does not increase with the distance between sending and receiving
stations.
Technological Advances. Technological advances continue to increase the
capacity of a single satellite and reduce the overall cost of a system and the
service it delivers. This increases the number of potential end-users for the
services and expands the available market. We believe that recent technological
developments such as bandwidth on demand, digital television compression
technology, and signal processing methods will continue to simulate the demand
for the use of satellite communication services.
Market Opportunities
Satellite communication systems provide a number of advantages over
land-based networks for a variety for applications. We have identified several
key markets and customer groups that we believe provide opportunities to sell
our products.
International and Rural Telephony
Satellite communication systems enjoy advantages in international
telecommunications markets for several reasons:
o It is not cost-effective to utilize land-based networks in many areas
of the world, especially developing countries where modern
communications capabilities are just beginning to develop.
o All areas within a satellite beam receive the same level of service,
making it highly attractive in rough terrain or underdeveloped
regions.
o Satellites can be deployed much more rapidly to offer international
services.
We believe there are certain communication requirements that can be
reasonably satisfied only with satellite systems. For example, satellite
communications offer a cost-effective solution that can be installed relatively
quickly to provide communications services in remote or sparsely populated
areas, in rugged or in mountainous terrain, or in nations composed of many
islands, a geographical feature which is relatively common in the Pacific
region.
The potential to reach areas of low subscriber density without costly
construction of land-based networks makes satellite communication systems a
viable solution for rural telephony systems. Rural telephony can be described as
an intra-country telecommunications network linking many remote locations, such
as small villages or islands in the Philippines. These networks allow villages
to communicate with each other and with the world. In a typical rural telephony
system, a small village might install a satellite earth station in a central
location such as the local post office. Residents then use this convenient
location to communicate throughout the country and the world.
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Private Networks
As businesses and other organizations expand into regions of the world
where the telecommunications infrastructure is inadequate for land-based
networks, the need for alternative communications connections among multiple
facilities becomes evident. A private network is a dedicated communications
and/or data transmission network. Such a network may link employees of a
multiple-location business with co-workers located throughout the world. Users
can consolidate multiple-applications over a single satellite network and
receive the same quality of service at a lower over-all cost. We believe the
satellite communications industry is poised to gain a foothold in this market by
offering reliable high-speed connectivity. Satellite systems can bypass the
complexity of land-based networks, multiple carriers, and varying price and
billing schedules.
Information and Radio Broadcasts
Satellites are an ideal transmission medium for broadcast services, as a
single satellite has the ability to communicate with ground locations spread
across up to one-third of the surface of the earth. Financial news providers,
merchandise retailers, and others use satellite systems to provide financial
data and other audio and video transmissions for a variety of applications, such
as news wire services and supermarket in-store radio.
Television Video Distribution
Compressed digital video is a recently developed technology that provides
significant new market opportunities for the satellite communications industry.
The development of digital compression technology allows the transmission of
television signals via satellite in a smaller bandwidth than is currently
possible through alternative technologies. This advance in communications
technology is enabling a wider application of satellite solutions for television
and video broadcast services, including the following:
o Satellites provide television broadcasters with an efficient and
economical method to distribute their programming to cable service
providers and direct broadcast satellite operators.
o Compressed video encoding and decoding make satellites available for
less demanding video transmissions, including business
teleconferencing, private business networks, and telemedicine.
o The economics of compressed video allow the use of satellite
transmission for long-distance teaching applications.
o Digital cinema distribution is emerging as a viable alternative to the
physical distribution of feature length films.
o There is an emerging market to provide data and video directly to the
personal computer via satellite.
Internet Communications
The Internet is evolving into a global medium, allowing millions of
individuals throughout the world to communicate, share information, and engage
in electronic commerce. According to International Data Corporation, the number
of people worldwide accessing the Internet will grow from approximately 100
million at year end 1998 to 320 million by 2002. This growth is expected to be
driven by the large and growing number of personal computers installed in homes
and offices, the declining prices of personal computers, improvements in network
infrastructure, the availability of faster and cheaper Internet access, and the
increasing familiarity with and acceptance of the Internet by businesses and
consumers. Internet usage also is expected to continue to grow rapidly due to
unique characteristics that differentiate it from traditional media, such as
real-time access to interactive content, real-time communication capabilities,
and the absence of geographic or temporal limitations.
According to DTT Consulting, a satellite industry consulting and research
firm, there has been significant growth in the use of satellites for Internet
traffic in recent years. This growth has been centered on connecting Internet
service providers, or ISPs, with Internet servers. DTT Consulting estimates
there were 948 satellite ISP links in operation in January 1999, up from 222 at
the same time in the prior year. Satellite capacity is being used for ISP links
primarily where fiber cable is prohibitively expensive or rare, such as in
underdeveloped or emerging countries or where there is insufficient transoceanic
fiber. Although ISPs rarely use satellites to provide point-to-point
infrastructure for the Internet within the United States, the following table
sets forth data that indicates that nearly one in ten ISPs worldwide use
satellite capacity to link with an Internet server for point-to-point traffic.
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Internet Service Providers Connections by Region
As of January 1999
% ISPS
No. Satellite Connected
Geographic Area No. of ISPS Links via Satcoms*
--------------- ----------- ------------- ------------
Western Europe .................. 2,273 84 3.7%
CEE and CIS** ................... 359 280 78.0
Sub-Saharan Africa .............. 288 131 45.5
Latin America ................... 577 138 23.9
Middle East & North Africa ...... 156 48 30.8
Asia ............................ 825 85 10.3
Australasia ..................... 748 86 11.5
North America ................... 4,512 96 2.1
----- ----- ----
Total .................. 9,738 948 9.7%
===== ===== ====
Source: DTT Consulting
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* Satcoms are communications satellites.
** CEE stands for Central and Eastern Europe and CIS stands for the
Commonwealth of Independent States.
We expect satellite communications to continue to offer a cost-effective
augmentation capability for Internet service providers, particularly in markets
where land-based networks are unlikely to be either cost-effective or abundant,
such as rural areas. Additionally, satellite broadcast architecture provides an
attractive alternative for Internet service providers, which presently are
dealing with the bottlenecks associated with rapid and uneven Internet growth.
Satellite systems can relieve congestion by providing a low-cost means of
selectively distributing content to sites closer to end-users. Today, only 1,000
Websites represent over 80% of the most frequently accessed content on the
Internet. These Web pages can be transmitted via satellite at regular intervals
to designated server destinations and then stored in servers for local users to
access. This cached content reduces the need to retrieve the most popular data
from the source, thus reducing delays and congestion on the Internet. Likewise,
we expect Internet multicasting to serve as a solution for the distribution of
large applications, such as database updates.
Government and Military
The United States government provides a significant market opportunity for
satellite equipment manufacturers as the defense budget shrinks and government
policies encourage the use of commercial off-the-shelf components whenever
feasible. This provides us with the opportunity to configure our standard
products for a customer that is sizable and likely to provide consistent
business.
Strategy
Our business goals are to expand our market share in our ground-based
satellite systems business and improve profitability. We intend to achieve these
goals through the following strategies:
Target Providers of Fixed, Mobile, and Direct Broadcast Communications
Services Worldwide. We plan to target developing markets that we believe will
account for a significant portion of the demand for satellite-based systems.
These markets typically lack terrestrial infrastructure adequate to support
demand for domestic and international communications services. We plan to target
providers of rural telephony services and Internet service providers in
developing markets because we believe they will rely extensively upon satellite
communication solutions. In developed countries, we plan to target emerging
satellite communications service providers such as those offering direct
broadcast applications.
Exploit New Applications for Our Existing Satellite Technology. We plan to
adapt existing products for use in the Internet broadband, cable television, and
television news gathering markets, which utilize digital receivers and
transmission equipment using many of the same modulation, coding, interface, and
protocol technologies as the satellite business. We have adapted some of our
products for the television distribution market, including satellite modems that
we converted for use in cable television systems. We also recently entered into
a strategic relationship with DiviCom Inc., a major producer of compressed
digital television systems. Under this arrangement, our strategic partner will
utilize our products in cable systems that it markets to cable television system
operators.
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Develop New Products to Exploit New Market Opportunities. We plan to use
our international sales force and our research and development capabilities to
identify new market opportunities and develop new products to exploit these
opportunities. We intend to develop new products to penetrate and increase our
presence in the markets for Internet communications, rural telephony for
developing markets, high-speed satellite communications, government data
equipment, cable television distribution, and private networks for businesses
and governments.
Provide High-Margin Customized Products to Niche Markets. We design our
products so we can adapt them to differing specifications with minimal
engineering. We plan to design and produce customized products for niche
markets, particularly military and government markets, which require customized
technology.
Pursue Strategic Acquisitions. We intend to pursue strategic acquisitions
of competitive or complementary companies in order to gain market share,
increase our revenues, expand our product line, improve our sales force or
increase our profitability.
Products
We offer the following product families:
o Satellite modems and earth stations.
o Frequency converters.
o Data, audio, and video broadcast equipment.
o Digital video broadcast (DVB) and high speed modems.
o Cable and microwave modems.
Satellite Modems and Earth Stations
We produce satellite modems that are sold individually and earth stations
that are a bundled solution built around our satellite modems. Satellite modems
transform user information, such as data, video or audio, into a signal that can
be further processed for transmission via satellite. We produce several
varieties of satellite modems, which operate at different speeds using a variety
of modulation techniques.
Our earth stations commonly consist of several components, including a
satellite modem, a frequency converter, a transceiver, a transmitter, and an
antenna. Earth stations serve as an essential link in transmitting signals to,
and receiving signals from, satellites. Our earth stations enable users to
program power levels and operating parameters in order to compensate for low
signal levels, extreme weather conditions, and other variables. We design and
manufacture our earth stations using components that we manufacture as well as
components that we obtain from other manufacturers.
Our Star Network Management System augments these product offerings. The
Star Network Management System, which consists of a Windows NT(R) point and
click system, is used to remotely monitor and maintain the functioning of an
entire network of modems, earth stations, and ancillary equipment. This can be
done from a single location, thereby eliminating the need to travel to each
remote location. This system provides local and remote modem management, control
of the equipment connected to the modems and earth stations, collection of
network status and alarm information, remote channel monitoring, and dial-up
control.
Frequency Converters
We currently market two varieties of converters used to transmit signals to
satellites and three converters used to receive signals relayed from satellites.
We also produce a redundancy control unit, which will switch a satellite system
to stand-by equipment in the event of a malfunction in a satellite modem or
converter. Such redundancy is a critical element for many of our customers, such
as rural or international telephony networks, that strive to provide
uninterrupted satellite communications services to their customers.
Each satellite is configured to receive or transmit a particular radio wave
pattern, otherwise called a frequency band, which is typically different from
the frequency of the satellite modem. Frequency converters are used to alter the
input/output of a satellite
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modem into a wave pattern that can be interpreted by the particular satellite
being used in the satellite system to relay communication signals.
Data, Audio and Video Broadcast Equipment
Our digital audio distribution products provide radio networks, service
providers, and merchandise retailers with a satellite distribution system for
the broadcast of in-store advertising and background music. Our data
distribution products deliver real-time, high-value data and digital video
broadcast services. To date, the primary customers for our data distribution
products have been participants in the financial industry. For example, our
IntelliCast Digital Data Broadcast Receiver is used by customers, such as
Reuters, to distribute financial information, up-to-date news stories or image
files of weather information and database updates from a central location to
many remote outlets.
Our Mediacast Satellite PC/Receiver card allows personal computers to
request information over a telephone link and then receive a digital video
broadcast of a wide range of data, audio, and video information directly from a
satellite. This speeds the reception of information, particularly in regions
with underdeveloped telephony, and is often used by Internet service providers.
Digital Video Broadcast (DVB) and High Speed Modems
Our DVB modems facilitate the transmission of high-quality video images
among multiple locations via satellite. These modems utilize digital compression
technology that allows users to transmit television signals in a smaller
bandwidth than is possible using older technology, thereby making television
transmission by satellite more economical. Video compression allows for the
transmission by satellite of a much higher number of channels than was
previously the case, thus producing a significant new market for our products.
Satellites are often used in industries where live, high-quality video images
are essential, such as direct television broadcasts.
Our high-speed digital modems transmit a greater volume of data than
standard satellite modems. Our modems are used in large satellite system
connections that transmit significant amounts of data at high speeds. Internet
service providers and government agencies are principal customers for our
high-speed and digital high-speed products.
Cable and Microwave Modems
Our cable modems are used primarily in the distribution of digital video
for use by cable television distributors and in high-definition television. The
design of our cable modems allows for the transmission of digital video on
terrestrial, broadband cable and enables system operators to manage and control
the available bandwidth. Our microwave modems transmit over microwave
frequencies and usually feature high-speed and multidata-rate capabilities that
provide a complete point-to-multipoint communication link that facilitates
microwave link upgrades. For example, television stations use our microwave
modems to transmit audio and video over a microwave link to and from digital
news gathering trucks.
Research and Development
We conduct an active and ongoing research and development program that
focuses on advancing technology, developing improved design and manufacturing
processes, and improving the overall quality of the products we provide. Our
goal is to provide our customers with new solutions that address their needs.
Our research and development personnel concentrate on technology for the
satellite communications, telecommunications, and cable television industries.
Our future growth depends on increasing the market share of our new products,
adapting our existing satellite communications products to new applications, and
introducing new communications products that will find market acceptance and
benefit from our established international distribution channels. Accordingly,
we are actively applying our communications technology expertise to improving
the performance of our existing products and developing new products to serve
existing and new markets.
We work closely with our customers and potential customers to assess their
needs in order to facilitate our design and development of new products. We
believe that this approach minimizes our development risk and improves the
potential for market acceptance of our product introductions. Additionally, we
use information obtained from our customers and our technological expertise to
develop custom-designed products for our customers' special applications.
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Research and development expenses amounted to $9.1 million for the year
ended December 31, 1999, $4.3 million for the year ended December 31, 1998, and
$2.3 million for the year ended December 31, 1997. A number of new products were
either launched or reached an advanced stage of development during these
periods.
Much of the increase in research and development expenses is due to
developmental products acquired in the 1998 acquisition of ComStream Holdings,
Inc., but the remainder is directly related to our ongoing commitment to expand
our product line and penetrate new markets. We intend to use a significant
portion of the proceeds obtained through a public offering of our common stock
to fund our research into Internet-related products for satellite ISP links, and
other new telecommunications products. This offering became effective on
February 7, 2000. We also plan to target our research and development activities
at digital audio, video, and data products. However, there is no assurance that
we will continue to have access to sufficient capital to fund the necessary
research and development or that such efforts, even if adequately funded, will
prove successful.
Sales and Marketing
We sell our products through an international sales force with sales and/or
service offices in San Diego, Phoenix, Boca Raton, Beijing, Singapore, London,
Amsterdam, and Jakarta. Our direct sales force consists of 14 individuals
supported by systems and applications engineers. We focus direct sales
activities on expanding our international sales by identifying emerging markets
and establishing new customer accounts. Additionally, we directly target certain
major accounts that may provide entry into new markets or lead to subsequent
distribution arrangements. International representatives, distributors and
systems integrators sell our products, supported by our sales and marketing
personnel.
We participate in approximately six trade shows each year. We also generate
new sales leads through advertising in trade magazines, direct mail, and our Web
site (http://www.RadyneComStream.com).
We maintain a customer service and support staff that primarily supports
customers and distributors and is responsible for after-sale support and
installation supervision. In certain instances, we use third-party companies to
install and maintain our products at our customers' sites.
Customers
Our customers generally include national and international
telecommunications providers, digital television users, including broadcast and
cable networks, Internet service providers, financial information providers,
systems integrators, and the U.S. government.
For the years ended December 31, 1999 and 1998, no single customer
represented more than 10% of our net sales. During the year ended December 31,
1997, one customer represented 14.5% of our net sales. Because of the nature of
our business, we anticipate that any customers that represent 10% or more of our
total revenue will vary from period to period depending upon the placement of
significant orders by a particular customer or customers in any given year.
Our sales in principal foreign markets for the periods indicated consisted
of the following percentages of total sales.
