<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 24, 2000
REGISTRATION NO. 333-90731
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
RADYNE COMSTREAM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
NEW YORK 3665 11-2569467
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
3138 EAST ELWOOD STREET
PHOENIX, ARIZONA 85034
(602) 437-9620
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT C. FITTING, CHIEF EXECUTIVE OFFICER
RADYNE COMSTREAM INC.
3138 EAST ELWOOD STREET
PHOENIX, ARIZONA 85034
(602) 437-9620
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN B. WADE, III, ESQ. ROBERT S. KANT, ESQ.
KEVIN T. COLLINS, ESQ. JERE M. FRIEDMAN, ESQ.
DORSEY & WHITNEY LLP GREENBERG TRAURIG, LLP
250 PARK AVENUE ONE EAST CAMELBACK ROAD, SUITE 1100
NEW YORK, NEW YORK 10177 PHOENIX, ARIZONA 85012
(212) 415-9200 (602) 263-2300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [x]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to item 11(a)(1)
of this form, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
------------------------
WE HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE
NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL WE SHALL FILE A FURTHER AMENDMENT
WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER
BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933
OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
________________________________________________________________________________
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT
NOTICE. RADYNE COMSTREAM INC. MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND RADYNE
COMSTREAM INC. IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY
JURISDICTION WHERE THE OFFER OR SALE OF THESE SECURITIES IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 24, 2000
PROSPECTUS
2,000,000 UNITS
[LOGO]
RADYNE COMSTREAM INC.
Radyne ComStream Inc. is offering 2,000,000 units, each consisting of one
share of its common stock and one warrant to purchase one share of common stock
at a price of $ per share, subject to adjustment in certain
circumstances. The warrants will be exercisable at any time after they become
separately transferable, until five years from the date of this prospectus. The
common stock and warrants included in the units will not be separately
transferable until 180 days after the date of the prospectus or such earlier
date as HD Brous & Co., Inc. may determine. We may redeem the warrants for $0.01
per warrant upon not less than 30 days' nor more than 60 days' notice mailed
within five days after the closing sales price of our common stock has equaled
or exceeded $ for each of 20 consecutive trading days.
On January 21, 2000, our common stock closed at $10.562 per share on the
OTC Bulletin Board. Prior to this offering, there has been no market for the
units or warrants. Our common stock, units, and warrants have been approved for
listing on the Nasdaq SmallCap Market under the symbols 'RADN,' 'RADNU' and
'RADNW,' respectively, subject to the effectiveness of this offering.
------------------------
THESE ARE SPECULATIVE SECURITIES AND INVOLVE A HIGH DEGREE OF RISK AND
SUBSTANTIAL DILUTION. YOU SHOULD NOT INVEST IN OUR SECURITIES UNLESS YOU CAN
AFFORD TO LOSE YOUR ENTIRE INVESTMENT. PLEASE SEE 'RISK FACTORS' BEGINNING ON
PAGE 6 OF THIS PROSPECTUS.
------------------------
<TABLE>
<CAPTION>
PER UNIT TOTAL
<S> <C> <C>
Public Offering Price................................
Underwriting Discount................................
Proceeds, before expenses, to Radyne ComStream.......
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have granted the underwriters an option to purchase up to an additional
300,000 units at the public offering price, less the underwriting discount, to
cover over-allotments. The underwriters may exercise this option at any time
within 45 days of the date of this prospectus. We expect that the units of
common stock and warrants will be ready for delivery in New York, New York on or
about , 2000.
HD BROUS & CO., INC.
------------------------
THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE>
[Color picture consisting of four samples
of our print advertising, including depictions
of our products.]
TRADEMARKS
Each trademark, trade name or service mark appearing in this prospectus
belongs to its respective holder. Our trademarks include ComStream'TM',
MediaCast'TM', IP Sat'TM' and IntelliCast'TM'.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully. All references to 'we,' 'us,'
the 'company,' and 'Radyne ComStream' mean Radyne ComStream Inc., including
subsidiaries and predecessors, except where it is clear that the term refers
only to Radyne ComStream Inc. Unless otherwise indicated, all information
contained in this prospectus assumes that the underwriters will not exercise
their over-allotment option, HD Brous will not exercise its representative's
purchase option, and that none of the warrants included in the units and no
other outstanding options will be exercised. This prospectus contains
forward-looking statements, which involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under 'Risk
Factors' and elsewhere in this prospectus.
RADYNE COMSTREAM INC.
We design, manufacture, and sell equipment used in the ground-based portion
of satellite communication systems to receive data from, and transmit data to,
satellites. 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 cable television. We serve customers in over
80 countries, including customers in the television broadcast, international
telecommunications, Internet service provider, and private communication
networks industries, as well as the U.S. government.
Our products have been utilized in major communications systems worldwide,
including the following:
The world's highest capacity domestic, digital satellite telephone
network -- PT Telkom, Indonesia.
Italy's first digital telephone/data network -- Telespacio, Italian
Railways.
Colombia's first alternate telecommunications network -- Americatel.
Earth stations for the first international satellite links in China,
India, Pakistan, Brazil, Haiti, and Zambia.
The world's largest private satellite broadcast network -- Reuters.
International Cablecasting Technologies -- utilizing 40,000 digital
audio broadcast receivers.
We believe that the demand for the types of products that we sell will
increase as factors such as worldwide economic development, governmental
policies aimed at improving the telecommunications infrastructure in developing
countries, and the globalization of commerce contribute to an increased
worldwide requirement for communications services. We believe these factors will
continue to drive demand for communications systems, including those based on
satellite technology.
We also believe we are well-positioned to capitalize on this increased
demand for satellite communications systems as a result of our ability to
leverage our competitive advantages, which include the following:
Our 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.
Our expansive line of well-known, well-respected, off-the-shelf,
state-of-the-art equipment that enables us to meet our customers'
requirements.
Our ability to custom design products for our customers' special
applications and to provide a one-stop shopping option to our
customers.
1
<PAGE>
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.
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 Beijing, Singapore, London, Jakarta,
and Amsterdam.
Our October 1998 acquisition of a significant competitor, ComStream
Holdings Inc., which:
significantly expanded our product lines,
enhanced our sales force,
increased our market share, and
increased our profitability.
Our net sales increased to $21.1 million in the year ended December 31,
1998 from $13.4 million in the year ended December 31, 1997 and to $39.3 million
in the nine months ended September 30, 1999 from $10.0 million in the nine
months ended September 30, 1998. We had net income of approximately $914,000 in
the nine months ended September 30, 1999 compared to a net loss of $2.8 million
in the nine months ended September 30, 1998. These increases in sales and net
income resulted in large part from our acquisition of ComStream and our ability
to significantly reduce ComStream's operating expenses. Our last audited balance
sheet as of December 31, 1998 showed an accumulated deficit of $21.4 million and
a shareholders' deficit of $15.2 million.
On December 1, 1999 we completed a rights offering to our shareholders to
purchase an aggregate of up to 4,745,076 shares of our common stock. These
rights were exercisable at a purchase price of $3.73 per share. Our shareholders
purchased 4,520,264 shares of common stock in this rights offering at an
aggregate purchase price of $16,860,585. Our controlling shareholder, Singapore
Technologies Pte Ltd through its wholly-owned subsidiary, Stetsys Pte Ltd, and
Stetsys Pte Ltd's wholly-owned subsidiary, Stetsys US, Inc. (Stetsys Pte, and
Stetsys US, collectively, ST), purchased 4,300,800 shares of common stock issued
in the rights offering at an aggregate purchase price of approximately
$16,000,000. ST now owns approximately 90% of our outstanding common stock. We
used the proceeds of the rights offering to retire approximately $15,600,000 in
short-term debt plus accrued interest we owed to ST.
MARKET OPPORTUNITY AND STRATEGY
We believe that growth in demand for ground-based satellite system
equipment is being driven by the growth of satellite-delivered communications
services. 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 annual growth rate to $26.2 billion in 1998, from $21.2
billion in 1997 and $15.9 billion in 1996. The Satellite Industry Association
estimates that the global market for satellite ground equipment and integration
services was $15.2 billion in 1998.
We currently address a niche of the ground-based satellite equipment market
that our management estimates currently generates worldwide revenues of $800
million. We intend to expand our share in this market by:
targeting providers of broadcast communications services worldwide,
exploiting new applications for our existing satellite technology,
developing new products to exploit new market opportunities,
providing high-margin customized products to niche markets, and
pursuing future acquisitions of competitive or complementary
companies.
2
<PAGE>
We will use a significant portion of the net proceeds of this offering to
fund our research and development program so that we can develop new products
for satellite communications systems, including products designed to address
transmission requirements for the Internet and digital television industries.
Our corporate headquarters are located at 3138 E. Elwood Street, Phoenix,
Arizona 85034. Our telephone number is (602) 437-9620. We maintain an Internet
Website at www.radynecomstream.com. Information contained at our Website is not
a part of this prospectus.