Region Year ended Year ended Year ended
------ 12-31-99 12-31-98 12-31-97
---------- ---------- ----------
Asia 25% 7% 32%
Africa/Middle East 4% 8% 0%
Latin America 4% 9% 12%
Europe 21% 23% 7%
Canada 2% 3% 5%
-- -- --
Total Exports 56% 50% 56%
We believe that the amount of our total exports may rise in subsequent
periods. We consider our ability to continue to sell our products in developing
markets to be important to our future growth. We may not, however, succeed in
our efforts to cultivate such markets.
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Competition
We have a number of major competitors in the satellite communications
field. These include large companies, such as Hughes Network Systems, NEC, and
Adaptive Broadband Corp., all of which have significantly larger and more
diversified operations and greater financial, marketing, human and other
resources than we possess. We estimate that our major competitors in the
principal markets in which we compete have the following market shares as
compared to our market share:
<TABLE>
<CAPTION>
Digital Video
Satellite Modems & Broadcast & Government & Data, Audio &
Competitor Earth Stations High Speed Modems Military Modems Video Broadcast
- ---------- -------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Adaptive Broadband............ 19% 30% 35% *
Hughes Network Systems........ 19 * * *
SSE Telecom................... 8 * 10 *
NEC........................... 24 * * *
Wegener....................... * * * 25
IDC........................... * * * 25
Radyne ComStream.............. 8 35 35 40
</TABLE>
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* Competitor does not participate in product category.
We do not believe that any other single competitor has a greater than 10%
market share for any of these product classes. However, the foregoing market
share figures represent estimates based on the limited information available to
us, and we cannot assure you that it is accurate.
We compete by concentrating our sales efforts in the international market
and emphasizing our product features and quality. We believe that the quality,
performance, and capabilities of our products, our ability to customize certain
network functions, and the relatively lower overall cost of our products as
compared to the cost of the competing products generally offered by our major
competitors represent major factors in our ability to compete. However, our
major competitors have the resources to develop products with features and
functions that are competitive with or superior to our products. Competition
from current competitors or future entrants in the markets in which we compete
could cause us to lose orders or customers or could force us to lower the prices
we charge for our products.
We believe we are well positioned to capitalize on the increased demand for
satellite ground segment systems and that our future success in this market will
be based upon our ability to leverage our competitive advantages, which include
the following:
o An experienced management group, which has extensive technological and
engineering expertise and excellent customer relationships. The
members of our management team have an average of over 20 years of
experience in the satellite communications industry.
o Our expansive line of well-known, well-respected, off-the-shelf,
state-of-the-art equipment that enables us to meet our customers'
requirements.
o Our ability to custom design products for our customers' special
applications and to provide a one-stop shopping option to our
customers.
o Our ability to meet the complex satellite ground communications
systems requirements of our customers in diverse political, economic,
and regulatory environments in various locations around the world.
o Our worldwide sales and service organization with the expertise to
successfully conduct business internationally through sales and
service offices staffed by our employees in most of our major markets
throughout the world, including in Beijing, Singapore, London,
Jakarta, and Amsterdam.
o Our October 1998 acquisition of ComStream, which:
o significantly expanded our product lines,
o enhanced our sales force,
10
<PAGE>
o increased our market share, and
o increased our profitability.
Manufacturing
We assemble and test certain of our products at our Phoenix, Arizona and
San Diego, California facilities using subsystems and circuit boards that we
obtain from subcontractors. We obtain the remainder of our products, completely
assembled and tested, from subcontractors. Although we believe that we maintain
adequate stock to reduce the procurement lead time for certain components, our
products use a number of specialized chips and customized components or
subassemblies produced by a limited number of suppliers. In the event that such
suppliers were unable or unwilling to fulfill our requirements, we could
experience an interruption in production until we develop an alternative supply
source. We maintain an inventory of certain chips and components and
subassemblies to limit the potential for such an interruption. We believe that
there are a number of companies capable of providing replacements for the types
of chips and customized components and subassemblies used in our products.
In 1999, our Phoenix facility was awarded ISO-9001 certification, the
international quality control standard for research and development, marketing,
sales, manufacturing, and distribution processes. This certification will assist
in increasing the acceptance of our products in foreign markets. We intend to
pursue certification of our San Diego facility. We cannot provide assurance,
however, that certification will be granted.
Intellectual Property
We rely on our proprietary technology and intellectual property to maintain
our competitive position. We protect a significant portion of our proprietary
technology as trade secrets by relying on confidentiality agreements with our
employees and some of our suppliers. We also control access to and distribution
of confidential information concerning our proprietary information.
We also have patents which protect certain of our proprietary technology.
We have been cautious in seeking to obtain patent protection for our products,
since patents often provide only narrow protection that may not prevent
competitors from developing products that function in a manner similar to those
covered by our patents. In addition, some of the foreign countries in which we
sell our products do not provide the same level of protection to intellectual
property as the laws of the United States provide. We will continue to seek
patent protection for our proprietary technology in those cases where we think
it can be obtained and will provide us with a competitive advantage.
Employees
As of December 31, 1999, we had 183 full-time employees, including three
executive officers, 123 in engineering and manufacturing, 34 in marketing
operations, and 23 in administration. These figures include 23 employees who are
based outside the United States. None of our employees are represented by a
union in collective bargaining with us. We believe that our relationships with
our employees are satisfactory.
ITEM 2. PROPERTIES
In order to accommodate our recent growth, we moved into new leased
facilities in both Phoenix, Arizona and San Diego, California in late 1998. We
currently have 76,000 square feet available in Phoenix and 66,400 square feet
available in the San Diego facility. The lease for our Phoenix facility expires
in July 2008 and we have an option to renew for two consecutive terms of five
years each. The lease for our San Diego facility expires in March 2005 and we
have an option to renew for two consecutive terms of five years each. We expect
these facilities will be adequate for meeting our needs in the immediate future.
We also have regional sales and service offices in Boca Raton, Beijing,
Singapore, London, Jakarta, and Amsterdam. All of these facilities are leased.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of securities holders during the three
months ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock was traded on the OTC Bulletin Board under the symbol
"RADN" as of December 31, 1999. As a result of our public offering, which became
effective February 7, 2000, our common stock and warrants now trade on the
Nasdaq SmallCap Market under the symbols "RADN" and "RADNW," respectively. The
following table sets forth the range of high and low trading prices as reported
by the OTC Bulletin Board for the periods indicated. At February 22, 2000, we
had approximately 419 stockholders of record and approximately 2,460 beneficial
owners of our common stock.
High $ Low $
------ -----
1997:
First Quarter ..................... 6 3 1/8
Second Quarter .................... 3 1/4 3
Third Quarter ..................... 10 3/4 5
Fourth Quarter .................... 10 1/2 4
1998:
First Quarter ..................... 5 1/4 2 1/8
Second Quarter .................... 5 2 3/4
Third Quarter ..................... 4 15/16 3 1/4
Fourth Quarter .................... 5 2 1/2
1999:
First Quarter ..................... 4 1/4 2 1/4
Second Quarter .................... 3 3/4 2 1/2
Third Quarter ..................... 3 9/16 2 1/4
Fourth Quarter .................... 8 1/2 2 3/4
On March 1, 2000 the last sale price of the common stock as reported by the
NASDAQ SmallCap Market was $28.50 per share.
We have not paid dividends on the Common Stock since inception and we do
not intend to pay any dividends to our stockholders in the foreseeable future.
The Company currently intends to reinvest earnings, if any, in the development
and expansion of its business. The declaration of dividends in the future will
be at the election of the Board of Directors and will depend upon the earnings,
capital requirements and financial position of the Company, general economic
conditions and other pertinent factors.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations data for the years ended
December 31, 1999, 1998 and 1997, the six months ended December 31, 1996, the
year ended June 30, 1996 and the six and one-half month period ended June 30,
1995, and the selected balance sheet data at those dates, are derived from our
consolidated financial statements and notes thereto audited by our independent
auditors: KPMG LLP (in the case of the years ended December 31, 1999 and 1998)
and Deloitte & Touche LLP (in the case of the year ended December 31, 1997, the
six months ended December 31, 1996, the year ended June 30, 1996, and the six
and one-half months ended June 30, 1995). Per share data and shares outstanding
reflect an adjustment for the effects of the 1-for-5 reverse split of our common
stock, which became effective on January 9, 1997. The following data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this 10-K Annual Report.
The variations in the duration of the respective periods in the table on
the following page are due to a series of changes in our fiscal year. Upon our
emergence from bankruptcy on December 16, 1994, our fiscal year ended. We then
adopted the fiscal year of our new parent, which ran through June 30, 1995 which
created a 6 1/2 month period, followed by a full year ended June 30, 1996. We
then became a subsidiary of ST in August 1996 and adopted its fiscal year (the
calendar year), which created a stub fiscal period from July 1, 1996 through
December 31, 1996.
13
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
Years Ended December 31, 6 Months 6 1/2 Months
---------------------------------------- Ended Year Ended Ended
1999 1998 1997 12/31/96 6/30/96 6/30/95
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ..................................... $ 55,839,792 $ 21,111,704 $ 13,446,852 $ 4,905,059 $ 3,829,523 $ 1,861,262
Cost of sales ................................. 29,970,560 15,808,459 8,022,262 4,052,433 2,559,350 1,228,747
------------ ------------ ------------ ------------ ------------ ------------
Gross profit .................................. 25,869,232 5,303,245 5,424,590 852,626 1,270,173 632,515
------------ ------------ ------------ ------------ ------------ ------------
Selling, general and administrative expense ... 12,355,188 5,531,213 4,242,138 1,437,971 1,843,576 961,162
Research and development expense .............. 9,126,545 4,296,268 2,262,066 808,025 1,794,823 --
Stock option compensation expense ............. 350,000 1,566,075 -- -- -- --
In-process research and development expense ... -- 3,909,000 -- -- -- --
Restructuring costs ........................... -- 3,100,000 -- -- -- --
Asset impairment charges(1) ................... -- 262,935 -- 421,000 -- --
------------ ------------ ------------ ------------ ------------
Total operating expenses ...................... 21,831,733 18,665,491 6,504,204 2,666,996 3,638,399 961,162
------------ ------------ ------------ ------------ ------------ ------------
Earnings (loss) from operations ............... 4,037,499 (13,362,246) (1,079,614) (1,814,370) (2,368,226) (328,647)
Interest expense .............................. 1,910,422 1,198,777 677,102 255,604 256,871 36,209
Other income .................................. (76,045) (23,480) -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Earnings (loss) before income taxes and
extraordinary item ............................ 2,203,122 (14,537,543) (1,756,716) (2,069,974) (2,625,097) (364,856)
Income taxes .................................. 85,000 -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Earnings (loss) before extraordinary item ..... 2,118,122 (14,537,543) (1,756,716) (2,069,974) (2,625,097) (364,856)
Extraordinary item ............................ 188,182 -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net earnings (loss) ........................... $ 2,306,304 ($14,537,543) ($ 1,756,716) (2,069,974) (2,625,097) (364,856)
============ ============ ============ ============ ============ ============
Basic earnings (loss) per share:
Earnings (loss) before extraordinary item .. $ 0.30 $ (2.45) $ (0.35) $ (0.55) $ (0.70) $ (0.10)
Extraordinary item ......................... 0.02 0.00 0.00 0.00 0.00 0.00
------------ ------------ ------------ ------------ ------------ ------------
Net earnings (loss) ........................ $ 0.32 $ (2.45) $ (0.35) $ (0.55) $ (0.70) $ (0.10)
============ ============ ============ ============ ============ ============
Diluted earnings (loss) per share:
Earnings (loss) before extraordinary item .. $ 0.28 $ (2.45) $ (0.35) $ (0.55) $ (0.70) $ (0.10)
Extraordinary item ......................... 0.02 0.00 0.00 0.00 0.00 0.00
------------ ------------ ------------ ------------ ------------ ------------
Net earnings (loss) ........................ $ 0.30 $ (2.45) $ (0.35) $ (0.55) $ (0.70) $ (0.10)
============ ============ ============ ============ ============ ============
Weighted average shares used in computation
Basic ......................................... 7,111,777 5,931,346 5,012,664 3,750,699 3,742,227 3,729,721
============ ============ ============ ============ ============ ============
Diluted 7,571,425 5,931,346 5,012,664 3,750,699 3,742,227 3,729,721
============ ============ ============ ============ ============ ============
EBITDA (2) .................................... $ 6,948,568 ($12,297,678) ($ 625,431) ($ 1,636,835) ($ 2,091,313) ($ 181,124)
BALANCE SHEET DATA:
Cash and cash equivalents ..................... $ 2,947,660 $ 254,956 $ 569,692 $ 186,488 $ 971 $ 2,109
Working capital (deficit) ..................... (2,255,064) (8,803,970) 1,654,857 (5,851,527) (4,082,987) (1,343,018)
Total assets .................................. 28,236,062 29,190,714 10,231,617 6,572,917 272,686 3,452,999
Long-term liabilities ......................... 760,085 16,862,337 4,649,404 161,968 130,414 168,304
Total liabilities ............................. 23,909,150 44,427,634 11,381,678 11,019,543 5,669,338 3,264,554
Stockholder's equity (deficiency) ............. 4,326,912 (15,236,920) (1,150,061) (4,446,626) (2,396,652) 188,445
</TABLE>
(1) Consists of the writedown of designs and drawings in light of the
introduction of replacement products.
(2) Earnings before interest, taxes, depreciation and amortization
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In reviewing the following discussion and analysis, the reader should take
note of the fact that the respective periods being compared are of various
durations. When we became an indirect subsidiary of Singapore Technologies Pte
Ltd ("ST") in August 1996, we adopted ST's calendar fiscal year, which created a
stub fiscal period from July 1, 1996 through December 31, 1996.
Radyne Corp., our predecessor, was incorporated in 1980 and filed for
Chapter 11 bankruptcy protection in April 1994. It successfully emerged from
bankruptcy in December 1994 upon the acquisition of approximately 91% of its
common stock by Engineering and Technical Services, Inc. ("ETS"), then a major
customer. On August 12, 1996, ST acquired ETS through its indirect wholly owned
subsidiary, Stetsys US, Inc. ST held approximately 71% of our common stock as of
February 11, 2000.
In 1995, we installed a new management team, which moved our operations
from New York to Phoenix, Arizona. As part of this management change, we hired
an almost entirely new staff of engineering, sales and support personnel.
On October 15, 1998, we purchased ComStream Holdings, Inc. (a corporation
incorporated under the laws of the State of Delaware with an office currently
located at 6340 Sequence Drive, San Diego, California) from Spar Aerospace
Limited ("Spar"), a Canadian advanced technology company. ComStream is an
international provider of digital transmission solutions for voice, data, audio
and video applications with offices in the United States, Singapore, Indonesia,
China and the United Kingdom. ComStream recorded revenue of approximately $37
million in fiscal 1998. We acquired ComStream in an effort to expand our core
business and to supplement our product lines with a number of viable developed
products and superior quality products in the design stage, all of which have
since been released for production. In addition, we based our decision to
acquire ComStream on the strategic belief that the combined companies could
compete more effectively and realize certain synergies. We believe that our
acquisition of ComStream has had and will have a number of positive effects,
including the following:
1. The combined annual revenue of Radyne ComStream for fiscal 1999 was
approximately $56 million versus Radyne Corp.'s 1998 stand-alone
revenue of approximately $13 million. This dramatic difference in size
provides us with better control over prices and margins and enables us
to compete in larger markets.
2. The acquisition has produced positive synergistic effects by combining
Radyne's newer product lines with ComStream's established products and
sales channels. We have experienced positive results from the efforts
of the ComStream sales force as compared with our historic reliance on
independent sales representatives. The addition of ComStream's
technology in the satellite communications industry has strengthened
our market share and provided new customers for our existing products.
3. While we viewed ComStream's gross margins as excellent, its
profitability had suffered from extremely high expenses. During 1999,
we reduced ComStream's recurring expenses by approximately $1,000,000
per month. The continued efficiencies and restructuring of our product
lines have resulted in significant cost savings.
We recorded the acquisition of ComStream under the "purchase method" of
accounting. Accordingly, we allocated the purchase price to the assets purchased
and the liabilities assumed based upon the estimated fair values at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was approximately $8.7 million, of which $3.9 million was
allocated to in-process research and development, $2.5 million was valued as
purchased technology, which is being amortized over 6.25 years, and $2.3 million
has been recorded as goodwill, which is being amortized over ten years. As a
result of the recent completion of our settlement negotiations with Spar, the
amount of goodwill recorded in the transaction was reduced by $516,000 to $1.5
million (after amortization of $254,000) in the year ended December 31, 1999.
See " -- Liquidity and Capital Resources." We have included ComStream's results
in our combined statement of operations from the acquisition date.
15
<PAGE>
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1998
The Company's net sales increased 164% to $55,840,000 during the year ended
December 31, 1999 from $21,112,000 during the year ended December 31, 1998. This
increase is primarily attributable to the increased product sales resulting from
our acquisition and integration of ComStream in October 1998 and new product
development.
The Company's cost of sales as a percentage of net sales decreased to 54%
during the year ended December 31, 1999 from 75% for the year ended December 31,
1998. Costs associated with the delivery of new products to the marketplace
accounted for the high period costs in 1998. We expensed $911,000 during 1998 to
write off these costs and to increase our provision for obsolescence; we
anticipate that neither of these adjustments will have an impact on our future
results of operations. In addition, we were able to realize certain synergies in
our operations as a result of the acquisition and integration of ComStream,
which enabled us to significantly increase our margins on product sales.
Selling, general and administrative costs increased to $12,355,000 or 22%
of sales during the year ended December 31, 1999 from $5,531,000 or 26% of sales
for the year ended December 31, 1998. The increase in real costs and the
reduction, in terms of percentage of sales, was primarily a result of higher
expense levels and sales amounts due to our acquisition and integration of
ComStream into our operations.
Research and development expenditures increased to $9,127,000 or 16% of
sales from $4,296,000 or 20% of sales during the year ended December 31, 1998.
These expenses reflect our continued commitment to invest in our future through
technological advances and our 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, was primarily a result of the higher expense
levels and sales amounts due to our acquisition and integration of ComStream
into our operations. It is anticipated that the Company will continue to
experience high research and development expenses as it positions itself,
through the introduction of new products, to gain market share.
Based on the increases in our gross margins and our lower operating costs
as a percentage of sales (39% in 1999 compared to 88% in 1998) we recorded
earnings before interest and taxes ("EBIT") of $4,037,000 during 1999 compared
to a loss before interest and taxes of $13,362,000 in 1998. In addition to lower
sales and higher operating costs as a percentage of sales in 1998, we recorded
stock option expense of $1,566,000 (as compared to $350,000 in 1999) and other
costs of $7,272,000 as a result of the acquisition of ComStream which
significantly reduced our EBIT in 1998.
Interest expense increased to $1,910,000 or 3% of sales in 1999 from
$1,199,000 or 6% of sales in 1998 due to our increased level of debt for the
first three quarters of 1999.
We recorded extraordinary income of $188,000 during 1999 as a result of
negotiated forgiveness of previously recorded and accrued interest expense in
connection with the note payable to Spar related to the ComStream acquisition.
We have recorded income tax expense in 1999 of $85,000, which related
solely to Alternative Minimum Tax. Additionally, the effective tax rate is 3.6%
which is significantly below statutory income tax rates because of the
utilization of net operating loss carryforwards.
Based on all of the above, we recorded net earnings of $2,306,000 or $.30
per diluted weighted average share outstanding during 1999 as compared to a net
loss of ($14,538,000) or ($2.45) per diluted weighted average share outstanding
during 1998.
Our new-orders-booked (Bookings) increased 151% to $62,531,000 for the year
ended December 31, 1999 from $24,904,000 for the year ended December 31, 1998.
This increase was primarily a result of our acquisition and integration of
ComStream into our operations in addition to new product development and
enhancement.
Our "Backlog" of orders to be shipped (unshipped orders from the prior
period plus new orders booked less orders shipped during the period) was
$14,522,000 as of December 31,1999, an increase of 69% over the $8,606,000 in
Backlog as of December 31, 1998. Our Backlog consists of firm orders as
evidenced by written contracts and/or purchase orders from customers.
In connection with the acquisition of ComStream, we 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.
16
<PAGE>
This allocation was based on a number of assumptions, including those
regarding estimated project completion dates and costs. As of the year ended
December 31, 1999, all of the seven projects have been completed. The original
cost estimates remain essentially accurate and no other material variations in
the assumptions have appeared. Therefore, we continue to regard the $3,909,000
valuation as correct.
The nature, amount, and timing of the costs required to complete the
in-process technology are presented in the following chart:
<TABLE>
<CAPTION>
Total
Product Cost at
Base Line Started Completion Completion
Description Technology Applicability (Month - Year) Date $000'S
- ----------- ---------- ------------- -------------- ---- ------
<S> <C> <C> <C> <C> <C>
2 MB Card QPSK, FEC Coding Modems 01 - 98 11 - 99 $1,820*
"CM 601" Low Coding Modulation Modems 05 - 97 03 - 99 1,400**
Cost Modem
"DT8000" Modulation Coding Earth Stations 03 - 97 12 - 98 2,850***
Ku-band 2 Watt Transmission
Earth Station
"DBR 2000" Data L-Band Receivers Broadcast Data 06 - 98 06 - 99 400
Broadcast Packet Protocol
Receiver
"ABR 202" Audio L-Band Receivers Broadcast Audio 03 - 98 12 - 98 750
Receiver Multiplexing
Set Top Box DTH Television Satellite 03 - 97 07 - 99 1,600
Receiver Cable Television Television Cable
Proprietary Television
IC's -- MPEG
Decoders
MediaCast Card Proprietary Internet Receiver 03 - 97 03 - 99 1,900
Receiver IC's -- Internet Video Receiver
Protocol DVB MPEG
Decoders
---------
$ 10,720
=========
</TABLE>
- ---------
* Estimated at $1,800 in our Form 10-K/A for the year ended 12/31/98.
** Estimated at $1,500 in our Form 10-K/A for the year ended 12/31/98.
*** Estimated at $2,750 in our Form 10-K/A for the year ended 12/31/98.
17
<PAGE>
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
We increased our net sales by 57% to $21,112,000 during the year ended
December 31, 1998 from $13,447,000 during the year ended December 31, 1997. This
increase was primarily attributable to the increased product sales resulting
from our purchase of ComStream.
Our cost of sales as a percentage of net sales increased to 75% during the
year ended December 31, 1998 from 60% for the year ended December 31, 1997.
During the year ended December 31, 1998, we recorded adjustments to inventory of
approximately $911,000 (4.3% of sales) to write off excess and obsolete
inventory as well as costs associated with the introduction of new products.
This included approximately $280,000 of inventory associated with the DMD-5000
and DMD-4500 modem product lines and approximately $30,000 of inventory
associated with the initial DVB-3000 video broadcast products, all of which were
essentially rendered obsolete by the introduction of newer products. The costs
associated with the introduction of new products (approximately $601,000)
related principally to the following product lines in the following approximate
amounts: the DD-45 and DM-45 high-speed modem products ($75,000), the DD-160 and
DM-160 high speed modem products ($80,000), Ku band converters ($110,000),
C-band converters ($40,000), L-band modem line ($100,000), the DMD-15G
government FM order wire products ($90,000), upgrade and enhancements on digital
video broadcast lines ($20,000) and upgrade and enhancements on the DMD-2401
modem line ($10,000). These costs included production line personnel training
costs, short-lived diagnostic and measurement equipment, set-up costs, expedited
product delivery costs, low volume pricing for purchased parts on initial
production runs and the costs of reworking early circuit board designs. In
addition, we increased our inventory obsolescence reserve by $1,261,000 during
the year ended December 31, 1998. The principal components of this reserve were
approximately $700,000 in parts for our DT-7000 earth station product and
$500,000 in parts for the DT-8000 Au band product, both of which were rendered
slow moving or obsolete by the introduction of the superior and more popular
DT-8000 Ku band product around December 1, 1998.
Selling, general and administrative costs increased to $5,531,000, or 26%
of sales, during the year ended December 31, 1998 from $4,242,000, or 32% of
sales, for the year ended December 31, 1997. The decrease in expenses as a
percentage of sales was primarily attributable to the sales growth as explained
above. The increase in pure dollars is mainly attributable to the purchase of
ComStream in October 1998.
We recorded an asset impairment charge of $263,000 during the year ended
December 31, 1998, to reflect a valuation adjustment to certain designs and
drawings that were fully impaired by the introduction of competing product lines
which we obtained in our purchase of ComStream. Impairment was determined by
comparing the amount of undiscounted projected cash flows attributable to each
product using the related technology to the carrying value of the asset.
Research and development expenditures increased to $4,296,000 (20% of
sales) from $2,262,000 (17% of sales) during the year ended December 31, 1997.
The increase in expenses was primarily attributable to major development
programs instituted during 1997 and to the inclusion of the research and
development expenses from our San Diego facility acquired in the purchase of
ComStream in October 1998.
We recorded stock option compensation expense of $1,566,000 in 1998 to
reflect the bonus and related expenses to be incurred as a result of the vesting
of 657,000 incentive stock options under the 1996 Incentive Stock Option Plan.
These options carry the right to a cash bonus of $1.72 per purchased share,
payable upon exercise. These options were fully vested by action of the Board of
Directors effective October 15, 1998.
We recorded restructuring costs of $3,100,000 in 1998 in connection with a
corporate restructuring cost-cutting initiative. This amount included (a)
$1,100,000 reserved for additional costs expected in connection with the
termination of approximately 25% of the ComStream work force and (b) $2,000,000
reserved for costs related to the termination of a lease for a 125,000 square
foot facility in San Diego, including $700,000 in leasehold improvements which
were abandoned.
In connection with the acquisition of ComStream, we allocated $3,909,000 of
the purchase price to in-process research and development projects. This
allocation represents the estimated fair value based on risk-adjusted future
cash flows related to the incomplete projects. At the date of the acquisition,
the development of these projects had not yet reached technological feasibility
and the research and development in process had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date.
Interest expense net of interest income increased to $1,199,000 (6% of
sales) during the year ended December 31, 1998 from $677,000 (5% of sales) for
the year ended December 31, 1997. The large increase in expense was primarily
attributable to our
18
<PAGE>
increased debt that, in turn, was primarily attributable to the acquisition of
ComStream.
For the year ended December 31, 1998, we did not provide for income taxes,
due to the current period net loss and our net operating loss carryforwards. We
also did not provide for income taxes for the prior period due to net operating
losses. The tax examinations disclosed in Note 18 to the consolidated financial
statements have been concluded without change to our tax liability.
For the year ended December 31, 1998, we had a net loss of $14,538,000 as
compared with a net loss of $1,757,000 for the year ended December 31, 1997. The
increase in net loss was primarily attributable to the restructuring costs,
acquired in-process research and development, increased research and development
expense, the stock option compensation expense and the asset impairment charge.
Bookings for the year ended December 31, 1998 were $24,904,000 as compared
to $15,788,000 for the year ended December 31, 1997. The increase is primarily
attributable to the bookings included in the fourth quarter for the acquired
ComStream products.
Our Backlog of orders to be shipped was $8,606,000 as of December 31, 1998,
an increase of 79% over the $4,814,000 in Backlog as of December 31, 1997. Our
Backlog consists of firm orders as evidenced by written contracts and/or
purchase orders from customers.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $2,255,000 at December 31,
1999, which represents an increase in our working capital of $6,549,000 from our
working capital deficit of ($8,804,000) at December 31, 1998. Our working
capital increased primarily as a result of a reduction in current liabilities of
$4,416,000 primarily made up of a reduction in short-term notes payable of
($2,080,000), a reduction in accrued expenses of ($2,853,000), offset by an
increase in accounts payable of $612,000. In addition, current assets increased
by $2,133,000 primarily as a result of an increase in accounts receivable of
$1,407,000, and an increase in cash of $2,693,000, offset by a decrease in
inventories of ($1,041,000), and a decrease in other receivables of
($1,265,000).
Net cash provided by operating activities was $2,564,000 for the year ended
December 31, 1999 compared to cash used in operating activities of $3,850,000
for the year ended December 31, 1998. The change is primarily due to an increase
in earnings from operations of $17,400,000 to $4,037,000 for the year ended
December 31, 1999 compared to a loss from operations of $13,362,000 for the year
ended December 31, 1998. Net cash used by operating activities was $3,850,000
for the year ended December 31, 1998 compared to $4,945,000 for the year ended
December 31, 1997.
Cash used in investing activities was $279,000 for the year ended December
31, 1999 compared to cash used in investing activities of $10,551,000 for the
year ended December 31, 1998 and $593,000 for the year ended December 31, 1997.
The decrease of $10,272,000 from $10,551,000 in 1998 to $279,000 in 1999 is due
to the purchase of ComStream in October 1998. The increase of almost $10,000,000
in 1998 compared to 1997 was also related to the purchase of Comstream. The
Company has no material commitments to make capital expenditures in 2000 or
thereafter.
The Company derived net cash from financing activities of $408,000,
$14,086,000 and $5,922,000 during the years ended December 31, 1999, 1998 and
1997, respectively. During the current period, net cash from financing
activities was composed primarily of $17,173,000 from proceeds obtained through
the sale of common stock, $4,920,000 from line of credit borrowings and offset
by ($15,618,000) in repayments of loans from affiliates, ($5,963,000) in
repayments of notes payable and ($105,000) in principal payments on capital
leases. During 1998, net cash from financing activities was composed of
$3,000,000 obtained through line of credit borrowings, $15,618,000 obtained from
loans due to affiliates and $40,000 received on notes issued in connection with
common stock and was offset by ($4,500,000) in repayments on loans under the
line of credit and ($72,000) in principal payments on capital lease obligations.
During 1997, net cash from financing activities was composed of $7,506,000
obtained through line of credit borrowings and $4,600,000 obtained from loans
due to affiliates and $5,053,000 obtained from the sale of common stock and was
offset by ($11,200,000) in payments on loans due to affiliates and ($38,000) in
principal payments on capital lease obligations.
19
<PAGE>
As a result of the foregoing, the Company increased its cash balance by
$2,693,000 for the year ended December 31, 1999, decreased its cash balance by
($315,000) for the year ended December 31, 1998, and increased its cash balance
by $383,000 for the year ended December 31, 1997.
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.
All loans pursuant to the bank line of credit are short term loans with
maturities no later than September 29, 2000. The bank could demand repayment at
any time after the maturity date of the loans in which case we might have to
seek additional financing to repay our line of credit. If we are required to
seek additional sources of financing to repay our line of credit, such financing
may not be available on terms that we consider acceptable or may not be
available in sufficient amounts to enable us to repay our obligations to the
bank. Any of these circumstances would have a material and adverse impact on our
business, financial condition, and results of operations. We believe the bank's
willingness to provide us with the line of credit is based in part on the bank's
relationship with ST. ST has provided the bank with a letter of awareness in
which ST states it (1) will endeavor to ensure that we utilize sound financial
and business practices in our operations and (2) ST will give that bank at least
60 days' prior written notice of any divestment of our shares held by ST or its
affiliates. ST has not, however, guaranteed our indebtedness to the bank and is
under no obligation to do so or to otherwise satisfy our debts if we fail to pay
them when due. 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.
The availability of additional borrowings under the credit agreement
expires September 29, 2000 and is renewable annually at the option of the Bank.
The Company owed principal of $12,920,000 under the line of credit at interest
rates from 6.59% percent to 6.94% as of December 31, 1999. Subsequent to the end
of the period reported on herein, the Company repaid $4,920,000 of outstanding
borrowings using cash from operations.