THE OFFERING
<TABLE>
<S> <C>
Securities offered by Radyne ComStream....... 2,000,000 units, each unit consisting of one
share of common stock and one five-year
common stock purchase warrant.
Exercise of warrants......................... Each warrant is exercisable to purchase one
share of common stock at a price of $ ,
subject to adjustment in certain
circumstances, at any time after the warrants
become separately transferable, until five
years from the date of this prospectus. The
common stock and warrants included in the
units will not be separately transferable
until 180 days after the date of this
prospectus or such earlier date as HD Brous &
Co. Inc. may determine.
Redemption of warrants....................... We may redeem the warrants for $0.01 per
warrant upon no less than 30 nor more than 60
days notice mailed within five days after the
closing sales price of the common stock has
equaled or exceeded $ for each of 20
consecutive trading days.
Common stock outstanding prior to this
offering................................... 10,733,977 shares(1)
Securities to be outstanding after this
offering................................... 12,733,977 shares of common stock and
2,000,000 warrants(1)
Use of proceeds.............................. We intend to use the net proceeds of this
offering to fund our research and development
program as a part of our growth strategy,
hire additional technical personnel, and for
working capital. See 'Use of Proceeds.'
Nasdaq SmallCap Market symbols:
Common Stock............................ 'RADN'
Warrants................................ 'RADNW'
Units................................... 'RADNU'
</TABLE>
- ------------
(1) Based on 10,733,977 shares outstanding on December 31, 1999, the number of
shares to be outstanding after the offering excludes the following:
2,000,000 shares of common stock reserved for issuance upon the
exercise of the 2,000,000 warrants included in the units;
1,790,670 shares of common stock remaining reserved for issuance
under our 1996 Incentive Stock Option Plan;
1,000,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan; and
200,000 shares of common stock reserved for issuance under the
representative's purchase option to be issued to HD Brous & Co. Inc.
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data below should be read in conjunction
with 'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the restated consolidated financial statements and the related
notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -------------------------
1997 1998 1998 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $ 13,447 $ 21,112 $ 9,974 $ 39,262
Gross profit................................ 5,425 5,303 2,269 18,171
Selling, general and administrative
expense................................... 4,242 5,531 2,544 9,139
Research and development expenses........... 2,262 4,296 1,945 6,730
Total operating expenses.................... 6,504 18,665 4,489 15,869
Operating income (loss)..................... (1,080) (13,362) (2,220) 2,302
Net income (loss) before extraordinary
income and taxes.......................... (1,757) (14,538) (2,789) 914
EBITDA(1)(2)................................ (625) (12,298) (1,824) 4,303
Basic net income (loss) per share........... (0.35) (2.45) (0.47) 0.15
Diluted net income (loss) per share......... (0.35) (2.45) (0.47) 0.14
Shares used in computing income (loss) per
common share:(3)(4)
Basic.................................. 5,012,664 5,931,346 5,931,340 5,961,937
Diluted................................ 5,012,664 5,931,346 5,931,340 6,401,161
</TABLE>
- ------------
(1) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation and amortization. EBITDA is a measure commonly used to assist
in understanding our operating results. However, it is not intended to
represent cash flow or results of operations in accordance with generally
accepted accounting principles.
(2) Net income figures for the year ended December 31, 1998 include a loss of
$3,909,000 related to expenses for in-process research and development costs
included in the ComStream acquisition.
(3) See note 13 of the notes to the restated consolidated financial statements
for a determination of the number of shares used in computing basic and
diluted net income per share and note 1 of the notes to the restated
consolidated financial statements for an explanation of the effect of the
acquisition of ComStream Holdings Inc. on the consolidated financial
statements.
(4) 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.
4
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
(UNAUDITED)
--------------------------------------------------------
PRO FORMA AS
ADJUSTED FOR PRO FORMA AS ADJUSTED
COMPLETION OF FOR RIGHTS OFFERING AND
ACTUAL(1) RIGHTS OFFERING(2) THIS OFFERING(2)(3)
--------- ------------------ -------------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and investments........ $ 1,622 $ 2,865 $12,914
Working capital (deficiency).................. (5,649) (4,407) 5,643
Total assets.................................. 24,968 26,210 36,260
Total shareholders' equity.................... 1,015 1,957 12,007
</TABLE>
- ------------
(1) Includes our sale of 4,187,205 shares of common stock and our receipt of
proceeds of $15,618,272 in the rights offering through September 30, 1999.
(2) Gives effect to our sale of an additional 333,059 shares of common stock in
the rights offering subsequent to September 30, 1999, and our receipt of
proceeds of $1,242,313 from the sale of such shares. Expenses associated
with the rights offering were approximately $300,000 and were paid as of
September 30, 1999.
(3) Reflects our sale of 2,000,000 units (not including the shares underlying
the warrants included in the units) offered by this prospectus at an assumed
public offering price of $6.00 per unit, after deducting the underwriting
discount and the estimated offering expenses that we will pay. See 'Use of
Proceeds' and 'Capitalization.'
5
<PAGE>
RISK FACTORS
A purchase of units involves a high degree of risk. You should consider
carefully the following risk factors, in addition to the other information
contained in this prospectus, before purchasing any units.
WE HAVE A HISTORY OF OPERATING LOSSES, ONLY RECENTLY BECAME PROFITABLE, AND
COULD SUFFER FURTHER LOSSES IN THE FUTURE.
We have incurred significant operating losses since our inception. Although
we generated operating income of $2,302,000 and net income of $913,547 for the
nine months ended September 30, 1999, we incurred operating losses of
$13,362,000 during the year ended December 31, 1998, $1,080,000 during the year
ended December 31, 1997, $1,814,000 during the six months ended December 31,
1996 and $2,368,000 during the 12 months ended June 30, 1996. Our last audited
balance sheet as of December 31, 1998 showed an accumulated deficit of
approximately $21.4 million and a shareholders' deficit of $15.2 million. Our
predecessor, Radyne Corp., emerged from Chapter 11 bankruptcy protection in
December 1994. Although the rights offering that we completed in December 1999
has eliminated our shareholders' deficit at September 30, 1999, our consolidated
financial statements for the year ended December 31, 1998 included a note
stating that our operating losses, working capital deficit, and shareholder's
deficit at that time raised doubts about our ability to operate as a going
concern. We have never paid any cash dividends on our capital stock and do not
anticipate paying any cash dividends in the foreseeable future. Accordingly, you
should consider the likelihood of our future success in light of our bankruptcy
in 1994, the losses we have incurred since our bankruptcy, and the possibility
that we may incur future operating losses. Our ability to expand our
ground-based satellite systems market, penetrate new markets, such as
Internet-related products, and generate additional revenues and future positive
operating and net income depends, in large part, on our ability to sell our
products to existing and new customers and the profitability of such sales.
There can be no assurance that we will generate significant additional revenue
or report positive quarterly or annual operating results. Based upon the matters
set forth in this risk factor and the other risk factors contained in this
prospectus, you should not invest in our securities unless you can afford to
lose your entire investment. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
WE HAVE DEPENDED ON OUR CONTROLLING SHAREHOLDER FOR CAPITAL, AND WE HAVE
SIGNIFICANT SHORT-TERM LOANS THAT COULD LEAD TO A CASH SHORTAGE.
To meet our working capital requirements, we have depended on a succession
of short-term loans from, and purchases of our common stock by, ST and its
affiliates since we emerged from Chapter 11 protection on December 16, 1994.
Prior to its acquisition by us, ComStream depended on borrowings facilitated by
its parent company, Spar Aerospace Limited. ST has no obligation to continue to
provide us with any financing and you should not assume that ST will provide us
with any future financing.
We have a $20,500,000 uncommitted bank line of credit on which we owed
approximately $12,920,000 as of December 31, 1999. All loans pursuant to the
bank line of credit are short-term loans with maturities no later than
September 28, 2000. The bank could demand repayment at any time after the loans
mature, in which case we might have to use the proceeds of this offering and
seek additional sources of financing to repay our line of credit. The use of the
proceeds of this offering to repay our bank debt instead of funding our research
and development program would adversely affect our growth strategy. 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 this line of credit is
based in part on the bank's relationship with ST. ST has provided the bank with
a letter of awareness of our debt in
6
<PAGE>
which ST states it (1) will endeavor to ensure that we utilize sound financial
and business practices in our operations and (2) will give the bank at least 60
days' prior written notice of any divestment of our shares held by ST. 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 repay them when due.
Additionally, ST has no obligation to and may not continue indefinitely to
provide assurances to our lender or otherwise assist us in maintaining such
financing.
Our current credit agreement with our bank expires on September 28, 2000.
We cannot assure you that a renewal agreement will be executed, when the current
agreement expires. If a renewal agreement is not executed the bank is likely to
demand repayment of our loan. If we are required to repay the loan it would have
a material adverse impact on our financial condition.
Since December 31, 1998, we have not been in compliance with the covenant
in our prior and current credit agreements with the bank that requires us to
limit our indebtedness to no more than twice our tangible net worth. Our failure
to comply with this covenant or any other covenant contained in our loan
agreement with the bank could cause the bank to demand repayment of our loan.