During 1999, we also had a note payable to Spar 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. We negotiated a reduction in the note
balance due to Spar for the following reasons: (i) a $521,000 reduction for our
assumption of $115,000 of liabilities from Spar and the waiver of Spar's
obligation to indemnify us against a $406,000 claim by a product assembly
contractor for costs incurred on ComStream's behalf prior to the acquisition,
and (ii) a $516,000 reduction in the note for certain inventory, furniture, and
equipment erroneously carried on ComStream's pre-closing balance sheet. Because
these discrepancies were identified prior to the purchase price allocation, no
portion of our purchase price for ComStream was allocated to such inventory,
furniture, and equipment. Therefore, this $516,000 reduction has resulted in a
reduction of goodwill. We paid the note during the quarter ended September 30,
1999. In addition, we negotiated a $278,000 reduction in interest on the note
($188,000 of which had been accrued in prior periods and has been reported as
extraordinary income). We have financed the repayment of debt incurred for the
ComStream acquisition, certain planned restructuring costs and our ongoing
working capital needs through (i) a rights offering pursuant to which we sold
$16,860,584 of Common Stock to our existing stockholders and (ii) the existing
bank line of credit. In the rights offering, we issued rights to our
shareholders entitling them to purchase an aggregate of up to 4,745,076 shares
of our common stock at a purchase price of $3.73 per share. On September 30,
1999, ST instructed us to capitalize the entire $15,618,272 principal amount of
the debt we owed to ST in partial exercise of its rights in the rights offering.
In October 1999, ST exercised the balance of its rights by paying cash to us in
the amount of $423,700. We used the funds, along with $932,200 of cash on hand,
to pay the accrued interest due to ST.
The rights offering was concluded on December 1, 1999. Our shareholders
purchased 4,520,264 shares at an aggregate purchase price of $16,860,585 in our
rights offering, including ST's purchase of 4,300,800 shares at an aggregate
purchase price of $16,041,984.
Subsequent to December 31, 1999, we completed a public offering of
2,400,000 units, each consisted of one share of common stock and one warrant to
purchase one share of common stock, plus a 360,000 unit underwriter's
over-allotment that was exercised at closing, providing us with approximately
$16,759,000 in net proceeds, a significant portion of which we plan to use for
our research and development programs and to hire additional technical personnel
to carry out those programs. The offering closed on February 11, 2000.
We believe that the proceeds from the offerings, our bank credit lines
and cash from operations are likely to be sufficient to fund our planned future
operations and capital requirements for continued growth through the end of
2000.
20
<PAGE>
SUPPLEMENTARY INFORMATION
YEAR 2000 COMPLIANCE
In preparation for the Year 2000, we engaged in efforts to ensure that our
products and business systems properly recognized date-sensitive information in
the Year 2000 and beyond. These efforts and their costs are described below. We
have not experienced any significant "Year 2000 problems" with our products and
business systems and do not expect that we will do so in the future.
State of Readiness. In 1999 we hired outside consultants to audit and
assess the ability of our hardware and software systems to operate properly in
the Year 2000 and beyond. We investigated the Year 2000 readiness of our
software, hardware and other significant vendors by requiring them to complete
questionnaires and submit internal Year 2000 plans to insure no disruption would
occur in our supply chain. To date we have not encountered any material Year
2000 issues or significant disruptions to our operations.
Cost of Assessment and Remediation. We have incurred direct costs of less
than $120,000 in assessing and remediating Year 2000 problems, and we do not
expect to spend more than $120,000 in the aggregate to complete the process.
Risks. We could be exposed to a loss of revenues and our operating expenses
could increase if our products or business systems have Year 2000 problems. Our
potential areas of exposure include products purchased from third parties,
information technology, including computers and software, and non-information
technology, including telephone systems and other equipment used internally. The
reasonable likely worst case scenario for Year 2000 problems would be if a
significant defect exists in key hardware or software and if a solution to such
a problem were not immediately available.
Contingency Plan. Although we have not experienced any Year 2000 related
problems affecting our internal systems, we have developed contingency plans to
be implemented if our efforts to identify and correct Year 2000 problems are not
effective. Depending on the systems affected, these plans include:
o accelerated replacement of affected equipment or software;
o short to medium-term use of back-up equipment and software or other
redundant systems; and
o increased work hours for our personnel or the hiring of additional
information technology staff.
The discussion of our efforts and expectations relating to Year 2000
compliance are forward-looking statements. Our ability to achieve Year 2000
compliance, and the level of incremental costs associated with compliance, could
be adversely affected by, among other things, the availability and costs of
external resources, third party suppliers' ability to modify proprietary
software and unanticipated problems not identified in our ongoing review.
IMPACT OF INFLATION
We do not believe that inflation has had a material impact on revenues or
expenses during the last four fiscal periods reported on herein.
ACCOUNTING MATTERS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). This statement requires recognition of
all derivatives as either assets or liabilities on the balance sheet and
measurement of those instruments at fair value. Changes in fair value of
derivatives are recorded each period in current earnings or other comprehensive
income (loss). Proper accounting for changes in fair value of derivatives held
is dependent on whether the derivative transaction qualifies as an accounting
hedge and on the classification of the hedge transaction.
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferral of the Effective Date of FASB Statement No.
133." This statement amended the effective date of SFAS No. 133 to all fiscal
quarters of all fiscal years beginning after June 15, 2000.
21
<PAGE>
Management does not expect the adoption of SFAS No. 133 to have a material
impact on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk on our financial instruments from changes in
interest rates. We do not use financial instruments for trading purposes or to
manage interest rate risk. Increases in market interest rates would not have a
substantial adverse effect on profitability.
Our financial instruments consist primarily of short-term variable rate
revolving credit lines, and fixed rate debt. Our debt at December 31, 1999
consists of notes payable under a line of credit agreement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Reports...........................................................................23
Consolidated Balance Sheets as of December 31, 1999 and 1998............................................25
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997..............26
Consolidated Statements of Stockholders' Equity (Deficiency) for the Years Ended
December 31, 1999, 1998 and 1997......................................................................27
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997..............28
Notes to Consolidated Financial Statements..............................................................29
</TABLE>
22
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Radyne ComStream Inc.:
We have audited the accompanying consolidated balance sheets of Radyne ComStream
Inc. and subsidiaries (the Company) (a majority-owned subsidiary of Singapore
Technologies Pte Ltd) as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficiency), and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1999
and 1998, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Phoenix, Arizona
February 4, 2000
23
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Radyne ComStream Inc.:
We have audited the accompanying statements of operations, stockholders'
deficiency and cash flows of Radyne ComStream Inc. (formerly Radyne Corp.) (the
Company) for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statements of operations, stockholders' deficiency,
and cash flows are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
statements of operations, stockholders' deficiency, and cash flows. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
statements of operations, stockholders' deficiency, and cash flows. We believe
that our audit of the statements of operations, stockholders' deficiency, and
cash flows provides a reasonable basis for our opinion.
In our opinion, the statements of operations, stockholders' deficiency, and cash
flows present fairly, in all material respects, the results of operations and
cash flows of the Company for the year ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Phoenix, Arizona
February 4, 1998
24
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
---------------------------------
Assets 1999 1998
------------ ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,947,660 254,956
Accounts receivable - trade, net of allowance for doubtful
accounts of $791,746 and $632,815, respectively 8,678,153 7,270,732
Other receivable -- 1,265,000
Inventories, net 8,339,112 9,380,478
Prepaid expenses 929,076 590,161
------------ ------------
Total current assets 20,894,001 18,761,327
------------ ------------
Property and equipment, net 3,595,168 5,533,645
Other assets:
Purchased technology, net of accumulated amortization of $505,000
and $105,000 at December 31, 1999 and 1998, respectively 1,995,000 2,395,000
Goodwill, net of accumulated amortization of $253,530 and
$35,960 at December 31, 1999 and 1998, respectively 1,544,861 2,278,300
Deposits and other 207,032 222,442
------------ ------------
Total other assets 3,746,893 4,895,742
------------ ------------
$ 28,236,062 29,190,714
============ ============
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Note payable under line of credit agreement $ 12,920,000 8,000,000
Note payable -- 7,000,000
Current installments of obligations under capital leases 44,332 124,891
Accounts payable, trade 3,911,742 3,291,915
Accounts payable, affiliate -- 8,150
Accrued expenses 5,588,609 8,441,874
Taxes payable 684,382 698,467
------------ ------------
Total current liabilities 23,149,065 27,565,297
Notes payable to affiliates -- 15,618,272
Obligations under capital leases, excluding current installments 64,652 88,588
Accrued stock option compensation 695,433 1,155,477
------------ ------------
Total liabilities 23,909,150 44,427,634
------------ ------------
Stockholders' equity (deficiency):
Common stock; $.002 par value - authorized, 20,000,000 shares; issued and
outstanding, 10,739,382 and 5,931,346 shares
at December 31, 1999 and 1998, respectively 21,476 11,862
Additional paid-in capital 23,353,318 6,105,404
Accumulated deficit (19,047,882) (21,354,186)
------------ ------------
Total stockholders' equity (deficiency) 4,326,912 (15,236,920)
Commitments, contingent liabilities and subsequent events (note 7, 8, 9, 11, 13,
15, 17 and 18)
------------ ------------
$ 28,236,062 29,190,714
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
RADYNE COMSTREAM INC.
Consolidated Statements of Operations
Years ended December 31,
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 55,839,792 21,111,704 13,446,852
Cost of sales 29,970,560 15,808,459 8,022,262
------------ ------------ ------------
Gross profit 25,869,232 5,303,245 5,424,590
------------ ------------ ------------
Operating expenses:
Selling, general and administrative 12,355,188 5,531,213 4,242,138
Research and development 9,126,545 4,296,268 2,262,066
Stock option compensation expense 350,000 1,566,075 --
In-process research and development -- 3,909,000 --
Restructuring costs -- 3,100,000 --
Asset impairment charge -- 262,935 --
------------ ------------ ------------
Total operating expenses 21,831,733 18,665,491 6,504,204
------------ ------------ ------------
Earnings (loss) from operations 4,037,499 (13,362,246) (1,079,614)
Other (income) expense:
Interest expense 1,910,422 1,198,777 677,102
Other (76,045) (23,480) --
------------ ------------ ------------
Earnings (loss) before income taxes and
extraordinary item 2,203,122 (14,537,543) (1,756,716)
Income taxes 85,000 -- --
------------ ------------ ------------
Earnings (loss) before extraordinary item 2,118,122 (14,537,543) (1,756,716)
Extraordinary item 188,182 -- --
------------ ------------ ------------
Net earnings (loss) $ 2,306,304 (14,537,543) (1,756,716)
============ ============ ============
Basic net earnings (loss) per share:
Earnings (loss) before extraordinary item $ 0.30 (2.45) (0.35)
Extraordinary item 0.02 -- --
------------ ------------ ------------
Net earnings (loss) $ 0.32 (2.45) (0.35)
============ ============ ============
Diluted net earnings (loss) per share:
Earnings (loss) before extraordinary item $ 0.28 (2.45) (0.35)
Extraordinary item 0.02 -- --
------------ ------------ ------------
Net earnings (loss) $ 0.30 (2.45) (0.35)
============ ============ ============
Weighted average number of common shares
outstanding - basic 7,111,777 5,931,346 5,012,664
============ ============ ============
Weighted average number of common shares
outstanding - diluted 7,571,425 5,931,346 5,012,664
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
RADYNE COMSTREAM INC.
Consolidated Statements of Stockholders' Equity (Deficiency)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Notes
Additional receivable
Common stock paid-in Accumulated from
Shares Amount capital Deficit stockholders Total
---------- ------- ----------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 3,759,721 $ 7,519 605,782 (5,059,927) -- (4,446,626)
Issuance of common stock, net of issuance
cost of $335,696 2,171,625 4,343 5,089,024 -- -- 5,093,367
Promissory notes received in connection
with issuance of stock -- -- -- -- (40,086) (40,086)
Net loss -- -- -- (1,756,716) -- (1,756,716)
---------- ------- ----------- ----------- ------- -----------
Balances, January 1, 1997 5,931,346 11,862 5,694,806 (6,816,643) (40,086) (1,150,061)
Payments received on promissory notes -- -- -- -- 40,086 40,086
Stock option plan -- -- 410,598 -- -- 410,598
Net loss -- -- -- (14,537,543) -- (14,537,543)
---------- ------- ----------- ----------- ------- -----------
Balances, December 31, 1998 5,931,346 11,862 6,105,404 (21,354,186) -- (15,236,920)
Issuance of common stock for cash 4,520,264 9,040 16,420,239 -- -- 16,429,279
Exercise of stock options 287,772 574 743,580 -- -- 744,154
Tax benefit of stock option exercises -- -- 84,095 -- -- 84,095
Net earnings -- -- -- 2,306,304 -- 2,306,304
---------- ------- ----------- ----------- ------- -----------
Balances, December 31, 1999 10,739,382 $21,476 23,353,318 (19,047,882) -- 4,326,912
========== ======= =========== =========== ======= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
RADYNE COMSTREAM INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 2,306,304 (14,537,543) (1,756,716)
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Forgiveness of interest (188,182) -- --
Loss on disposal of assets -- 961,069 2,122
Depreciation and amortization 2,835,024 1,041,088 454,183
Asset impairment charge -- 262,935 --
Stock option compensation -- 1,566,075 --
Write-off of in-process research and development -- 3,909,000 --
Increase (decrease) in cash resulting from changes in:
Accounts receivable (142,421) (915,154) 374,459
Prepaid expenses and other current assets (338,915) 20,069 26,222
Inventories 1,041,366 2,833,811 (3,398,560)
Deposits and other 15,410 242,787 (34,338)
Accounts payable, trade 286,550 (985,095) (138,077)
Accounts payable, affiliate (8,150) 113,682 (420,300)
Accrued expenses (2,853,265) 1,932,071 (25,924)
Taxes payable 70,010 (94,581) (28,487)
Accrued stock option compensation (460,044) -- --
------------ ------------ ------------
Net cash provided by (used in) operating activities 2,563,687 (3,649,786) (4,945,416)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (279,048) (543,630) (593,072)
Purchase of ComStream, net of cash acquired -- (10,007,369) --
------------ ------------ ------------
Net cash used in investing activities (279,048) (10,550,999) (593,072)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings from notes payable under line of credit 4,920,000 3,000,000 7,506,180
Payment on note payable under line of credit -- (4,500,000) --
Payment on note payable (5,962,561) -- --
Proceeds from notes payable to affiliates -- 15,618,272 4,600,000
Payments on note payable to affiliate (15,618,272) -- (11,200,000)
Payment of debt issuance costs on line of credit -- (200,000) --
Net proceeds from sale of common stock 17,173,433 -- 5,053,281
Payments received on promissory notes issued in connection
with common stock -- 40,086 --
Principal payments on capital lease obligations (104,535) (72,309) (37,769)
------------ ------------ ------------
Net cash provided by financing activities 408,065 13,886,049 5,921,692
------------ ------------ ------------
Net increase (decrease) in cash 2,692,704 (314,736) 383,204
Cash and cash equivalents, beginning of year 254,956 569,692 186,488
------------ ------------ ------------
Cash and cash equivalents, end of year $ 2,947,660 254,956 569,692
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,090,298 568,812 687,626
============ ============ ============
Cash paid for taxes $ 22,000 -- --
============ ============ ============
Supplemental disclosures of noncash investing and financing activities:
During 1997, the Company incurred capital lease obligations of $106,512 for
new machinery and equipment. In October 1998, the Company made an
acquisition for $17,000,000 plus $300,000 of other costs incurred in
connection with the acquisition. A summary of the acquisition was as
follows:
Purchase price $ 17,000,000
Costs incurred 300,000
Less issuance of note payable (7,000,000)
Less cash acquired (292,631)
------------
Cash invested $ 10,007,369
============
</TABLE>
During 1999, the Company negotiated a write-down of the note payable in the
amount of $515,940.
See accompanying notes to consolidated financial statements.
28
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(1) Organization and Acquisition
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.
Radyne Corp., a New York corporation, (Radyne) was incorporated on November
25, 1980. On August 12, 1996, Radyne became a subsidiary of Singapore
Technologies Pte Ltd (STPL), through its wholly-owned subsidiary, Stetsys
US, Inc. (ST). In 1996, Radyne changed its fiscal year-end to December 31.