Our current credit agreement does not require us to comply with this covenant
until March 31, 2000. We expect to be in compliance with this covenant upon
completion of this offering, but we cannot assure you that this will be the
case. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources.'
WE DEPEND ON INTERNATIONAL SALES, WHICH COULD CAUSE OUR SALES LEVELS TO BE
VOLATILE.
Our export sales were approximately 55% of our net sales for the year ended
December 31, 1997, 50% of our net sales for the year ended December 31, 1998 and
56% of our net sales for the nine months ended September 30, 1999. 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. ISPs rarely use satellites to provide
point-to-point infrastructure for the Internet in the United States and, thus,
we expect that our sales to this market will be primarily to customers located
outside the United States. We anticipate that foreign sales will continue to
account for a significant portion of our revenue in the near future. Our foreign
sales are denominated in U.S. dollars. As a result, any decrease in the value of
foreign currencies relative to the U.S. dollar may adversely affect the demand
for our products by increasing their costs in the currency of those countries.
For example, the economic crisis in the Pacific Rim region and other
international markets decreased our bookings from these regions and adversely
affected our results of operations in the fourth quarter of 1998 and in the
first nine months of 1999. We expect these negative trends to continue in the
near future.
Additional risks in the international marketplace include the following:
changing regulatory requirements,
the availability of export licenses,
political and economic instability,
difficulties in staffing and managing foreign operations,
tariffs and other trade barriers,
complex foreign laws and treaties, and
difficulty of collecting foreign account receivables.
In addition, we are subject to the Foreign Corrupt Practices Act, which
prohibits us from making payments to government officials and others in order to
influence the granting of contracts we may be seeking. Our non-U.S. competitors
are not subject to this law and this may give them a competitive advantage over
us. See 'Business -- Customers.'
7
<PAGE>
A DOWNTURN IN THE RAPIDLY EVOLVING TELECOMMUNICATIONS AND INTERNET INDUSTRIES
COULD HARM OUR BUSINESS.
Our success depends upon the continued growth of the telecommunications
industry, particularly with regard to the Internet. The global
telecommunications and Internet industries are evolving rapidly, and the
potential growth rates or future trends in technology development are
unpredictable. We cannot provide assurance that the deregulation, privatization
and economic globalization of the worldwide telecommunications market that has
resulted in demand for technologies and services will continue in a manner
favorable to us or our business strategies. In addition, there is no assurance
that the growth in demand for Internet services and the resulting need for
high-speed or enhanced telecommunications products will continue at its current
rate or at all. See 'Business -- Market Opportunities.'
WE DEPEND ON DEVELOPING MARKETS AND THEIR UNCERTAIN GROWTH POTENTIAL COULD
RESULT IN LOSSES.
We believe a substantial portion of the growth in demand for our products
will depend upon customers in developing countries. We cannot provide assurance
that such increases in demand will occur or that prospective customers will
accept our products. The degree to which we are able to penetrate potential
markets in developing countries will be affected to a large extent by the speed
with which other competing elements of the communications infrastructure, such
as other satellite-delivered solutions, telephone lines, television cable, and
land-based solutions, are installed in developing countries in which we sell our
products. The failure to increase the sales of our products in developing
countries would have a material adverse effect on our business, financial
condition, and results of operations. See 'Business -- Market Opportunities.'
THE LOSS OF THE SERVICES OF ANY MEMBER OF OUR SENIOR MANAGEMENT OR THE INABILITY
TO ATTRACT OR RETAIN ADDITIONAL TECHNICAL PERSONNEL COULD IMPAIR OUR ABILITY TO
CONDUCT AND EXPAND OUR BUSINESS.
Our future performance depends significantly on Robert C. Fitting, our
President and Chief Executive Officer, and Steve Eymann, our Executive Vice
President and Chief Technical Officer. Under the respective employment
agreements we have with each of Messrs. Fitting and Eymann, they will serve as
our Chief Executive Officer and President and our Executive Vice President,
respectively, until the earlier of June 30, 2000 or such time as our adjusted
earnings before interest and taxes exceeds $6,000,000 for a period of four
calendar quarters. The loss of either of these key employees would adversely
affect our operations.
Our continued ability to attract and retain highly skilled personnel also
is critical to the operation and expansion of our business. The market for
skilled engineers and other technical personnel is extremely competitive, and
recruitment and retention costs are high. Although we have been able to attract
and retain the personnel necessary to operate our business, we may not be able
to do so in the future, particularly as we expand our business into
Internet-related products and other markets. The failure to attract and retain
personnel with the necessary skills when needed could materially and adversely
affect our business and expansion plans. See 'Management.'
COMPETITION IN OUR INDUSTRY IS INTENSE AND CAN LEAD TO REDUCED SALES AND MARKET
SHARE.
The markets for ground segment systems are highly competitive. We have a
number of major competitors in the satellite communications equipment field.
These include large companies, such as Hughes Network Systems, Inc., NEC, and
Adaptive Broadband Corp. (formerly California Microwave), which have
significantly larger and more diversified operations and greater financial,
marketing, personnel and other resources than we possess. As a result, these
competitors may develop and expand their products more quickly, adapt more
quickly to new or emerging technologies and changes in customer requirements,
take advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products than we can.
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
8
<PAGE>
compared to the costs of the products generally offered by our major
competitors, have contributed to our ability to compete. Most of our competitors
offer products that have one or more features or functions similar to those that
we offer. 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, all of which would have a
material adverse impact on our business, financial condition, and results of
operations. See 'Business -- Competition.'
OUR PRODUCTS MAY BECOME OBSOLETE DUE TO RAPID TECHNOLOGICAL CHANGE.
The telecommunications industry, including the ground-based satellite
communications systems business, is characterized by rapid and continuous
technological change. Future technological advances in the telecommunications
industry may result in the introduction of new products or services that compete
with our products or render them obsolete. Our success depends in part on our
ability to respond quickly to technological changes through the improvement of
our current products and the development of new products. Accordingly, we
believe that we will need to allocate a substantial amount of capital to
research and development activities in the future. We may not generate cash flow
from operations or have access to outside financing in amounts that are
sufficient to adequately fund the development of new products. Even if we are
able to obtain the required funding to develop new products, we cannot assure
you that we will be able to develop products that we will be able to sell
successfully. Our inability to improve our existing products and develop new
products could have a material adverse effect on our business, financial
condition, and results of operations. See 'Business -- Research and
Development.'
THE HIGH COST OF RESEARCH AND DEVELOPMENT REDUCES OUR PROFITABILITY.
Our future growth depends on penetrating new markets, adapting existing
satellite communications products to new applications, and introducing new
communications products that achieve market acceptance and benefit from our
established international distribution channels. Accordingly, we are actively
applying our communications expertise to design and develop new hardware and
software products and enhance existing products. We expended $4,296,000 in the
year ended December 31, 1998 and $6,730,000 in the nine months ended September
30, 1999 on research and development activities. This represents 20% of our net
sales for the year ended December 31, 1998 and 17% for the nine months ended
September 30, 1999. We intend to utilize a significant portion of the net
proceeds of this offering to fund our research and development efforts. Since we
account for our research and development as an operating expense, these
expenditures will adversely affect our earnings in the near future.
Additionally, even if adequately funded, our research and development program
may not produce successful results, which would have a material adverse effect
on our business, financial condition, and results of operations. See
'Business -- Research and Development.'
RAPID GROWTH COULD STRAIN OUR PERSONNEL AND SYSTEMS.
Our operations have expanded significantly as a result of our acquisition
of ComStream. In order to pursue successfully the opportunities presented by the
ground segment and emerging satellite-delivered communications and
Internet/intranet-infrastructure markets, we will be required to continue to
expand our operations. This expansion could place a significant strain on our
personnel, management, and financial and other resources. In order to manage any
future growth effectively, we will be required to:
attract, train, motivate, and manage a significantly larger number of
employees;
conduct product engineering and management, sales and marketing
efforts, and customer support activities; and
manage higher capital requirements.
Any failure to manage any further growth in an efficient manner and at a
pace consistent with our business could have a material adverse effect on our
growth and our business, financial
9
<PAGE>
condition, and results of operations. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of Operations.'
OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY OF OTHERS.
We rely on our proprietary technology and intellectual property to maintain
our competitive position. Unauthorized parties could attempt to copy aspects of
our technologies or to obtain information that we regard as proprietary. We may
not be able to police unauthorized use of our intellectual property. Our failure
to protect our proprietary technology and intellectual property could adversely
affect our competitive position.
We generally rely on confidentiality agreements with our employees and some
of our suppliers to protect our proprietary technology. We also control access
to and distribution of confidential information concerning our proprietary
technology. We cannot guarantee that the other parties to these agreements will
not disclose or misappropriate the confidential information concerning our
proprietary technology, which could have a material adverse effect on our
business.
We rely on patents to protect certain of our proprietary technology.
Patents, however, 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 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 cannot assure you that any patents we
currently own or control, or that we may acquire in the future, will prevent our
competitors from independently developing products that are substantially
similar or superior to ours.
Third parties may in the future assert that our technology violates their
intellectual property rights. As a result of such claims, we could be required
to enter into licensing arrangements or develop non-infringing products, which
could be prohibitively expensive or could divert a significant amount of
resources from other aspects of our business.
We may find it necessary to take legal action in the future to enforce or
protect our intellectual property rights or to defend against claims that our
products or technologies infringe the rights of third parties. Litigation can be
very expensive and can distract our management's time and attention, which could
adversely affect our business. In addition, we may not be able to obtain a
favorable outcome in any intellectual property litigation. See
'Business -- Intellectual Property.'
WE DEPEND UPON CERTAIN SUPPLIERS AND SUBCONTRACTORS, THE LOSS OF WHICH COULD
CAUSE AN INTERRUPTION IN THE PRODUCTION OF OUR PRODUCTS.
We rely on subcontractors to assemble and test some of our products.
Additionally, our products use a number of specialized chips and customized
components or subassemblies produced by a limited number of suppliers. We
maintain limited inventories of these products and do not have long-term supply
contracts with our vendors. In the event our subcontractors or suppliers are
unable or unwilling to fulfill our requirements, we could experience an
interruption in product availability until we are able to secure alternative
sources of supplies. We are also subject to price increases by suppliers that
could increase the cost of our products or require us to develop alternative
suppliers, which could interrupt our business. It may not be possible to obtain
alternative sources at a reasonable cost. Supply interruptions could cause us to
lose orders or customers, which would result in a material adverse impact on our
business, financial condition, and results of operations. See
'Business -- Manufacturing.'
OUR QUARTERLY OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND
WE ANTICIPATE THAT THEY COULD DO SO IN THE FUTURE, WHICH COULD ADVERSELY AFFECT
OUR STOCK PRICE.
We may continue to experience significant quarter to quarter fluctuations
in our operating results, which may result in volatility in the price of our
common stock. These fluctuating operating results result from a variety of
factors, including the following:
timing of the initiation and completion of our purchase orders,
demand for our products,
introduction of new or enhanced products by us or our competitors,
10
<PAGE>
growth of demand for Internet-based products and services in
developing countries,
timing of significant marketing programs we may implement,
extent and timing of hiring additional personnel,
competitive conditions in our industry, and
general economic conditions in the United States and abroad.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations.'
THE OWNERSHIP INTEREST OF OUR CONTROLLING SHAREHOLDER MAY MAKE OUR STOCK LESS
ATTRACTIVE TO INVESTORS AND POTENTIAL ACQUIRORS.
Upon the completion of this offering, ST will own approximately 76% of our
outstanding common stock. ST will, therefore, continue to have the ability to
elect all of our directors and to control the outcome of all issues submitted to
a vote of our shareholders. It also would be impossible for a third party to
acquire us without the consent or participation of ST. ST has signed a lock-in
agreement required by certain state regulatory authorities that could, in
certain circumstances, reduce the proceeds receivable by ST in the event of a
sale or merger of our company during the term of the lock-in agreement. The
lock-in agreement is for a term of two years, unless earlier terminated as
provided in the agreement. This requirement might make ST less likely to consent
to any sale or merger of our company during the term of this lock-in agreement.
See 'Principal Shareholders.'
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION WHEN YOU PURCHASE UNITS
IN THIS OFFERING.
Upon the closing of this offering, investors will incur immediate and
substantial dilution in the per share net tangible book value of their common
stock. At September 30, 1999, after giving pro forma effect to our receipt of
the net proceeds of our rights offering, we would have had a pro forma net
tangible book value (deficit) of approximately $(0.16) per share. Net tangible
book value is the amount of our total assets minus intangible assets and
liabilities. At September 30, 1999, after giving pro forma effect to our receipt
of the net proceeds of our rights offering and the net proceeds of this
offering, we would have a pro forma net tangible book value of $0.67 per share.
This represents a gain in our net tangible book value of $0.83 per share, or
519% of the net tangible book value as of September 30, 1999, for the benefit of
our current shareholders, and dilution of $5.33, or 88.9% of the public offering
price, for investors in this offering. Investors in this offering will be
subject to substantially more dilution upon the exercise of outstanding options.
These options represent an additional 1,542,706 shares of common stock that
could be issued in the future. See 'Dilution.'
SHARES OF STOCK ISSUABLE PURSUANT TO OUR STOCK OPTION PLAN, STOCK PURCHASE PLAN,
WARRANTS, AND THE REPRESENTATIVE'S PURCHASE OPTION MAY ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.
As of December 31, 1999, we have outstanding under the 1996 Incentive Stock
Option Plan options to purchase an aggregate of 1,542,706 shares of common stock
at a weighted average exercise price of $3.10 per share (in the case of 398,756
of such options, the optionee/employee would be entitled to a bonus of $1.72 per
share upon exercise). We may sell an additional 1,000,000 shares to employees at
85% of fair market value pursuant to our 1999 Employee Stock Purchase Plan. The
exercise of the options granted under our stock option plan and the sales of
stock under our purchase plan would further reduce a shareholder's percentage
voting and ownership interest. See 'Management -- Employee Compensation Plans.'
Upon completion of this offering, we will issue to the representative of
the underwriters for nominal consideration an option to purchase up to 200,000
shares of common stock. This option will be exercisable for five years after the
date of this prospectus at an exercise price of $ per share (125% of the
offering price of the units). See 'Underwriting.'
The options granted under our stock option plan and the representative's
purchase option are likely to be exercised when our common stock is trading at a
price that is higher than the exercise
11
<PAGE>
price of these options and we would be able to obtain a higher price for our
common stock than we will receive under such options. The exercise, or potential
exercise, of these options could adversely affect the market price of our common
stock and adversely affect the terms on which we could obtain additional
financing.
THE LARGE NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.
The sale, or availability for sale, of a substantial number of shares of
common stock in the public market could materially adversely affect the market
price of our common stock and could impair our ability to raise additional
capital through the sale of our equity securities. At the conclusion of this
offering, there will be approximately 12,733,977 shares of common stock issued
and outstanding. Of these shares, approximately 2,763,741 will be freely
transferable. ST and certain of our officers hold 9,906,151 shares, which would
be eligible for resale, subject to the volume and manner of sale limitations of
Rule 144 of the Securities Act. An additional 64,084 shares are 'restricted
shares' as that term is defined in Rule 144 and are eligible for sale under the
provisions of Rule 144(k).
The representative will have registration rights for purposes of reselling
any shares purchased upon exercise of the representative's purchase option. We
have registered the shares of common stock issuable pursuant to our stock option
plan and stock purchase plan and shares issued under these plans will generally
be freely transferable. In addition, the shares issuable upon the exercise of
the warrants sold in this offering will be freely transferable. See 'Shares
Eligible for Future Sale.'
THE MARKET PRICE OF OUR SHARES HAS BEEN VOLATILE AND COULD RESULT IN LOSSES TO
OUR SHAREHOLDERS.
We cannot predict the effect that this offering will have on the trading
price of our common stock. We cannot provide assurance that the market price of
our common stock will not fall below the initial offering price or that,
following the offering, a shareholder will be able to sell shares acquired in
this offering at a price equal to or greater than the offering price. Since we
emerged from bankruptcy, there has been a very limited trading market for our
common stock. We believe that the low volume of trading in this market has been
the primary reason that the market price of our common stock has varied widely.
We cannot assure you that an active trading market will develop for our common
stock following this offering. In addition, the market price of our common stock
may continue to be volatile after this offering.
The price of the units, common stock or the warrants may be subject to
significant fluctuation in the future. There has been no prior market for the
units or warrants and there can be no assurance that one will develop or be
maintained after this offering. See 'Price Range of Common Stock.'
WARRANTHOLDERS MAY SUFFER POTENTIAL ADVERSE EFFECTS FROM THE REDEMPTION OF THE
WARRANTS AFTER THIS OFFERING.
Commencing one year from the date of this prospectus, we may call the
warrants for redemption at a price of $.01 per warrant upon not less than 30
days' nor more than 60 days' notice if the average closing price of our common
stock is at least $ per share for each of the 20 consecutive trading days
ending not earlier than five days from the date we call the warrants for
redemption. If we call the warrants for redemption, the holders will have the
right to:
exercise the warrants and pay the exercise price at a time when it
may be disadvantageous for the holder to do so,
sell the warrants at the then-current market price, or
accept the redemption price, which is likely to be substantially less
than the market value of the warrants.
See 'Description of Securities -- Common Stock Purchase Warrants.'
12
<PAGE>
WE MUST MAINTAIN A CURRENT PROSPECTUS REGISTRATION FOR WARRANT HOLDERS TO
EXERCISE WARRANTS.