In March 1999, Radyne changed its name to Radyne ComStream Inc.
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. In addition, the Company accrued $1.6
million of severance costs as a result of the acquisition (note 5). 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 was
recorded as goodwill, which is being amortized over ten years. The results
of operations of ComStream have been included in the accompanying
consolidated statement of operations from October 15, 1998.
The Company negotiated a reduction in the note balance due to Spar for the
following reasons: (i) a $521,000 reduction for the Company's assumption of
$115,000 of liabilities from Spar and the waiver of Spar's obligation to
indemnify the Company against a $406,000 claim by a product assembly
contractor for costs incurred on ComStream's behalf prior to the
acquisition, and (ii) a $516,000 reduction in the note for certain
inventory and furniture and equipment erroneously carried on ComStream's
pre-closing balance sheet. Because these discrepancies 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 $516,000 reduction has resulted in a reduction
in goodwill. The note was paid during the quarter ended September 30, 1999.
In addition, the Company negotiated a $278,000 reduction in interest on the
note ($188,000 of which had been accrued in prior periods and so has been
reported as extraordinary income in the current period).
The allocation to in-process research and development, for which management
was primarily responsible, 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.
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.
29
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Products-in-development at ComStream at the time of the acquisition were
classified as in-process technology. All of the products were completed by
December 31, 1999. These include the following products with their
respective completion dates:
Description Completion Date
------------------------------------------ -------------------------
A 2MB card Jan-99
"CM601" modem modifications Mar-99
"DT 8000" - a Ku-band 2 Watt earth station Dec-98
"DBR 2000" - a new data broadcast receiver Jun-99
"ABR 202" - a new audio receiver Nov-98
Set Top Box Jun-99
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. 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 achieved for all products during 1998 or 1999.
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,
estimates of ComStream's future revenues, cost of goods sold, sales and
marketing, general and administrative, and research and development
expenses on a stand-alone basis were used to estimate a baseline measure of
earnings attributable to the products. 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. For this purpose, the annual
charge for core technology included in the products under development was
calculated by multiplying the unamortized book value of the developed
technology for that year by the required rate of return on developed
technology. The opening value of core technology was calculated using a
residual income approach similar to the methodology employed to calculate
the value of in-process research and development. The remaining book value
of the developed technology was calculated by amortizing its opening fair
value over 6.25 years. The total charge was allocated to the in-process
technology based on the in-process technology projects' share of total
revenue.
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. The resulting residual cash flows represent the expected cash
flows attributable to the in-process technologies. A factor, based on the
stage of completion of the
30
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
in-process projects, was applied to these expected cash flows to isolate
the value relating to development efforts completed at the acquisition
date. These cash flows were then discounted at a rate of 36 percent.
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.
The Company has determined that no changes to the original assumptions were
deemed necessary as a result of completing the in-process technologies.
ComStream operates primarily in North America in the satellite
communications industry. ComStream designs, markets and manufacturers
satellite interactive modems and earth stations. Additionally, ComStream
manufactures and markets full-transponder satellite digital audio receivers
for music providers and has designed and developed a PC broadband satellite
receiver card which is an Internet and high-speed data networking product.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the financial statement date and the reported amounts of revenue and
expenses during the reporting period. The industry in which the
Company operates is characterized by rapid technological change and
short product life cycles. As a result, estimates are required to
provide for product obsolescence and warranty returns as well as other
matters. Actual results could differ from those estimates.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany accounts and
transactions have been eliminated in the consolidation.
(c) Cash Equivalents
The Company considers all money market accounts with a maturity of 90
days or less to be cash equivalents.
(d) Revenue Recognition
The Company recognizes revenue upon shipment of product.
31
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(e) Inventories
Inventories, consisting of satellite modems and related products, are
valued at the lower of cost (first-in, first-out) or market.
(f) Property and Equipment
Property and equipment are stated at cost. Equipment held under
capital leases is stated at the present value of future minimum lease
payments. Expenditures for repairs and maintenance are charged to
operations as incurred, and improvements which extend the useful lives
of the assets are capitalized. Depreciation and amortization of
machinery and equipment are computed using the straight-line method
over an estimated useful life of three to ten years. Equipment held
under capital leases and leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or estimated
useful lives of the assets.
(g) 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.
(h) Purchased Technology
In connection with the acquisition of ComStream, value was assigned to
purchased technology. Purchased technology is being amortized on a
straight-line basis over the expected period to be benefited of 6.25
years.
(i) 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. During 1998, the Company recognized a design and drawing
impairment charge of $262,935, with no associated tax benefit as a
result of technology used in new products.
(j) 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.
(k) Research and Development
The cost of research and development is charged to expense as
incurred.
32
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(l) Income Taxes
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future consequences attributed to differences between the consolidated
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Differences between income
for financial and tax reporting purposes arise primarily from
amortization of certain designs and drawings and accruals for warranty
reserves and compensated absences. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(m) 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.
Periodically during the year, the Company maintains cash in financial
institutions in excess of the amounts insured by the federal
government.
(n) Net Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing earnings
(loss) available to stockholders by the weighted-average number of
shares outstanding for the period. Diluted earnings (loss) per share
reflects the potential dilution that could occur if securities or
contracts to issue common stock were exercised or converted to stock
or resulted in the issuance of stock that then shared in the earnings
or loss of the Company. Assumed exercise of outstanding stock options
for 1998 and 1997 have been excluded from the calculations of diluted
net loss per share as their effect is antidilutive. Per share amounts
have been adjusted to reflect a 1-for-5 reverse stock split that
occurred on January 9, 1997.
(o) 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.
(p) 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.
33
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(q) Segment Reporting
The Company has only one operating business segment, the sale of
equipment for satellite and cable communications networks.
(r) Reclassifications
Certain reclassifications have been made to the prior years'
consolidated financial statement amounts to conform to the current
year presentation.
(3) Inventories
Inventories at December 31 consist of the following:
1999 1998
------------ ------------
Raw materials and components $ 5,550,279 6,065,751
Work-in-process 3,724,908 4,319,338
Finished goods 863,154 546,858
------------ ------------
10,138,341 10,931,947
Obsolescence reserve (1,799,229) (1,551,469)
------------ ------------
$ 8,339,112 9,380,478
============ ============
(4) Property and Equipment
Property and equipment at December 31 consist of the following:
1999 1998
----------- -----------
Machinery and equipment $ 3,674,803 3,598,732
Furniture and fixtures 2,048,976 2,661,195
Leasehold improvements 445,127 312,425
Computers and software 462,042 --
----------- -----------
6,630,948 6,572,352
Less accumulated depreciation and
amortization (3,035,780) (1,038,707)
----------- -----------
Property and equipment, net $ 3,595,168 5,533,645
=========== ===========
34
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(5) Accrued Expenses
Accrued expenses at December 31 consist of the following:
1999 1998
---------- ----------
Wages, vacation and related payroll taxes $ 788,559 1,355,316
Interest 303,205 803,929
Professional fees 630,650 378,817
Warranty reserve 924,928 679,964
Severance -- 1,282,761
Lease buyout (notes 8 and 16) 172,511 2,443,110
Other 2,768,756 1,497,977
---------- ----------
Total accrued expenses $5,588,609 8,441,874
========== ==========
The severance balance included in accrued expenses at December 31, 1998
consisted of approximately $688,000 associated with the restructuring
charge in the fourth quarter of 1998, discussed in note 16, and the
remaining $595,000 of severance (for 16 technical staff and management)
related to the Company's acquisition of ComStream in October 1998. This
$595,000 is part of a termination benefits cost totaling $1,600,000 (note
1).
(6) Notes Payable
The Company has a $20,500,000 credit agreement with a bank expiring
September 29, 2000. STPL has issued a nonbinding letter of awareness in
connection with this credit agreement. Borrowings under the line of credit
bear interest equal to LIBOR or the bank's Quoted Rate plus 1 percent per
annum at the time of draw. The interest rates on the December 31, 1999
borrowings ranged from 6.59% to 6.94% and 6.125% on the December 31, 1998
borrowings. At December 31, 1999 and 1998, outstanding borrowings against
the line were $12,920,000 and $8,000,000, respectively, plus accrued
interest. This credit facility is an uncommitted line of credit which the
bank may modify or cancel without prior notice.
In connection with the purchase of ComStream, the Company executed a
$7,000,000 note payable to the former owner of ComStream. 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. The Company negotiated a reduction in the note balance due to
Spar (note 1). The note was paid during the quarter ended September 30,
1999.
(7) Obligations Under Capital Leases
The Company leases machinery and equipment under capital leases. The cost
and accumulated depreciation of the equipment was $289,558 and $132,531
respectively, at December 31, 1999 and is included in property and
equipment in the accompanying consolidated balance sheets and is being
depreciated over the estimated useful lives of the machinery and equipment.
35
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Payments on capital lease obligations due after December 31, 1999 are as
follows:
2000 $ 52,693
2001 37,330
2002 18,786
2003 12,230
2004 6,790
2005 and thereafter --
---------
Total minimum lease payments 127,829
Less amount representing interest at
rates of 2.26% to 12.96% (18,845)
---------
Present value of minimum lease payments 108,984
Less current installments (44,332)
---------
Capital lease obligations due after one year $ 64,652
=========
(8) Commitments
Rent expense was approximately $1,790,248, $517,853, and $94,000 for the
years ended December 31, 1999, 1998 and 1997. Future minimum rentals under
leases after December 31, 1999 are as follows:
2000 $ 1,803,124
2001 1,806,877
2002 1,800,441
2003 1,830,431
2004 1,784,509
Thereafter 3,126,603
-----------
$12,151,985
===========
Prior to October 15, 1998, ComStream leased two buildings (of different
size) from the same landlord under a single lease. The entire lease
remained in effect after Radyne's acquisition of the stock of ComStream
from Spar Aerospace Limited. However, Spar and Radyne agreed that ComStream
would occupy only the larger of the two buildings, while Spar would seek to
divide the lease into two separate building leases with Spar as lessor of
the smaller building. Spar agreed to indemnify Radyne ComStream from all
costs associated with the lease of the smaller building. However, after the
closing of the acquisition, a new tenant was found for the larger building.
This permitted both Spar and Radyne ComStream to realize substantial cost
savings. Accordingly on November 18, 1998, the landlord and ComStream
agreed that ComStream would (i) retain the smaller building, (ii) vacate
the larger building no later than December 15, 1998, (iii) pay $2,000,000
to the landlord, and (iv) commence paying rent on the smaller building
alone as of March 1, 1999. Additionally, the Company negotiated a cost
reimbursement of $1,265,000 from Spar, which was netted against the
restructuring cost discussed in note 16, resulting in a net restructuring
cost of $1.3 million for the lease buyout. The recovery is recorded as
other receivable as of December 31, 1998. The $2,000,000 cash buyout was
paid in two equal installments of $1,000,000 on March 1, 1999 and September
1, 1999.
36
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The Company generally has commitments with certain suppliers and
subcontract manufacturers to purchase certain components and estimates its
non-cancelable obligations to be approximately $4,800,000 at December 31,
1999.
(9) Income Taxes
Income tax expense amounted to $85,000, and $0 and $0 for the years ended
December 31, 1999, 1998 and 1997. The actual tax expense (benefit) for
these periods differs from the "expected" tax expense for those periods as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense $ 813,043 (4,943,000) (597,000)
State tax expense 190,158 (541,000) (64,000)
Valuation allowance benefit (1,080,360) 5,190,000 613,000
Other adjustments 162,159 294,000 48,000
----------- ----------- -----------
Total $ 85,000 -- --
=========== =========== ===========
</TABLE>
Components of income tax expense for 1999 follows:
Current Deferred Total
------------ ------------ ------------
1999:
Federal $ 85,000 -- 85,000
State -- -- --
------------ ------------ ------------
Total $ $85,000 -- 85,000
============ ============ ============
There was no current or deferred income tax expense for the years ended
December 31, 1998 and 1997.
Deferred tax assets at December 31 consisted of the following:
1999 1998
------------ ------------
Deferred tax assets:
Cumulative tax effect of net
operating loss carryforwards $ 9,316,187 $ 8,459,000
Tax credits 552,846 155,000
Temporary differences 3,937,989 3,734,000
Valuation allowance (13,807,022) (12,348,000)
------------ ------------
$ -- $ --
============ ============
The net change in the total valuation allowance for the years ended
December 31, 1999 and 1998 was $1,459,022 and $7,625,000, respectively. At
December 31, 1999, the Company has net operating loss carryforwards of
approximately $24,241,000 expiring in various years through 2019 and
general business credit carryforwards of $351,000 expiring in various years
through 2004, and federal AMT credit of
37
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
$202,000 for utilization against taxable income/taxes payable of future
periods, if any. Approximately $6,200,000 of the Company's net operating
loss and tax credit carryforwards are subject to an annual limitation under
Internal Revenue Code Section 382, in future years, as a result of changes
in ownership of the Company's stock. Management believes that the inability
to utilize net operating loss and tax credit carryforwards to offset future
taxable income within the carryforward periods under existing tax laws and
regulations is more likely than not. Accordingly, a 100 percent valuation
allowance has been recorded against the net deferred tax assets as of
December 31, 1999 and 1998.
(10) Significant Customers and Foreign and Domestic Sales
During 1999 and 1998, no customers represented greater than 10 percent of
net sales. During 1997, one customer represented 14.5 percent of net sales.
Our sales in principal foreign and domestic markets as a percentage of
total sales for the years ended December 31, 1999, 1998 and 1997 follow:
Years ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
Asia 25% 7% 32%
Africa/Middle East 4 8 0
Latin America 4 9 12
Europe 21 23 7
Canada 2 3 5
-------- -------- --------
Total foreign 56 50 56
Domestic 44 50 44
-------- -------- --------
100% 100% 100%
======== ======== ========
Foreign assets $333,000 385,000 *
======== ======== ========
* Total foreign asset information is not available as of December 31,
1997.
The Company does not track sales by customer by country. Therefore, this
information is not available.
The Company has two primary product lines: 1) satellite modems and
earthstations, and 2) broadcast products. The sales of satellite modems and
earthstations accounted for approximately 54% of 1999 and 75% of 1998 net
sales. Information concerning the breakout of sales by these two product
lines for periods prior to 1998 is not available.
(11) Stockholders' Equity
In December 1999, the Company completed a rights offering of 4,520,264
shares of common stock to existing shareholders for a total of
approximately $16,429,000, net of issuance costs. The Company used
$15,618,272 of the proceeds from the partial exercise by ST to pay the
total amount of debt owed to ST.
38
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The Compensation Committee and the Board of Directors resolved to permit
senior management to borrow funds from the Company for the purpose of
exercising stock options. In October and November 1999, the chief executive
officer, chief technology officer, and chief financial officer borrowed
$200,000, $100,000 and $50,000, respectively, for the purpose of exercising
stock options. The Company recorded the $350,000 in forgivable loans made
as compensation expense in 1999.
In February 2000, the Company completed an offering of 2,400,000 units,
each consisting of one share of common stock and one warrant to purchase
one share of common stock, plus an additional 360,000 units sold pursuant
to the underwriters' over-allotment option, for a total of approximately
$16,759,000 cash, net of issuance costs.
(12) Earnings (Loss) Per Share
A summary of the reconciliation from basic earnings (loss) per share to
diluted earnings (loss) per share follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- ----------
<S> <C> <C> <C>
Earnings (loss) available to common
stockholders $ 2,306,304 (14,537,543) (1,756,716)
============= ============= ==========
Basic EPS-weighted average shares
outstanding 7,111,777 5,931,346 5,012,664
============= ============= ==========
Basic earnings (loss) per share:
Earnings (loss) before
extraordinary item
$ 0.30 (2.45) (.35)
Extraordinary item 0.02 -- --
------------- ------------- ----------
Net earnings (loss) $ 0.32 (2.45) (.35)
============= ============= ==========
Basic EPS-weighted average shares
outstanding 7,111,777 5,931,346 5,012,664
Effect of dilutive securities 459,648 -- --
------------- ------------- ----------
Dilutive EPS-weighted average shares
outstanding 7,571,425 5,931,346 5,012,664
============= ============= ==========
Diluted earnings (loss) per share:
Earnings (loss) before
extraordinary item $ 0.28 (2.45) (.35)
Extraordinary item 0.02 -- --
------------- ------------- ----------
Net earnings (loss) $ 0.30 (2.45) (.35)
============= ============= ==========
Stock options not included in
diluted EPS since antidilutive -- 691,559 169,818
============= ============= ==========
</TABLE>
39
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(13) Employee Benefit Plan
The Company has a qualified contributory 401(k) plan that covers all
employees in Phoenix, Arizona, who have attained the age of 18 and are
employed at the enrollment date. Matching contributions were $85,301,
$31,690 and $30,230 for the years ended December 31, 1999, 1998 and 1997,
respectively. Each participant may elect to contribute up to 15 percent of
his or her gross compensation up to the maximum amount allowed by the
Internal Revenue Service. The Company matches up to 1 percent of the
employee's salary.