You will only be able to exercise the warrants if (a) a current prospectus
under the Securities Act relating to the shares of common stock issuable upon
exercise of the warrants is then in effect and (b) such securities are qualified
for sale or exempt from qualification under the applicable securities laws of
the states in which the warrant holders reside. We have agreed with the
underwriters to maintain the effectiveness of a current prospectus covering the
common stock underlying the warrants and to use our best efforts to maintain the
qualification for the sale of the shares of common stock underlying the warrants
under certain state securities laws. However, there can be no assurance that we
will be able to do this. Persons residing in states where the shares underlying
the warrants are not qualified for sale may acquire the warrants, pursuant to
'secondary market' trading exemptions under the securities laws for those
states. We will not accept payment for or issue common stock upon the exercise
of any warrants unless (1) there is an effective and current registration
statement covering the issuance of the common stock upon exercise of the
warrants, and (2) such common stock is qualified for sale or exempt from
qualification under the applicable securities laws of the state in which the
exercising warrant holder resides. If either condition is not met, we will
refund those payments to the warrant holder. The value of the warrants may be
greatly reduced if we fail to meet our registration obligations. See
'Description of Securities -- Common Stock Purchase Warrants.'
OUR SECURITIES COULD BE DELISTED FROM THE NASDAQ SMALLCAP MARKET, WHICH COULD
LEAD TO LOSSES FOR INVESTORS.
Our common stock, warrants, and units have been approved for listing on the
Nasdaq SmallCap Market subject to the effectiveness of this offering. Our common
stock is currently listed on the OTC Bulletin Board. To qualify for continued
inclusion in the Nasdaq SmallCap Market, we will have to maintain.
either (1) $2,000,000 in net tangible assets (total assets minus
total liabilities and goodwill), (2) market capitalization of
$35,000,000, or (3) net income of $500,000 in the most recently
completed fiscal year or in two of the last three most recently
completed fiscal years; and
a public float of at least 500,000 shares with a market value of at
least $1,000,000.
Public float is defined as shares not directly or indirectly held by any of our
officers or directors or by any other person who is the beneficial owner of more
than 10% of the total shares outstanding.
In addition, continued inclusion requires two market-makers, a minimum bid
price for the common stock of $1.00 per share, and at least 300 shareholders
holding 100 shares or more. If we fail to meet the listing maintenance criteria
of the Nasdaq SmallCap market in the future for any reason, Nasdaq may
discontinue the inclusion of our securities in such market. In the event of
delisting, trading in our securities may then continue to be conducted on the
OTC Bulletin Board or in the over-the-counter market. In this event you may find
it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, our securities.
WE HAVE PROVISIONS IN OUR CERTIFICATE OF INCORPORATION THAT SUBSTANTIALLY
ELIMINATE THE PERSONAL LIABILITY OF MEMBERS OF OUR BOARD OF DIRECTORS FOR
VIOLATIONS OF THEIR FIDUCIARY DUTY OF CARE AS A DIRECTOR AND THAT ALLOW US TO
INDEMNIFY OUR OFFICERS AND DIRECTORS. THIS COULD MAKE IT VERY DIFFICULT FOR YOU
TO BRING ANY LEGAL ACTIONS AGAINST OUR DIRECTORS FOR SUCH VIOLATIONS OR COULD
REQUIRE US TO PAY ANY AMOUNTS INCURRED BY OUR DIRECTORS IN ANY SUCH ACTIONS.
Pursuant to our certificate of incorporation, members of our Board of
Directors will have no liability for violations of their fiduciary duty of care
as a director, except in limited circumstances. This means that you may be
unable to prevail in a legal action against our directors even if you believe
they have breached their fiduciary duty of care. In addition, our certificate of
incorporation allows us to indemnify our directors from and against any and all
expenses or liabilities arising from or in connection with their serving in such
capacities with us. This means that if you were able to enforce an action
against our directors or officers, in all likelihood we would be required
13
<PAGE>
to pay any expenses they incurred in defending the lawsuit and any judgment or
settlement they otherwise would be required to pay. See
'Management -- Limitation of Directors' Liability and Indemnification of
Directors and Officers.'
SINCE SOME MEMBERS OF OUR BOARD OF DIRECTORS ARE NOT RESIDENTS OF THE UNITED
STATES AND CERTAIN OF OUR ASSETS ARE LOCATED OUTSIDE OF THE UNITED STATES, YOU
MAY NOT BE ABLE TO ENFORCE ANY U.S. JUDGMENT FOR CLAIMS YOU MAY BRING AGAINST
SUCH DIRECTORS OR ASSETS.
Two members of our board of directors are residents of Singapore, and an
immaterial portion of our assets and a substantial portion of the assets of
these directors are located outside the United States. As a result, it may be
more difficult for you to enforce a lawsuit within the United States against
these non-U.S. residents than if they were residents of the United States. Also,
it may be more difficult for you to enforce any judgment obtained in the United
States against our assets or the assets of our non-U.S. resident directors
located outside the United States than if these assets were located within the
United States. We cannot assure you that foreign courts would enforce:
liabilities predicated on U.S. federal securities laws in original
actions commenced in such foreign jurisdiction; or
judgments of U.S. courts obtained in actions based upon the civil
liability provisions of U.S. federal securities laws.
PARTIES ON WHICH WE RELY MAY HAVE YEAR 2000 TECHNOLOGY PROBLEMS THAT COULD
DISRUPT OUR BUSINESS.
The Year 2000 issue concerns the fact that certain computer systems and
processors may recognize the designation '00' as 1900 when it is intended to
mean 2000, resulting in system failure or miscalculations. Other potential
date-related errors may result from computer systems' inability to recognize the
Year 2000 as a leap year, and the date January 1, 2001 (1-1-01). All of these
date-related issues are commonly referred to as the Year 2000 issue. Commencing
in 1997, we began a comprehensive review of our information technology systems,
upon which our day-to-day business operations depend, in order to determine the
adequacy of those systems in light of future business requirements. Year 2000
readiness was one of the factors considered in the review process. Prior to
December 31, 1999, we completed that review and believe that all mission
critical systems at our Phoenix and San Diego facilities are Year 2000
compliant.
Our Year 2000 readiness plan also involved the review of our
non-information technology systems, a review that we consider to be complete.
The only noncompliance that we discovered relates to certain date functions in
diagnostic equipment, which functions we do not employ. To date, we have not
encountered any significant problems in our information technology systems or
non-information technology systems related to the Year 2000 issue, but we cannot
assure you that we will not encounter such problems in the future.
As part of our comprehensive review, we have verified the Year 2000
readiness of third parties (vendors and customers) with whom we have material
relationships. This is a particular concern in light of our reliance on overseas
assembly operations. We sent a Year 2000 readiness survey to all of our material
vendors and customers. We have received acceptable responses from all of our
mission critical vendors. We received responses from approximately 70% of our
non-critical vendors. To date, we have not encountered any significant problems
with our vendors related to the Year 2000 issue, but we cannot assure you that
we will not encounter such problems in the future.
While we believe our efforts to date are adequate to prevent any Year 2000
issue from having a material adverse effect on us, our assessment may turn out
to be inaccurate. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Compliance.'
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<PAGE>
USE OF PROCEEDS
We estimate the net proceeds to us from the sale of the units in this
offering will be approximately $10,050,000, or approximately $11,634,000 if the
underwriters' over-allotment option is exercised in full, based on an assumed
public offering price of $6.00 per unit and after deducting the underwriting
discount and our estimated offering expenses.
We intend to use the net proceeds from this offering for the following
purposes and in the following order of priority:
<TABLE>
<CAPTION>
PERCENTAGE OF
PURPOSE AMOUNT NET PROCEEDS
------- ------ ------------
<S> <C> <C>
Research and development
Internet-related products..................... $ 3,015,000 30%
New telecommunications products............... $ 1,205,000 12%
Digital audio, video, and data products....... $ 2,010,000 20%
Hire additional technical personnel................ $ 2,510,000 25%
Working capital.................................... $ 1,310,000 13%
----------- ---
Total.................................... $10,050,000 100%
</TABLE>
The planned research and development expenditures are intended to further
the proposed expansion of our product lines.
We also plan to use a portion of the proceeds to hire additional technical
personnel to assist in determining practical applications for our design,
engineering, and manufacturing capabilities in existing and developing market
segments, to enhance our efforts to market both our newly developed and our
existing product lines, and to pursue our growth strategy.
Pending these uses, we intend to invest the net proceeds from this offering
in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid any cash dividends on our capital stock and do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain any future earnings to fund the development and growth of our
business.
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<PAGE>
CAPITALIZATION
The following table summarizes our capitalization as of September 30, 1999
(a) on an actual basis giving effect to our sale of 4,187,205 shares of common
stock and our receipt of proceeds of $15,618,272 in the rights offering through
September 30, 1999, (b) on a pro forma basis as adjusted to give effect to our
receipt of proceeds of $1,242,313 from our sale of an additional 333,059 shares
of common stock in the rights offering subsequent to September 30, 1999, and (c)
on a pro forma as adjusted basis to reflect our receipt of the net proceeds we
received from the rights offering and the estimated net proceeds we expect to
receive from the sale of 2,000,000 units offered by this prospectus at an
assumed public offering price of $6.00 per unit, after deducting the
underwriting discount and the estimated offering expenses we will pay.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------------------------
PRO FORMA AS
PRO FORMA AS ADJUSTED FOR
ADJUSTED FOR RIGHTS
RIGHTS OFFERING AND
ACTUAL OFFERING THIS OFFERING
------ -------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Short-term debt....................................... $12,984,561 $12,984,561 $12,984,561
Long-term debt and capitalized lease obligations, less
current portion..................................... 76,572 76,572 76,572
Accrued stock option compensation..................... 1,108,804 1,108,804 1,108,804
Shareholders equity:
Common Stock, $.002 par value, 20,000,000 shares
authorized, 10,151,026 shares outstanding,
actual; 10,484,085 shares outstanding, pro
forma as adjusted for the rights offering;
12,484,085 shares outstanding, pro forma as
adjusted for the rights offering and this
offering(1).................................... 20,303 20,969 24,969
Additional paid-in capital....................... 21,435,312 22,376,959 32,422,516
Retained earnings (accumulated deficit).......... (20,440,639) (20,440,639) (20,440,639)
Total shareholders' equity....................... 1,014,976 1,957,289 12,006,846
----------- ----------- -----------
----------- ----------- -----------
Total capitalization.................................. $15,184,913 $16,127,226 $26,176,783
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------
(1) The number of shares issued and outstanding and the additional paid-in
capital exclude (a) 2,000,000 shares of common stock reserved for issuance
upon the exercise of 2,000,000 common stock purchase warrants included in
the units, (b) 1,790,670 shares of common stock remaining reserved for
issuance under our 1996 Incentive Stock Option Plan, of which options to
purchase 1,542,706 shares were outstanding as of December 31, 1999 at a
weighted average exercise price of $3.10 per share, (c) 249,892 shares
issued upon the exercise of options subsequent to September 30, 1999, and
(d) 1,000,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan. See 'Management -- Employee Compensation
Plans.'
16
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock currently trades on the OTC Bulletin Board under the
symbol 'RADN.' Our units, common stock, and warrants have been approved for
listing on the Nasdaq SmallCap Market under the symbols 'RADNU,' 'RADN,' and
'RADNW,' respectively, subject to the effectiveness of this offering. There
currently is no established trading market for our common stock as actual
transactions are infrequent and we cannot assure you that an active trading
market will develop after this offering. 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 December 31, 1999, we had 418 shareholders of record
and approximately 1,400 beneficial owners of our common stock.
<TABLE>
<CAPTION>
1997:
<S> <C> <C>
First Quarter........................................ 6 3 1/8
Second Quarter....................................... 5 3/4 1 1/8
Third Quarter........................................ 10 3/4 1 5/8
Fourth Quarter....................................... 10 1/2 3 1/8
1998:
First Quarter........................................ 5 1/4 2 7/64
Second Quarter....................................... 5 2 3/4
Third Quarter........................................ 5 3 3/16
Fourth Quarter....................................... 5 2 3/8
1999:
First Quarter........................................ 4 1/4 2 1/4
Second Quarter....................................... 3 3/4 2 5/8
Third Quarter........................................ 3 9/16 2 1/4
Fourth Quarter....................................... 8 1/2 2 1/2
</TABLE>
On January 21, 2000 the last sale price of the common stock as reported by
the OTC Bulletin Board was $10.562 per share.
17
<PAGE>
DILUTION
Purchasers of units in this offering will be diluted to the extent of the
difference between the public offering price per unit and the net tangible book
value per share of our common stock after this offering. Net tangible book value
dilution per share represents the difference between the amount per share paid
by purchasers of shares of common stock in this offering and the pro forma,
adjusted net tangible book value per share of common stock immediately after
completion of this offering.
Our pro forma, adjusted net tangible book value (deficit) as of September
30, 1999, after giving pro forma effect to the common stock issued in the rights
offering subsequent to September 30, 1999 and the application of the net
proceeds from such transaction, would have been $(1,736,005) or $(0.16) per
share of common stock. Pro forma net tangible book value (deficit) per share as
of a specified date is determined by dividing our tangible book value (deficit)
(total tangible assets less total liabilities) by the number of outstanding
shares of common stock at such date. After giving effect to our sale of the
2,000,000 units offered hereby (based upon an assumed public offering price of
$6.00 per unit, assuming that no portion of the unit offering price is allocated
to the warrant included in the unit and after deducting the underwriting
discount and our estimated offering expenses), our pro forma net tangible book
value as of September 30, 1999 would have been $8,313,552, or $0.67 per share of
common stock. This represents an immediate increase in pro forma net tangible
book value to existing shareholders of $0.83 per share, or 502% of the net
tangible book value as of September 30, 1999, and an immediate dilution to new
investors of $5.33 per share, or 88.9% of the public offering price of the units
offered in this offering. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $6.00
Pro forma net tangible book value (deficit) per share as of
September 30, 1999 (giving effect to the rights
offering)................................................. $ (0.17)
Increase in pro forma net tangible book value (deficit) per
share attributable to new investors in this offering...... 0.83
Pro forma net tangible book value per share as of September
30, 1999 after this offering.............................. 0.67
Pro forma net tangible book value dilution per share to new
investors in this offering................................ $5.33
</TABLE>
Investors in this offering will be subject to substantially more dilution
upon the exercise of outstanding options. As of December 31, 1999, these options
represent an additional 1,542,706 shares that could be issued in the future.
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected statement of operations data for the years ended
December 31, 1998 and December 31, 1997, the six months ended December 31, 1996,
the year ended June 30, 1996, the six and one-half month period ended June 30,
1995, and the ten and one-half month period ended December 16, 1994, and the
selected balance sheet data at those dates, are derived from our consolidated
financial statements and notes thereto audited by our independent auditors: KPMG
LLP (in the case of the year ended December 31, 1998, restated) and Deloitte &
Touche LLP (in the case of the year ended December 31, 1997, the six months
ended December 31, 1996, the year ended June 30, 1996, the six and one-half
months ended June 30, 1995, and the ten and one-half months ended December 16,
1994). The statement of operations data for the nine months ended September 30,
1999 and September 30, 1998 are unaudited. 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 prospectus.
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,
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.
19
<PAGE>
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
10 1/2
MONTHS 6 1/2 MONTHS
ENDED ENDED YEAR ENDED
12/16/1994(1) 6/30/1995 6/30/1996
------------- --------- ---------
<S> <C> <C> <C>
Net sales...................................... $ 2,569,396 $1,861,262 $ 3,829,523
Cost of sales.................................. 2,229,329 1,228,747 2,559,350
Gross profit................................... 340,067 632,515 1,270,173
Selling, general and administrative expense.... 1,658,388 961,162 1,843,576
Asset impairment charge(2)..................... -- -- --
Professional fees related to reorganization.... 600,198 -- --
Research and development expense............... -- -- 1,794,823
Stock option compensation expense.............. -- -- --
In-process research and development expense.... -- -- --
Restructuring costs............................ -- -- --
Total operating expenses....................... 2,258,586 961,162 3,638,399
Operating income (loss)........................ (1,918,519) (328,647) (2,368,226)
Interest expense............................... 118,235 36,209 256,871
Other.......................................... -- -- --
Income (loss) before fresh start adjustments
and extraordinary items...................... (2,036,754) (364,856) (2,625,097)
Fresh start adjustments........................ 1,598,841 -- --
Income (loss) before extraordinary items and
taxes on income.............................. (437,913) (364,856) (2,625,097)
Extraordinary items............................ 2,699,156 (3) -- --
----------- ---------- -----------
Income (loss) before taxes..................... 2,261,243 (364,856) (2,625,097)
Basic earnings (loss) per share:
Income (loss) before extraordinary item.... (1.33) (0.10) (0.70)
Extraordinary item......................... 8.20 0.00 0.00
----------- ---------- -----------
Net income (loss).......................... 6.87 (0.10) (0.70)
Diluted earnings (loss) per share:
Income (loss) before extraordinary item.... (1.33) (0.10) (0.70)
Extraordinary item......................... 8.20 0.00 0.00
----------- ---------- -----------
Net income (loss).......................... 6.87 (0.10) (0.70)
Weighted average shares used in computation
Basic...................................... 329,020 3,729,721 3,742,227
Diluted.................................... 329,020 3,729,721 3,742,227
<CAPTION>
6 MONTHS 9 MONTHS 9 MONTHS
ENDED YEAR ENDED YEAR ENDED ENDED ENDED
12/31/1996 12/31/1997 12/31/1998 9/30/1998 9/30/1999
---------- ---------- ---------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales...................................... $4,905,059 $13,446,852 $ 21,111,704 $ 9,973,611 $39,261,814
Cost of sales.................................. 4,052,433 8,022,262 15,808,459 7,704,856 21,090,713