The Company has a qualified contributory 401(k) plan that covers all
full-time employees in San Diego, California, who have been employed
continuously for at least 30 days before enrollment date. Matching
contributions were $143,487 for the year ended December 31, 1999 and
$30,450 for the period October 15, 1998 through December 31, 1998,
respectively. Each participant may elect to contribute up to 15 percent of
his or her gross compensation up to the maximum amount allowed by the
Internal Revenue Service. The Company matches $.35 for every dollar up to 7
percent of the participant's contribution.
(14) Stock Options
In November 1996, the Board of Directors adopted the 1996 Incentive Stock
Option Plan (the Plan), which was approved by the stockholders on January
8, 1997. The Plan provided for the grant of options to employees of the
Company to purchase up to 1,282,042 shares of common stock. The option
price per share under the Plan may not be less than the fair market value
of the stock (110 percent of the fair market value for an optionee who is a
10 percent stockholder) on the day the option is granted. In October 1998,
the Company amended the terms of certain stock options pursuant to the Plan
to accelerate vesting of the awards, thereby creating a new measurement
date and, accordingly, recognized compensation costs amounting to
$1,566,075. The Company recognized no compensation cost relative to those
stock options in 1997. In November 1998, the Plan was amended to increase
the options available by 900,000, providing a total of 2,182,042 options
available to purchase shares of common stock.
At December 31, 1999, the Company had 1,535,206 options outstanding at
exercise prices ranging from $2.50 to 4.188 per share. Of the total
options, the Company had 394,769 options outstanding at an exercise price
of $2.50 per share that carry the right to a cash bonus of $1.72 per
purchased share, payable upon exercise. The stock option compensation
accrual related to the bonus is $695,433 at December 31, 1999.
The Company applies APB Opinion 25 in accounting for its Plan. Had the
Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net earnings
(loss) and earnings (loss) per share would have been reduced (increased) to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C> <C>
Net earnings (loss) As reported $ 2,306,304 $ (14,537,543) $ (1,756,716)
Pro forma (unaudited) 1,482,399 (15,293,957) (2,028,121)
Earnings (loss) per share - basic As reported .32 (2.45) (.35)
Pro forma (unaudited) .21 (2.58) (.40)
Earnings (loss) per share - diluted As Reported .30 (2.45) (.35)
Pro forma (unaudited) .20 (2.58) (.40)
</TABLE>
40
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net earnings (loss) amounts
presented above because compensation cost is reflected (increased) over the
options' vesting period of three years.
The fair value of options granted under the Plan was estimated on the date
of grant with vesting periods ranging from one to three years using the
Black-Scholes option-pricing model with the following weighted average
assumptions used: no dividend yield, expected volatility of 118 percent -
184 percent, risk free interest rate of 6 percent - 5.27 percent, and
expected lives of five years.
A summary of the aforementioned stock plan activity follows:
Weighted
Average Price
Number Per Share
---------- -------------
Balance, December 31, 1996 684,395 $2.50
Granted 15,500 2.50
Forfeited (9,230) 2.50
---------- ----------
Balance, December 31, 1997 690,665 2.50
Granted 553,000 2.89
Forfeited (37,708) 2.50
---------- ----------
Balance, December 31, 1998 1,205,957 2.68
Granted 857,000 3.60
Forfeited (239,979) 3.45
Exercised (287,772) 2.54
---------- ----------
Balance, December 31, 1999 1,535,206 $3.09
========== ==========
A summary of stock options granted at December 31, 1999 follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- -------------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding at Remaining Exercise Exercisable at Exercise
Exercise Prices 12/31/99 Contractual Life Price 12/31/99 Price
--------------- -------------- ---------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$ 2.50 410,904 1 years $ 2.50 410,904 $ 2.50
$ 2.50 6,500 2 years 2.50 4,875 2.50
$2.50 to 3.125 439,552 3 years 2.92 219,776 2.92
$3.00 to 4.1875 678,250 4 years 3.57 169,562 3.57
--------- --------- --------- ---------
1,535,206 $ 3.09 805,117 $ 2.84
========= ========= ========= =========
</TABLE>
41
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(15) Employee Stock Purchase Plan
On June 15, 1999, our shareholders adopted the 1999 Employee Stock Purchase
Plan (the Purchase Plan), as a means of rewarding and retaining existing
employees. The purchase plan allows employees, including officers and
directors who are employees, to utilize payroll deductions to purchase
shares of our common stock. The Board of Directors or a committee of two or
more directors, none of whom will be officers or employees, have full
authority to administer all aspects of the Purchase Plan. As of December
31, 1999, 1,000,000 shares are authorized for issuance under the plan. The
Purchase Plan was activated in the first quarter of 2000.
(16) Restructuring Costs
In November 1998, the Company announced a corporate restructuring
cost-cutting initiative, and provided a restructuring charge of
approximately $3,100,000. Included in this restructuring charge was
approximately $1,100,000 in termination benefits for 38 technical, sales
and administrative staff. The Company paid $412,000 of these termination
benefits prior to December 31, 1998 and $688,000 was included in accrued
expenses as of December 31, 1998 which was paid in 1999. The remaining
$2,000,000 was comprised of $1,300,000 for the net cost of a lease buyout
and $700,000 of leasehold improvements that were abandoned upon movement to
a new building in San Diego, California. At December 31, 1999, the
remaining balance in the accrued expenses related to the restructuring
costs is comprised of remaining costs associated with the lease buyout.
(17) Related Party Transactions
Sales to a subsidiary of STPL for the years ended December 31, 1998 and
1997 were $50,000 and $152,500, respectively.
Sales to Agilis Communication Technologies Pte Ltd (Agilis), an affiliate
of ST, amounted to $200,000, $65,000 and $540,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Interest expense on notes payable to affiliates was $765,914, $581,000 and
$148,000 for the years ended December 31, 1999, 1998 and 1997,
respectively, of which $0 and $581,000 were included in accrued expenses in
the accompanying consolidated balance sheets as of December 31, 1999 and
1998, respectively.
During 1998, an ST affiliate made loans of $15,618,272 to the Company. The
Company used the proceeds from the 1999 rights offering to pay off the ST
loan (note 11).
(18) Contingencies
The Company developed a plan to deal with the Year 2000 issue and converted
its computer systems to be Year 2000 compliant. The Year 2000 issue is the
result of computer programs being written using two digits rather than four
to define the applicable year. Management has also assessed the Year 2000
remediation efforts of the Company's significant suppliers. Although
management believes its efforts minimize the potential adverse effects on
the Company of a supplier's failure to be Year 2000 compliant on time,
there can be no absolute assurance that all its suppliers will become Year
2000 compliant on time or in a way that will be compatible with the
Company's systems. Additionally, there can be no assurance that the Company
will be able to completely resolve all Year 2000 issues or that the
ultimate cost to identify and implement solutions to all Year 2000 issues
will not be material to the Company.
42
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The Company is involved in litigation and claims arising in the normal
course of operations. In the opinion of management based on consultation
with legal counsel, losses, if any, from this litigation are covered by
insurance or are immaterial; therefore, no provision has been made in the
accompanying consolidated financial statements for losses, if any, that
might result from the ultimate outcome of these matters.
(19) Supplemental Financial Information
A summary of additions and deductions related to the allowance for doubtful
accounts and inventory obsolescence reserve for the years ended December
31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Other at End of
of Year Additions Accounts Deductions Year
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowances for doubtful receivables:
Years ended December 31:
1999 $ 632,815 175,000 -- 16,069 791,746
========== ========= ========= ========= ==========
1998 $ 15,000 155,000 462,815* -- 632,815
========== ========= ========= ========= ==========
1997 $ 13,000 2,000 -- -- 15,000
========== ========= ========= ========= ==========
Reserve for inventory obsolescence:
Years ended December 31:
1999 $1,551,469 420,162 -- 172,402 1,799,229
========== ========= ========= ========= ==========
1998 $ 291,000 1,260,469 -- -- 1,551,469
========== ========= ========= ========= ==========
1997 $ 486,000 -- -- (195,000) 291,000
========== ========= ========= ========= ==========
</TABLE>
* Balance represents allowance acquired during purchase of ComStream
Holdings, Inc.
43
<PAGE>
RADYNE COMSTREAM INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(20) Quarterly Financial Data - Unaudited
A summary of the quarterly data for the years ended December 31, 1999, 1998
and 1997 follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
1999:
Total revenues $ 12,319 12,944 13,999 16,578 55,840
========= ========= ========= ========= =======
Gross profit $ 5,546 5,921 6,704 7,698 25,869
========= ========= ========= ========= =======
Operating expenses $ 5,308 4,956 5,605 5,963 21,832
========= ========= ========= ========= =======
Earnings (loss) before interest
expense taxes and extraordinary item $ 238 965 1,099 1,812 4,114
========= ========= ========= ========= =======
Net earnings (loss) $ (317) 422 809 1,392 2,306
========= ========= ========= ========= =======
Basic earnings (loss) per share $ (.05) .07 .13 .13 .32
========= ========= ========= ========= =======
Diluted earnings (loss) per share $ (.05) .06 .13 .13 .30
========= ========= ========= ========= =======
1998:
Total revenues $ 3,949 2,718 3,307 11,138 21,112
========= ========= ========= ========= =======
Gross profit $ 1,194 48 1,027 3,034 5,303
========= ========= ========= ========= =======
Operating expenses $ 1,506 1,577 1,384 14,198 18,665
========= ========= ========= ========= =======
Loss before interest expense $ (312) (1,529) (357) (11,164) (13,362)
========= ========= ========= ========= =======
Net loss $ (490) (1,727) (550) (11,771) (14,538)
========= ========= ========= ========= =======
Basic loss per share $ (.08) (.29) (.09) (1.99) (2.45)
========= ========= ========= ========= =======
Diluted loss per share $ (.08) (.29) (.09) (1.99) (2.45)
========= ========= ========= ========= =======
1997:
Total revenues $ 2,741 2,812 4,434 3,460 13,447
========= ========= ========= ========= =======
Gross profit $ 1,061 1,158 2,036 1,170 5,425
========= ========= ========= ========= =======
Operating expenses $ 1,363 1,499 1,788 1,854 6,504
========= ========= ========= ========= =======
Earnings (loss) before interest expense $ (302) (341) 248 (684) (1,080)
========= ========= ========= ========= =======
Net earnings (loss) $ (474) (504) 86 (865) (1,757)
========= ========= ========= ========= =======
Basic earnings (loss) per share $ (.13) (.11) .01 (.12) (.35)
========= ========= ========= ========= =======
Diluted earnings (loss) per share $ (.13) (.11) .01 (.12) (.35)
========= ========= ========= ========= =======
</TABLE>
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
See our report on Form 8-K/A, filed on July 31, 1998.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding our executive
officers and directors:
Name Age Position
- ---- --- --------
Robert C. Fitting..... 64 Director, Chief Executive Officer and President
Steven W. Eymann...... 47 Executive Vice President and Chief Technical
Officer
Garry D. Kline........ 50 Vice President of Finance, Chief Financial
Officer and Secretary
Ming Seong Lim........ 52 Chairman of the Board
Yip Loi Lee........... 56 Director
Robert A. Grimes...... 47 Director
Dennis W. Elliott..... 58 Director
Kum Chuen Tang........ 44 Director
----------
Robert C. Fitting has been Chief Executive Officer since October 1998 and
has been President since February 1995. He became a Director in March 1995. Mr.
Fitting has a Master of Electrical Engineering degree from New York University
and a Bachelors with distinction from Penn State University. His professional
career began at Bell Laboratories in 1962, where he spent six years developing
innovative communication technologies. Mr. Fitting then joined the Motorola
Government Electronics Division, where he was an engineering manager. He
published more than a dozen technical papers and was awarded a number of
patents. Mr. Fitting left Motorola in 1978 to build a new company under an
agreement with Comtech Telecommunications. The new company was named Comtech
Data Corporation, currently known as Fairchild Data Corporation. Mr. Fitting was
the General Manager and President of Comtech Data Corporation from 1978 to 1984.
In August 1984, Mr. Fitting left Comtech, along with Steven Eymann, to start
EFData Corporation. As co-founder, CEO, and President of EFData Corporation, Mr.
Fitting built the company into a worldwide market leader in satellite
communications equipment. While at EFData, Mr. Fitting won the "Arizona
Entrepreneur of the Year" award in 1993 in the manufacturing/high technology
category. Mr. Fitting left EFData in February 1995 to join our company. Pursuant
to our underwriting agreement with HD Brous & Co. Inc., we have agreed to obtain
"key person" life insurance on the life of Mr. Fitting in the amount of
$1,000,000. The proceeds of this policy will be payable to us.
Steven Eymann has been Chief Technical Officer since October 1998 and has
been our Executive Vice President since February 1995. Mr. Eymann graduated with
honors and a Bachelor of Science in Electrical Engineering from the University
of Nebraska. His professional career began in 1974 at the Motorola Government
Electronics Division, where he was a design engineer, task leader and finally a
project leader for the DSU-23/29B fuse development program. As project leader,
he was responsible for project management, budgets, schedules, and design and
testing of the fuse. He designed the computer-controlled automatic test set for
factory testing based on a HP 9825 computer. The DSU-23/29B is a L-Band PN radar
for accurate, low-cost altitude direction. In June 1981, Mr. Eymann joined
Comtech Data Corporation, where he was Director of Product Development. Mr.
Eymann was responsible for budget, schedule, and technical aspects of all new
product development within Comtech. Prior to becoming the Director of Product
Development, he served as a senior engineer with program and technical design
responsibility. He left Comtech in 1984, along with Robert Fitting, to start
EFData Corporation. As co-founder and Vice President of EFData, Mr. Eymann was
responsible for new product development and engineering management in the design
and manufacture of high technology, military and commercial communications
equipment. Mr. Eymann left EFData in February 1995 to join our company. Pursuant
to our underwriting agreement with HD Brous & Co. Inc., we have agreed to obtain
"key person" life
45
<PAGE>
insurance on the life of Mr. Eymann in the amount of $500,000. The proceeds of
this policy will be payable to us.
Garry D. Kline, Vice President of Finance, Chief Financial Officer and
Secretary, joined our company in September 1995. From that time until July 1997
he was Secretary and Controller. From 1987 until September 1995, Mr. Kline
served as CFO and Controller of EFData Corporation. Prior to 1987, Mr. Kline
served in various positions, including Vice President of Finance for Megatronics
Inc., a publicly held printed circuit board manufacturer, Vice President of
Operations for Vernal Lodging Associates, a hospitality management company, and
General Partner of Tax and Accounting Computer Service, an accounting firm.
Ming Seong Lim has been a Director and Chairman of the Board since August
13, 1996 and is chairman of the Compensation Committee. He is the Chairman of
Stetsys Pte Ltd and Stetsys US, Inc., members of the Singapore Technologies
group. He has been Group Director of Singapore Technologies Pte Ltd, since
February 1995. From March 1992 until February 1995, he was Executive Director of
Singapore Technologies Ventures Pte Ltd and from February 1990 to March 1992, he
was Group President of Singapore Technologies Holdings Pte Ltd. Prior to that
time he held various corporate and government positions, including Deputy
Secretary in the Singapore Ministry of Defense from 1979 to 1986.