Gross profit................................... 852,626 5,424,590 5,303,245 2,268,755 18,171,101
Selling, general and administrative expense.... 1,437,971 4,242,138 5,531,213 2,543,986 9,138,897
Asset impairment charge(2)..................... 421,000 -- 262,935 -- --
Professional fees related to reorganization.... -- -- -- -- --
Research and development expense............... 808,025 2,262,066 4,296,268 1,944,809 6,730,223
Stock option compensation expense.............. -- -- 1,566,075 -- --
In-process research and development expense.... -- -- 3,909,000 -- --
Restructuring costs............................ -- -- 3,100,000 -- --
Total operating expenses....................... 2,666,996 6,504,204 18,665,491 4,488,795 15,869,120
Operating income (loss)........................ (1,814,370) (1,079,614) (13,362,246) (2,220,040) 2,301,981
Interest expense............................... 255,604 677,102 1,198,777 568,592 1,561,616
Other.......................................... -- -- (23,480) -- --
Income (loss) before fresh start adjustments
and extraordinary items...................... (2,069,974) (1,756,716) (14,537,543) (2,788,632) 740,365
Fresh start adjustments........................ -- -- -- -- --
Income (loss) before extraordinary items and
taxes on income.............................. (2,069,974) (1,756,716) (14,537,543) (2,788,632) 740,365
Extraordinary items............................ -- -- -- -- 188,182
---------- ----------- ------------ ----------- -----------
Income (loss) before taxes..................... (2,069,974) (1,756,716) (14,537,543) (2,788,632) 913,547
Basic earnings (loss) per share:
Income (loss) before extraordinary item.... (0.55) (0.35) (2.45) (0.47) 0.12
Extraordinary item......................... 0.00 0.00 0.00 0.00 0.03
---------- ----------- ------------ ----------- -----------
Net income (loss).......................... (0.55) (0.35) (2.45) (0.47) 0.15
Diluted earnings (loss) per share:
Income (loss) before extraordinary item.... (0.55) (0.35) (2.45) (0.47) 0.11
Extraordinary item......................... 0.00 0.00 0.00 0.00 0.03
---------- ----------- ------------ ----------- -----------
Net income (loss).......................... (0.55) (0.35) (2.45) (0.47) 0.14
Weighted average shares used in computation
Basic...................................... 3,750,699 5,012,664 5,931,346 5,931,340 5,961,937
Diluted.................................... 3,750,699 5,012,664 5,931,346 5,931,340 6,401,161
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF AS OF AS OF
12/16/94(1) 6/30/95 6/30/96 12/31/96 12/31/97 12/31/98 9/30/99
----------- ------- ------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
quivalents......... $ 256,398 $ 2,109 $ 971 $ 186,488 $ 569,692 $ 254,956 $ 1,622,256
Working capital
(deficit).......... (977,678) (1,343,018) (4,082,987) (5,851,527) 1,654,857 (8,803,970) (5,649,048)
Total assets......... 3,084,394 3,452,999 3,272,686 6,572,917 10,231,617 29,190,714 24,968,155
Long-term
liabilities........ 192,603 168,304 130,414 161,968 4,649,404 16,862,337 1,185,376
Total liabilities.... 2,531,093 3,264,554 5,669,338 11,019,543 11,381,678 44,427,634 23,953,179
Shareholders' equity
(deficit).......... 553,301 188,445 (2,396,652) (4,446,626) (1,150,061) (15,236,920) 1,014,976
</TABLE>
- ------------
(1) Radyne ComStream's predecessor petitioned for bankruptcy protection in April
1994 and operated as a debtor-in-possession until December 16, 1994.
(2) Consists of the writedown of designs and drawings in light of the
introduction of replacement products.
(3) Consists of $1,062,667 gain on exchange of debt for common stock and
$1,636,489 gain on debt forgiveness.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under 'Risk Factors' and elsewhere in this prospectus.
The following discussion should be read in conjunction with our consolidated
financial statements and related notes thereto included elsewhere in this
prospectus.
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. This is due to a series of changes in our fiscal year. Upon emergence
from bankruptcy on December 16, 1994, our predecessor company's fiscal year
ended on that date. At that time we adopted the fiscal year of our new parent,
Engineering and Technical Services, Inc., or ETS. This created a fiscal period
from December 17, 1994 through June 30, 1995, followed by a full year ended
June 30, 1996. When we became a subsidiary of 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.
COMPANY HISTORY
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 ETS, then a major customer. On August 12, 1996, ST acquired ETS
through its indirect wholly owned subsidiary, Stetsys US, Inc. ST now holds
approximately 90% of our common stock.
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, 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. We expect the combined annual revenue of Radyne ComStream for
fiscal 1999 will be approximately $55 million versus Radyne Corp.'s
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.
21
<PAGE>
3. While we viewed ComStream's gross margins as excellent, its
profitability had suffered from extremely high expenses. Since closing the
acquisition in October 1998, we have reduced ComStream's recurring expenses
by approximately $1,000,000 per month. 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 $515,940 to
$1,576,538 (after amortization of $223,649) in the fiscal quarter ended
September 30, 1999. See ' -- Liquidity and Capital Resources.' We have included
ComStream's results in our combined statement of operations from the acquisition
date.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998.
We increased our net sales by 294% to $39,262,000 during the nine months
ended September 30, 1999 from $9,974,000 during the nine months ended
September 30, 1998, primarily as a result of our acquisition and integration of
ComStream into our operations.
Our cost of sales as a percentage of net sales decreased to 54% during the
nine months ended September 30, 1999 from 77% during the nine months ended
September 30, 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 the nine months ended September 30, 1998 to write off these costs and to
set up a provision for obsolescence. We expense costs in the period in which
they occur.
Selling, general and administrative costs increased to $9,139,000 (23% of
sales) during the nine months ended September 30, 1999 from $2,544,000 (26% of
sales) during the nine months ended September 30, 1998. 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.
Research and development expenditures increased to $6,730,000 (17% of
sales) during the nine months ended September 30, 1999 from $1,945,000 (20% of
sales) during the nine months ended September 30, 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.
Based on the increases in our gross margins and our lower operating costs
as a percentage of sales (40% for the nine months ended September 30, 1999
compared to 45% for the nine months ended September 30, 1998) we recorded
earnings before interest and taxes ('EBIT') of $2,302,000 during the nine months
ended September 30, 1999 compared to a loss before interest and taxes of
($2,220,000) for the nine months ended September 30, 1998.
Net interest expense increased to $1,562,000 (4% of sales) in the nine
months ended September 30, 1999 from $569,000 (6% of sales) in the nine months
ended September 30, 1998 due to an increase in our debt level.
We recorded extraordinary income of $188,000 during the nine months ended
September 30, 1999 as a result of negotiated forgiveness of previously recorded
and accrued interest expense in connection with the note payable to Spar.
22
<PAGE>
We recorded income tax expense in the nine months ended September 30, 1999
of $15,000. We had not previously provided for income taxes.
Based on all of the above we recorded net income of $914,000 or $0.14 per
diluted weighted average share outstanding during the nine months ended
September 30, 1999 as compared to a net loss of ($2,789,000) during the nine
months ended September 30, 1998.
Our new-orders-booked (Bookings) increased 282% to $43,849,000 for the nine
months ended September 30, 1999 from $11,490,000 for the nine months ended
September 30, 1998. This increase was primarily a result of our acquisition and
integration of ComStream into our operations.
Our level of unfilled-orders-to-ship (Backlog) increased 111% to
$13,193,000 at September 30, 1999 from $6,253,000 at September 30, 1998,
primarily due to the record level of bookings received during the current and
immediately preceding reporting periods.
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.
This allocation was based on a number of assumptions, including those
regarding estimated project completion dates and costs. 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 COST
PRODUCT LINE STARTED COMPLETION COMPLETION
DESCRIPTION BASE TECHNOLOGY APPLICABILITY (MONTH-YEAR) DATE $000's
- ----------- --------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
2 MB Card QPSK, FEC Modems 01 - 98 11 - 99 1,820*
Coding
'CM 601' Low Cost Coding Modulation Modems 05 - 97 03 - 99 1,400**
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 Receiver Packet Protocol
'ABR 202' Audio L-Band Receivers Broadcast Audio 03 - 98 12 - 98 750
Receiver Multiplexing
Set Top Box Receiver DTH Television Satellite 03 - 97 07 - 99 1,600
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.
23
<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. These adjustments are not
anticipated to have an impact on our future results of operations.
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 expect to continue to experience high research and
development expenses as we position ourselves to gain market share through the
introduction of new products.
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
24
<PAGE>
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 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.
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.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996
Our net sales increased 174% to $13,447,000 during the twelve month period
ended December 31, 1997 from $4,905,000 during the six months ended
December 31, 1996. This increase was primarily attributable to the fact that the
more recent period was twelve months and the prior period was six months, and to
the introduction of our new product lines, which experienced exceptional market
acceptance.
Our cost of sales as a percentage of net sales decreased to 60% during the
twelve months ended December 31, 1997 from 83% for the six months ended
December 31, 1996. During the six months ended December 31, 1996, adjustments to
inventory of approximately $491,000 (10% of sales) for obsolescence, of which
$364,000 was related to the introduction of new products (which essentially
rendered one entire older product line obsolete), and $340,000 (7% of sales) for
costs related to the introduction of new products were included in the cost of
sales as old product lines were replaced with new product lines. These products
included a new generation modem sub-system, which makes use of our proprietary
technology from older products while adding features and reducing future
manufacturing costs, and new digital video broadcast modems.