Yip Loi Lee has been a Director since August 13, 1996 and is chairman of
the Audit Committee and a member of the Compensation Committee of the Board. He
was Regional Director (America) of Singapore Technologies Pte Ltd from March
1994 until December 1998, and from May 1990 to January 1997 he was President of
its affiliate, Metheus Corporation. Prior to that time he held a number of
managerial positions with such corporations as Morgan Guaranty Trust and
Singapore Technologies Pte Ltd and government positions with the Singapore
Ministries of Education, Defense, Culture and Home Affairs. Mr. Lee is currently
a director of Stetsys Pte Ltd, Stetsys US Inc., California Avitron Corporation,
Tritech Microelectronics Ltd, and Vertex Management, Inc.
Robert A. Grimes, who is a member of the Audit and Compensation Committees
of the Board, has served as a member of the Board of Directors since December
1994. He has been President of Pinkerton Systems Integration since 1998. From
1991 to 1998, Mr. Grimes served as a member of the Board of Directors of
Engineering and Technical Services, Inc., of which he was President until
December 31, 1997. He was also the President of Stetsys US, Inc. from February
24, 1997 to January 23, 1998.
Dennis W. Elliott has been a Director and a member of the Audit and
Compensation Committees since October 1998. He has been the President of Elliott
Communications Co., a technology/marketing consulting concern involved in
advising companies on strategy and developing operating ventures in
telecommunications, data networking, digital television/high definition
television and multimedia since 1990. Mr. Elliott was a Director of STM
Wireless, Inc. and a member of its Compensation Committee from January to
September 1998. Mr. Elliott is currently a director of Firetalk, Inc. He has
also held executive positions at Pacific Telecom, Inc., RCA American
Communications (now GE American Communications) and RCA Global Communications.
Kum Chuen Tang has been a director since June 1999. Mr. Tang has been the
General Manager of Agilis Communication Technologies Pte Ltd. since January
1999. From July 1997 until December 1998, he was the Deputy General Manager of
CET Technologies Pte Ltd. From April 1990 until June 1997, he was employed by
Singapore Technologies Electronics Limited, initially as Senior Project Engineer
and promoted to Divisional Manager in July 1996. From May 1987 until March 1990,
he held various government positions with the Singapore Ministry of Defense. Mr.
Tang has a Master of Science degree (IE) from the National University of
Singapore and a Bachelor of Engineering degree (First Class Honors) from Monash
University.
Each director is elected for a period of one year at the annual meeting of
shareholders and serves until the next meeting and until his or her successor is
duly elected and qualified. A director is elected by a plurality of the votes
cast by the shareholders. Officers are elected by, and serve at the discretion
of, the Board of Directors. Messrs. Elliott and Grimes are "independent
directors" as defined in the North American Securities Administration
Association ("NASAA") Statement of Policy Regarding Loans and Other Material
Affiliated Transactions. We will maintain at least two independent directors on
the Board of Directors and it is our intention to add a third independent
director prior to June 2001.
46
<PAGE>
Certain Key Employees
David Koblinski has been general manager of our Phoenix operations since
October 1998. Additionally, from 1995 to September 1999 he also served as a Vice
President of Operations for our Phoenix facility. Mr. Koblinski's professional
career began in 1982 at Comtech Data Corporation, where he held the position of
Customer Service Representative. He was responsible for repairs as well as field
and telephone support of satellite data modems. From 1985 to 1995, Mr. Koblinski
was the Senior Product Manager and Customer Support Manager for EFData
Corporation.
John Restivo has been Executive Vice President and General Manager of our
San Diego operations since March 1999. His duties presently include management
of our San Diego facility. Mr. Restivo has a Bachelor of Science degree in
Engineering from Florida Institute of Technology. His professional career
includes more than thirteen years in engineering and management. He has held a
variety of positions, most recently as Chief Technical Officer of Radiation
Systems, Inc. Previous experience includes Scientific Atlanta, where he was
Director of Engineering and Operations, and Hughes Aircraft Company as a systems
engineer.
Brian Duggan has been the Vice President of Sales and Marketing since
December 1998. Mr. Duggan handles global sales and marketing efforts for our
complete equipment line, with all regional sales offices reporting directly to
him. Prior to this appointment, Mr. Duggan served as Director of Worldwide Sales
for ComStream Corporation. Before joining ComStream in 1995, Mr. Duggan spent
eight years as Director of Marketing with Comtech Systems, Inc. He has held
various positions with Plessey Electronics Systems Ltd. (UK) in engineering and
sales and marketing, and with Datotek Corporation in Texas as Director of
Marketing. Mr. Duggan is a graduate of Hatfield College in the United Kingdom,
where he majored in engineering.
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the registrant during the period from January 1, 1999 to December
31, 1999, none of the officers or directors of the registrant or the beneficial
owners of its equity securities failed to file reports on Forms 3, 4 or 5
required to be filed during such period or prior thereto, except that a Form 3
Report was filed late by Tang Kum Chuen and a Form 4 Report was filed late by
Stetsys Pte Ltd and Temasek Holdings (Private) Limited and by Steve Eymann.
ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION
Our policy has been to pay no cash compensation to directors who are our
employees or ST affiliates for their service as directors. Outside directors are
paid $4,000 per meeting attended and $500 if attendance is via telephone. In
April 1999, all directors became eligible to receive stock options. In June
1999, the Board of Directors voted to grant stock options to four directors.
Robert Grimes, Dennis Elliot, Kum Chuen Tang, and Yip Loi Lee each received an
option to purchase up to 10,000 shares of our common stock at an exercise price
of $3.25 per share. The options expire in June 2009.
In August 1999, our Board of Directors recognized the significant
achievements of our senior management in effecting the ComStream integration by
awarding bonuses of $203,900 to Robert C. Fitting, $98,900 to Steven W. Eymann,
and $46,700 to Garry Kline. In addition, to further the goal of providing senior
management an equity stake in our company, the Compensation committee and the
Board of Directors resolved to permit senior management to borrow funds from our
company for the purpose of exercising stock options. In October 1999, Messrs.
Fitting and Kline borrowed $200,000 and $50,000, respectively, for the purpose
of exercising stock options. In November 1999, Mr. Eymann borrowed $100,000 for
the purpose of exercising his stock options. No additional loans are available
under this arrangement. We recorded the $350,000 in loans made to Messrs.
Fitting Eymann and Kline as compensation expense in 1999.
Under the terms of the promissory notes executed by each of Messrs.
Fitting, Eymann, and Kline, each promises to pay 50% of the principal amount due
with interest on the first anniversary date of the note. The remainder of the
principal, plus interest, is due on the second anniversary date of the note. The
unpaid principal bears interest at a rate of 5% per annum. If the borrower
continues to be employed by us, we will forgive one-half of each loan (including
interest) in January 2001, and we will provide sufficient bonus compensation at
those times to enable the employees to satisfy the resulting income tax
obligation. If we sever our relationship with any of Messrs. Fitting, Eymann, or
Kline for cause or if any of them voluntarily severs the relationship, any
portion of the loan not forgiven
47
<PAGE>
will become due and payable. Further, based upon their exercise of the options
exercised with the proceeds of these loans, each of Messrs. Fitting, Eymann, and
Kline has agreed not to own, operate or be employed by a competing entity during
a two-year period commencing from the date of the termination of his employment
either involuntarily for cause or voluntarily by the employee.
The following table sets forth the compensation for services in all
capacities to the Company for the years ended December 31, 1999, 1998 and 1997
of the Company's Chief Executive Officer, Executive Vice President and Chief
Financial Officer. No other executive officer or employee received total annual
salary and bonus of more than $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
YEAR ALL OTHER
NAME AND PRINCIPAL POSITION ENDED SALARY OPTIONS(#) COMPENSATION(1)
--------------------------- ----- ------ ---------- ---------------
<S> <C> <C> <C> <C>
Robert C. Fitting, CEO ........................... 12/31/99 $366,588 0 $229,056
12/31/98 144,234 30,000 1,186
12/31/97 116,529 0 1,165
Steven Eymann, Exec. Vice Pres ................... 12/31/99 $236,916 0 $138,588
12/31/98 133,543 30,000 1,174
12/31/97 111,162 0 1,112
Garry Kline, CFO ................................. 12/31/99 $113,045 20,000 $ 92,070
12/31/98 75,000 30,000 692
12/31/97 69,904 0 524
</TABLE>
(1) For the years ended in 1997 and 1998, these amounts were for matching 401K
contributions. For 1999, Mr. Fitting's other compensation consisted of an
executive bonus of $203,900 plus matching 401K contributions of $2,000, excess
group term life insurance premiums of $3,048 and cafeteria plan related benefits
of $20,108. Mr. Eymann's other compensation for 1999 consisted of executive
bonuses of $132,900 plus matching 401K contributions of $2,000, excess group
term life insurance premiums of $635 and cafeteria plan related benefits of
$3,053. Mr. Kline's other compensation for 1999 consisted of executive bonuses
of $87,200 plus matching 401K contributions of $2,000 and cafeteria plan related
benefits of $2,870.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF TOTAL OPTIONS
OPTIONS GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION GRANT DATE PRESENT
NAME GRANTED FISCAL YEAR PRICE DATE VALUE(1)
- ---- ------- ---------- ----- ---- --------
<S> <C> <C> <C> <C> <C>
Robert C. Fitting .. 0 0% N/A N/A N/A
Steven Eymann....... 0 0% N/A N/A N/A
Garry Kline ........ 20,000 1% $3.00 9/16/09 $5.62
</TABLE>
- ----------
(1) Based on the Black-Scholes option pricing model, assuming that one-fourth
of the options will be exercisable on the grant date and each of the first
three anniversaries thereof, no dividend yield, expected volatility of 130%
and a risk-free interest rate of 5.76%. Potential gains are net of the
exercise price, but before taxes associated with the exercise. Amounts
represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. The assumed rates of
stock price appreciation are provided in accordance with the rules of the
SEC and do not represent our estimate or projection of the future price of
our common stock. Actual gains, if any, on stock option exercises will
depend upon the future market prices of our common stock.
48
<PAGE>
AGGREGATE OPTION EXERCISES IN 1999 AND HOLDINGS AT YEAR END
The following table sets forth information concerning option exercises and
option holdings for the year ended December 31, 1999 with respect to Robert C.
Fitting, the Chief Executive Officer and President of the Company, Steven
Eymann, the Executive Vice President and Garry Kline, the Chief Financial
Officer of the Company.
AGGREGATE OPTIONS EXERCISED IN THE
LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED, IN-THE-MONEY
NUMBER HELD AT OPTIONS AT
OF SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ACQUIRED ON VALUE ----------------- --------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Fitting...... 128,200 $64,100 101,885 15,000 $428,324 $59,063
Steven Eymann.......... 64,100 19,871 165,985 15,000 705,436 59,063
Garry Kline ........... 25,551 11,511 10,492 16,500 38,659 115,313
</TABLE>
- ----------
(1) Based on the December 31, 1999 closing price of the Common Stock of $6.75
per share on the OTC Bulletin Board, less the per share exercise price.
Employee Compensation Plans
1996 Incentive Stock Option Plan
Our shareholders adopted the 1996 Incentive Stock Option Plan (the "Plan")
on January 8, 1997, as a means of rewarding certain employees, officers and
directors for their efforts in improving our competitive and financial position
and also as an incentive to retain these individuals in the future. Our Board of
Directors or the compensation committee administers the Plan. Each has the
authority to determine all matters relating to the Plan, including the selection
of individuals to be granted options, the number of shares subject to the
options, the exercise price, and the term of an method by which the options may
be exercised. As of December 31, 1999, options to purchase 1,535,206 shares of
common stock were outstanding at a weighted average exercise price of $3.09 per
share and options have been exercised to purchase 287,772 shares of common
stock. The total number of shares of common stock remaining reserved for
issuance under the Plan as of December 31, 1999 was 1,784,170. Under the Plan,
we may not grant options after November 12, 2006. Subsequent to the year end,
the Board of Directors issued all of the remaining unissued stock options.
Options granted under the Plan may be non-qualified options or options
qualifying as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended. The initial exercise option price of
each stock option granted under the Plan will not be less than the fair market
value (100% of the fair market value if the grant is to any grantee owning more
than 10% of our outstanding common stock) of the common stock subject to the
option.
Any option granted on or after October 6, 1998 under the Plan generally
becomes exercisable immediately as to 25% of the shares covered thereby and
becomes exercisable for an additional 25% in each of the succeeding three years.
An amendment to the Plan has accelerated the exercise schedule on certain
earlier option grants to match the current schedule or to become immediately
exercisable. No options granted under the Plan are transferable, except upon the
death of the grantee.
49
<PAGE>
1999 Employee Stock Purchase Plan
On June 15, 1999, our shareholders adopted the 1999 Employee Stock Purchase
Plan (the "Purchase Plan"), as a means of rewarding and retaining existing
employees. The Purchase Plan allows eligible employees, including officers and
directors, to utilize payroll deductions to purchase shares of our common stock.
The Board of Directors or a committee of two or more directors, none of
whom will be officers or employees, have full authority to administer all
aspects of the Purchase Plan. As of December 31, 1999, 1,000,000 shares are
authorized for issuance under the Purchase Plan. The Purchase Plan was activated
in the first quarter of 2000.
Each eligible employee may elect to have from 1% to 15% of his or her
salary deducted in each pay period and deposited into a stock purchase account
in such employee's name. At the conclusion of each purchase period, the employee
may exercise the right to purchase shares of common stock or elect a cash
distribution of all amounts held in the stock purchase account. Amounts in such
accounts may be used by employees to purchase the largest number of whole shares
available at the purchase price. The purchase price for shares of common stock
will be the lesser of 85% of the fair market value of the common stock on (a)
the first day of the applicable purchase period, or (b) the last day of such
period. In the event of termination of a participant's employment of all funds
in the employee's stock purchase account will be distributed to such employee of
all funds in the employee's stock purchase account will be distributed to such
employee in cash, except for termination relating to a normal or early
retirement, in which case the balance in the stock purchase account will be used
to purchase shares of common stock.
Employee Benefit Plan
We have a qualified contributory 401(k) plan that covers all employees in
our Phoenix facility who have attained the age of 18 and are employed at the
enrollment date. We provided contributions of $85,301, $31,690 and $30,230
respectively for the years ended December 31, 1999, 1998 and 1997. Each
participant may elect to contribute up to 15% of his or her gross compensation
up to the maximum amount allowed by the Internal Revenue Service. During the
years ended December 31, 1999, 1998 and 1997, we matched up to 1% of the
employee's salary. Beginning January 1, 2000, we match 50% of each employee
contribution to the plan up to a maximum annual match of $2,000.
We also have a qualified contributory 401(k) plan that covers all full-time
employees in our San Diego facility who have been employed continuously for at
least 30 days prior to the enrollment date. We provided contributions of
$143,487 and $30,450 for the year ended December 31, 1999 and the period October
15, 1998 through December 31 1998, respectively. Each participant may elect to
contribute up to 15% of his or her gross compensation up to the maximum amount
allowed by the Internal Revenue Service. We match $0.35 for every dollar up to
7% of the employee's contribution.
EMPLOYMENT AGREEMENTS
Under the employment agreement between the Company and Messrs. Fitting and
Eymann, they will serve as Chief Executive Officer and Executive Vice President
of the Company until the earlier of June 30, 2000 or such time as the Company's
adjusted earnings before interest and taxes exceeds $6,000,000 for a period of
four calendar quarters. Pursuant to the agreement, the Company presently pays
Mr. Fitting and Mr. Eymann annual salaries of $200,000 and $150,000,
respectively, and has granted them certain of the stock options described in the
above table. Each of Mr. Fitting and Mr. Eymann has also agreed he will not
engage in any business which competes with the Company until after the second
anniversary of his termination of employment with the Company, except in the
case of involuntary termination without cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Lim, Lee, Grimes, and
Elliott. There were no interlocking relationships between our company and other
entities that might affect the determination of the compensation of our
executive officers. Mr. Lim is currently the Chairman of Stetsys Pte Ltd and
Stetsys US, Inc.
50
<PAGE>
and has been the Group Director of Singapore Technologies Pte Ltd since February
1995. Additionally, Mr. Lee served as a Regional Director of Singapore
Technologies Pte Ltd until December 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 11, 2000, the ownership of
the Common Stock by (i) each person who is known by the Company to own of record
or beneficially more than 5% of the outstanding Common Stock, (ii) each of the
Company's directors and its Chief Executive Officer and Executive Vice
President, and (iii) all directors and executive officers of the Company as a
group. Except as otherwise indicated, the Stockholders listed in the table have
sole voting and investment powers with respect to the shares indicated subject
to applicable community property law.
Number Percentage
Name and Address of Shares(1) of Class(1)
---------------- ------------ -----------
Stetsys US, Inc.(2) ................ 1,180,000 8.71%
Stetsys Pte Ltd(2) ................. 9,676,800(3) 71.40%
Robert C. Fitting(4) ............... 242,385(5) 1.77%
Steven W. Eymann(4) ................ 241,585(6) 1.76%
Garry D. Kline(4) .................. 46,243(7) *
Ming Seong Lim(2) .................. 0 0
Yip Loi Lee(4) ..................... 10,000(8) *
Robert A. Grimes(4) ................ 10,000(8) *
Dennis W. Elliott(4) ............... 10,000(8) *
Kum Chuen Tang(2) .................. 10,000(8) *
All directors and executive officers
of the company as a group (eight
persons) ......................... 570,213 4.20%
* Less than one percent.
(1) The numbers and percentages shown include the shares of common stock
actually owned as of February 11, 2000 and the shares of common stock that
the person or group had the right to acquire within 60 days of such date.
In calculating the percentage of ownership, all shares of common stock that
the identified person or group had the right to acquire within 60 days of
February 11, 2000 upon the exercise of options are deemed to be outstanding
for the purpose of computing the percentage of the shares of common stock
owned by such person or group, but are not deemed to be outstanding for the
purpose of computing the percentage of the shares of common stock owned by
any other person.
(2) The address for each of these shareholders is: c/o Singapore Technologies
Pte Ltd, 83 Science Park Drive, #01-01/02 The Curie, Singapore Science
Park, Singapore 118258.
(3) The shares reported as owned by Stetsys Pte Ltd include the shares reported
as beneficially owned by Stetsys US, Inc., of which Stetsys Pte Ltd is the
sole stockholder. The Minister of Finance (Incorporated) of Singapore owns
100% of the stock of Singapore Technologies Pte Ltd, which in turn owns
100% of Stetsys Pte Ltd. An aggregate of 3,900,000 of the outstanding
shares held by Stetsys Pte Ltd. and Stetsys US Inc. are subject to a
lock-in agreement required by certain state regulatory authorities, as
described in "Lock-in Agreements" below.
(4) The address for each of these shareholders is: c/o Radyne ComStream Inc.,
3138 East Elwood Street, Phoenix, Arizona 85034.
(5) Includes 109,385 shares underlying exercisable options held by Mr. Fitting.
Of the outstanding shares owned by Mr. Fitting, 59,500 shares are, and 40%
of any shares acquired by Mr. Fitting upon exercise of options may be,
subject to a lock-in agreement required by certain state regulatory
authorities, as described in "Lock-in Agreements" below.
(6) Includes 173,485 shares underlying exercisable options held by Mr. Eymann.
Of the outstanding shares owned by Mr. Eymann, 27,250 shares are, and 40%
of any shares acquired by Mr. Eymann upon exercise of options may be,
subject to a lock-in agreement required by certain state regulatory
authorities, as described in "Lock-in Agreements" below.
(7) Includes 17,992 shares underlying exercisable options held by Mr. Kline. Of
the outstanding shares owned by Mr. Kline, 11,500 are, and 40% of any
shares acquired by Mr. Kline upon exercise of options may be, subject to a
lock-in agreement required by certain state regulatory authorities, as
described "Lock-in Agreements" below.
51
<PAGE>
(8) Represents 10,000 shares underlying exercisable options held by each of
Messrs. Elliott, Grimes, Lee, and Tang.
Lock-in Agreements
We have entered into lock-in agreements with Stetsys Pte Ltd, Stetsys US
Inc. and Messrs. Fitting, Eymann and Kline pursuant to which these shareholders
have agreed not sell, pledge, hypothecate, assign, grant any option for the sale
of, or otherwise transfer or dispose of
o an aggregate of 3,998,250 shares of our common stock owned by these
shareholders, plus
o any shares issued to these shareholders with respect to the locked-in
shares in any stock dividend, stock split, recapitalization or similar
transaction, plus
o 40% of any shares acquired by these shareholders pursuant to the
exercise of any option during the terms of the lock-in agreement.
These lock-in agreements were required by certain state regulatory
authorities in connection with our recently concluded public offering, and the
terms of these agreements cannot be amended without the consent of these
regulatory authorities.
In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of our assets or securities (including by way
of a tender offer), or any other transaction or proceeding with a person who is
not a Promoter (as defined in the North American Securities Administrators
Association Statement of Policy on Corporate Securities Definitions) which
results in a distribution of our assets or securities while the lock-in
agreements are in effect:
o all holders of our common stock, except the shareholders who are party
to the lock-in agreements with respect to the shares they own that are
subject to the lock-in agreements, will first share in any such
distribution on a per-share basis until they have received $7.00 for
each share of our common stock that they own, then
o all of the shareholders who are parties to the lock-in agreements will
share in such distribution on a per-share basis with respect to the
shares they own that are the subject of the lock-in agreements until
they have received $7.00 for each such share of common stock, then
o all of our shareholders will share in any remaining portion of the
distribution equally on a per-share basis.
The distribution may be made on terms that are more favorable to the
shareholders who are party to the lock-in agreements if a majority of the shares
of common stock held by our other shareholders vote in favor of, or consent to,
such terms.
During the term of the lock-in agreements the shareholders who are parties
to such agreements cannot vote any of their shares in favor of any dissolution,
liquidation, merger, consolidation, reorganization, sale or exchange of our
assets or securities (including by way of a tender offer), or any other
transaction or proceeding which results in a distribution of our assets or
securities unless a majority of our independent directors have approved the
transaction.
Unless the lock-in agreements terminate sooner, as described below,
commencing February 11, 2001, 2 1/2% of the locked-in shares held by the
shareholders will be released from the terms of the lock-in agreements each
quarter. All shares remaining subject to the lock-in agreements will be released
February 11, 2002.
The lock-in agreements have a two year term commencing on February 11,
2000, but will terminate earlier if our common stock becomes a "covered
security" as defined under the National Securities Markets Improvement Act of
1996. Our common stock would be a covered security if it were to be listed on a
national stock exchange or on Nasdaq's National Market.
52
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As disclosed under "Management - Executive Compensation," we made loans of:
(1) $200,000 to Robert C. Fitting on October 8, 1999; (2) $100,000 to Steven W.
Eymann on November 1, 1999; and (3) $50,000 to Garry Kline on October 11, 1999.
The proceeds of these loans were used by each of Messrs. Fitting, Eymann, and
Kline to exercise stock options in October and November 1999 for an aggregate of
217,851 shares of common stock granted under the 1996 Incentive Stock Option
Plan.
Sales of products in the ordinary course of business to Agilis
Communication Technologies Pte Ltd, an affiliated company under the common
control of ST, were $200,115 for year ended December 31, 1999, $65,000 for the
year ended December 31, 1998, and $540,000 for the year ended December 31, 1997.
Until October 1998, ETS was a wholly owned subsidiary of ST. Sales of
products in the ordinary course of business to ETS were $172,750 for the year
ended December 31, 1999, $50,000 for the year ended December 31, 1998, and
$152,000 for the year ended December 31, 1997.
During 1998, ST loaned us $5,618,272, which bore interest at rates ranging
from 6.625% to 6.844%. We used the proceeds from these loans to repay and
terminate a bank line of credit with Bank of America NT & SA, for which ST had
provided a non-binding letter of awareness. In October 1998, ST loaned us an
additional $10.0 million in connection with the ComStream acquisition, which
bore interest at 6.375%. On September 30, 1999, ST instructed us to capitalize
the entire $15,618,272 principal amount of the debt we owed to ST in partial
exercise of its rights under our rights offering. In October 1999, ST exercised
the balance of its rights by paying cash to us in the amount of $423,700. We
used these funds, along with $932,200 of cash on hand, to pay the accrued
interest due of $1,355,000 to ST.
Interest expense on notes payable to ST was $774,000, $581,000 and $148,000
for the years ended December 31, 1999, 1998 and 1997, respectively. There is no
outstanding debt to ST as of December 31, 1999 and accrued interest has been
paid in full.
Management believes that all of the foregoing transactions were on terms no
less favorable to Radyne ComStream than it could have obtained in arms length
transactions with unaffiliated third parties.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) The following consolidated financial statements of Radyne ComStream
Inc. and subsidiaries are included in Part II, Item 8:
Independent Auditors' Reports
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a) (2) All financial statement schedules have been omitted because they
are not applicable, not required, or the information has been disclosed in the
consolidated financial statements or notes thereto or otherwise in this Form
10-K report.
(a) (3) The following exhibits are included in this Form 10-K report:
53
<PAGE>
EXHIBIT
NO.
2.1* Stock Purchase Agreement dated August 28, 1998 between Spar
Aerospace Limited and Radyne Corp.
3.1** Restated Certificate of Incorporation
3.2*** By-Laws, as amended and restated
10.1**** 1996 Incentive Stock Option Plan
10.2***** Employment Agreement with Robert C. Fitting (Radyne Termsheet)
10.3+ Lease between ADI Communication Partners, L.P. and
ComStream dated April 23, 1997
10.4+ First Amendment to lease between ADI Communication
Partners L.P. and ComStream dated July 16, 1997
10.5+ Second Amendment to Lease between Kilroy Realty, L.P. and
ComStream dated November 18, 1998
10.6+ Indemnity Agreement between Pacific Bell Corporation and
ComStream dated November 18, 1998
10.7+ Letter Agreement between Spar and Radyne Corp. dated
November 18, 1998
10.8****** Lease for facility in Phoenix, Arizona
10.9++ Amendment to 1996 Incentive Stock Option Plan
10.10+++ Uncommitted Line of Credit Facility Letter Agreement, dated
as of May 18, 1998, and amended as of September 28, 1998 and
September 30, 1999
10.11+++ Stock Purchase Loan Agreement executed by Robert Fitting,
dated October 8, 1999
10.12+++ Promissory Note executed by Robert Fitting, dated
October 8, 1999 in the amount of $200,000
10.13+++ Stock Purchase Loan Agreement executed by Garry Kline,
dated October 8, 1999
10.14+++ Promissory Note executed by Garry Kline, dated
October 11, 1999 in the amount of $50,000
10.15+++ Stock Purchase Loan Agreement executed by Steven Eymann,
dated November 11, 1999
10.16+++ Promissory Note executed by Steven Eymann, dated
November 1, 1999 in the amount of $100,000
10.17+++ General Release and Settlement Agreement between Spar
Aerospace Limited and Radyne ComStream Inc. dated
September 29, 1999
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2 Consent of Deloitte & Touche LLP
27.0 Financial Data Schedule
- ----------
* Incorporated by reference from Registrant's Form 8-K filed on
August 28, 1998.
** Incorporated by reference from Registrant's report on Form 10-Q
filed on March 11, 1997.
*** Incorporated by reference from Registrant's amended report on Form
10-K for the year ended December 31, 1998.
**** Incorporated by reference from Registrant's Registration Statement
on Form S-8, dated and declared effective on March 12, 1997 (File
No. 333-23159).
***** Incorporated by reference from Registrant's amended Registrant
Statement on Form S-1, dated May 8, 1997 and declared effective on
May 12, 1997 (File No. 333-18811).
****** Incorporated by reference from Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
+ Incorporated by reference from Registrant's Registration Statement
on Form S-2, filed January 11, 1999 (File No. 333-70403).
++ Incorporated by reference from Registrant's Registration Statement
on Form S-8, dated and declared effective on November 18, 1998
(File No. 333-67469).
54
<PAGE>
+++ Incorporated by reference from Registrant's amended Registration
Statement on Form S-2, dated and declared effective on February 7,
2000 (File No. 333-90731).
(b) Registrant filed the following reports on Form 8-K during the period
of October 1 through December 31, 1999:
Current Report on Form 8-K dated November 12, 1999, Item 5.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RADYNE COMSTREAM INC.
---------------------
(Registrant)
By: /s/ Robert C. Fitting
-------------------------------------
Robert C. Fitting,
Chief Executive Officer and President
Dated: March 1, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Lim Ming Seong Chairman of the Board of Directors March 1, 2000
- ------------------------
Lim Ming Seong
/s/ Robert C. Fitting Chief Executive Officer, President March 1, 2000
- ------------------------ and Director
Robert C. Fitting
/s/ Garry D. Kline Vice President, Finance March 1, 2000
- ------------------------ (Principal Financial and
Garry D. Kline Accounting Officer)
/s/ Robert A. Grimes Director March 1, 2000
- ------------------------
Robert A. Grimes
/s/ Lee Yip Loi Director March 1, 2000
- ------------------------
Lee Yip Loi
/s/ Dennis Elliot Director March 1, 2000
- ------------------------
Dennis Elliot
/s/ Tang Kum Chuen Director March 1, 2000
- ------------------------
Tang Kum Chuen
</TABLE>
56
Exhibit 21.1
List of Subsidiaries
Name Place of Incorporation
---- ----------------------
ComStream Corporation Delaware
ComStream UK Limited England and Wales
ComStream Israel Ltd. Israel
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Radyne ComStream Inc.:
We consent to the incorporation by reference in the registration statements
of Radyne ComStream Inc. on Form S-8 (File No. 333-23159) filed as of March
12, 1997, Form S-8 (File No. 333-67469) filed as of November 19, 1998 and
amended as of May 5, 1999, and Form S-8 (File No. 333-90383) filed as of
November 5, 1999, of our report dated February 4, 2000, on the consolidated
balance sheets of Radyne ComStream Inc. as of December 31, 1999 and 1998
and the related statements of operations, stockholders' equity (deficiency)
and cash flows for the years then ended, which report appears in the
December 31, 1999 annual report on Form 10-K of Radyne ComStream Inc.
/s/ KPMG LLP
Phoenix, Arizona
March 1, 2000
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Radyne ComStream Inc.:
We consent to the incorporation by reference in the Registration Statements
No. 333-23159, 333-67469, and 333-90383 of Radyne ComStream Inc. (formerly
Radyne Corp.) on Form S-8 of our report dated February 4, 1998 appearing in
this annual report on Form 10-K of Radyne ComStream Inc. for the year ended
December 31, 1999.
/s/ Deloitte & Touche LLP
Phoenix, Arizona
March 1, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-K FOR THE YEAR ENDED
12-31-99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,947,660
<SECURITIES> 0
<RECEIVABLES> 9,469,899
<ALLOWANCES> (791,746)
<INVENTORY> 8,339,112
<CURRENT-ASSETS> 20,894,001
<PP&E> 6,630,948
<DEPRECIATION> (3,035,780)
<TOTAL-ASSETS> 28,236,062
<CURRENT-LIABILITIES> 23,149,065
<BONDS> 0
0
0
<COMMON> 21,476
<OTHER-SE> 4,305,436
<TOTAL-LIABILITY-AND-EQUITY> 28,236,062
<SALES> 55,839,792
<TOTAL-REVENUES> 55,915,837
<CGS> 29,970,560
<TOTAL-COSTS> 29,970,560
<OTHER-EXPENSES> 21,831,733
<LOSS-PROVISION> 175,000
<INTEREST-EXPENSE> 1,910,422
<INCOME-PRETAX> 2,203,122
<INCOME-TAX> 85,000
<INCOME-CONTINUING> 2,118,122
<DISCONTINUED> 0
<EXTRAORDINARY> 188,182
<CHANGES> 0
<NET-INCOME> 2,306,304
<EPS-BASIC> .32
<EPS-DILUTED> .30
</TABLE>