Selling, general and administrative costs increased to $4,242,000 or 32% of
sales during the twelve months ended December 31, 1997 from $1,438,000 or 29% of
sales for the six months ended December 31, 1996. The increase in expenses as a
percentage of sales was primarily attributable to growth and expenses incurred
for market penetration. The increase in pure dollars was also attributable to
the increased time frame of the later period over the prior period.
We recorded an asset impairment charge of $421,000 during the six months
ended December 31, 1996, to reflect a valuation adjustment to designs and
drawings which were partially impaired due to the introduction of new product
lines.
25
<PAGE>
The valuation of designs and drawings was the result of adjustments made by
us to adopt 'Fresh Start' reporting in accordance with AICPA Statement of
Position 90-7, Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code, and represents the excess reorganization value that was applied
to the acquired technology supporting our products. Amortization of designs and
drawings was computed using the straight-line method over an estimated useful
life of four to seven years. The remaining asset carried a net book value of
$472,000, amortized using the straight-line method over the remaining estimated
useful life of one to four years.
Research and development expenditures increased to $2,262,000 (17% of
sales) during the twelve months ended December 31, 1997 from $808,000 (16% of
sales) for the six months ended December 31, 1996. The increase in expenses was
primarily attributable to the increased time frame of the later period over the
prior period and to major development programs instituted during the fiscal year
ended December 31, 1997. It is anticipated that we will continue to experience
high research and development expenses as we position ourselves to gain market
share through the introduction of new products.
As of the last day of the fiscal period ended December 31, 1997, we held
approximately $600,000 worth of inventory, in the form of finished goods in a
ready-to-ship status, on the shipping dock for two orders placed with us which
were to be purchased with funds underlying international letters of credit. Due
to unexpected difficulties, the letters of credit were not received by the end
of the period and so the products were not shipped. The impact of these delayed
letters of credit was to delay shipment, and revenue recognition, of
approximately $945,000 in sales.
Interest expense net of interest income increased to $677,000 (5% of sales)
during the twelve months ended December 31, 1997 from $256,000 (5% of sales) for
the six months ended December 31, 1996. The large increase in expense was
primarily attributable to the increased time frame of the later period over the
prior period.
For the period ended December 31, 1997, we did not provide for income
taxes, due to the net loss. We also did not provide for income taxes, for the
six months ended December 31, 1996, due to the net loss.
For the twelve month period ended December 31, 1997, we had a net loss of
($1,757,000) as compared with a net loss of ($2,070,000) in the six month period
ended December 31, 1996. The decrease was primarily attributable to increased
sales with a lower percentage of cost of sales.
Bookings for the twelve months ended December 31, 1997 were $15,788,000 as
compared to $5,939,000 for the six months ended December 31, 1996. This increase
was a result of the increased time frame of the later period over the prior
period coupled with our increased effort to rejuvenate our marketing strategy.
Our Backlog of orders to be shipped was $4,814,000 as of December 31, 1997,
an increase of 95% over the $2,473,000 in Backlog as of December 31, 1996.
Approximately $945,000 of our Backlog as of December 31, 1997 was due to the
effect of the late letters of credit from two orders as described above. One of
these orders was from South America and was subsequently shipped. The other
order was from Indonesia and was subsequently cancelled.
SIX MONTH PERIOD ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30,
1996.
Our net sales increased 28% to $4,905,000 during the six month period ended
December 31, 1996 from $3,830,000 during the twelve months ended June 30, 1996.
This increase was primarily attributable to the introduction of our new product
lines which experienced exceptional market acceptance. Sales of products
introduced since July 1, 1995 increased from $434,000 for the fiscal year ended
June 30, 1996 to $3,477,000 for the six month period ended December 31, 1996.
Our cost of sales as a percentage of net sales increased to 83% during the
six months ended December 31, 1996 from 67% for the fiscal year ended June 30,
1996. There were two primary reasons for this increase in percentage. First,
there were adjustments to inventory of $491,000
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(10% of sales) for obsolescence. Of this amount, $364,000 was related to the
introduction of new products which essentially rendered one entire product line
obsolete; $110,000 was related to ongoing product development; and $17,000 was
related to the valuation of excess materials on hand. Second, $340,000 (7% of
sales) of costs related to the introduction of new products were included in the
cost of sales for the period ended December 31, 1996. These products included a
new generation modem sub-system which makes use of our proprietary technology
from older products while adding features and reducing future manufacturing
costs. Also, we introduced and shipped the new digital video broadcast modem,
which experienced exceptional market acceptance. Also contributing to the
increase in cost of sales as a percentage of sales were freight charges related
to international sales (2% of sales) and higher than anticipated warranty
expense on some of our older products (1% of sales).
Selling, general and administrative costs decreased to $1,438,000 or 29% of
sales during the six months ended December 31, 1996 from $1,844,000 or 48% of
sales for the fiscal year ended June 30, 1996. The decrease in expenses was
primarily attributable to the fact that the more recent period was six months
and the prior period was twelve months (approximately $922,000) and partially
offset by increased costs related to the higher level of business that we
experienced during the latter period (approximately $516,000).
We recorded an asset impairment charge of $421,000 during the six month
period ended December 31, 1996 to reflect a valuation adjustment to designs and
drawings, which were partially impaired due to the introduction of new product
lines.
Research and development expenditures decreased to $808,000 (16% of sales)
during the six months ended December 31, 1996 from $1,795,000 (47% of sales) for
the twelve months ended June 30, 1996. The decrease in expenses was primarily
attributable to the fact that the more recent period was six months and the
prior period was twelve months (approximately $808,000). Additionally, we
embarked on a major development program during the fiscal year ended June 30,
1996, in order to regain a competitive posture after two fiscal periods during
which we made no development effort (approximately $897,000).
Interest expense net of interest income decreased to $256,000 (5% of sales)
during the six months ended December 31, 1996 from $257,000 (7% of sales) for
the fiscal year ended June 30, 1996. The small decrease in expense was primarily
attributable to the fact that the more recent period was six months and the
prior period was twelve months (approximately $250,000), offset by additional
interest from our increased debt level (approximately $250,000).
For the six month period ended December 31, 1996, we did not provide for
income taxes, due to the net loss and net operating loss carryforwards from
prior periods. We also did not provide for income taxes for the twelve month
period ended June 30, 1996, for the same reasons.
For the six month period ended December 31, 1996, we had a net loss of
$2,070,000 as compared with a net loss of $2,625,000 in the twelve month period
ended June 30, 1996. The decrease was primarily attributable to the fact that
the more recent period was six months and the prior period was twelve months as
partially offset by the increase in cost of sales as a percentage of sales and
the expenses of increased business activity, and the $421,000 asset impairment
charge as discussed above.
Bookings for the six months ended December 31, 1996 were $5,939,000 as
compared to $4,184,000 for the year ended June 30, 1996. Our Backlog of orders
to be shipped was $2,473,000 as of December 31, 1996, an increase of 72% over
the $1,439,000 in Backlog as of June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the past five years we have financed our working capital
requirements, capital expenditures and the acquisition of ComStream through
borrowings from our principal shareholder and banks and the sale of common stock
to our shareholders through rights offerings.
We had a working capital deficit of $5,649,000 at September 30, 1999, which
represents an increase in our working capital of $3,155,000 from our working
capital deficit of $8,804,000 at
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December 31, 1998. Our working capital increased primarily as a result of a
reduction in current liabilities of ($4,797,000), primarily made up of a
reduction in short-term notes payable of ($2,080,000), a reduction in accounts
payable of ($787,000), and in other accrued expenses and short term capital
lease obligations of ($1,930,000), as offset by a reduction in current assets of
($1,643,000), made up of an increase in cash of $1,367,000 and decreases in
accounts receivable of ($1,707,000), inventories of ($1,142,000) and prepaid
expenses of ($160,000).
Net cash provided by/(used in) operating activities was $2,997,000 for the
nine months ended September 30, 1999; ($3,850,000) for the year ended
December 31, 1998; and ($4,945,000) for the year ended December 31, 1997.
Cash used in investing activities was $235,000 for the nine months ended
September 30, 1999; $10,551,000 for the year ended December 31, 1998; and
$593,000 for the year ended December 31, 1997. The increase of almost
$10,000,000 in 1998 was related to the purchase of ComStream. We have no
material commitments to make capital expenditures in 2000.
Net cash (used in)/provided by financing activities was ($1,395,000) for
the nine months ended September 30, 1999; $14,086,000 for the year ended
December 31, 1998; and $5,922,000 for the year ended December 31, 1997. The net
cash provided from financing activities in 1998 and 1997 resulted from
borrowings under our bank credit line, as described below, and from ST, and in
1997 from the sale of shares of our common stock in a rights offering. In 1999,
net cash used in financing activities resulted from payments made to the bank
under our line of credit.
We have a $20,500,000 uncommitted credit line with Citibank, N.A. that
includes $20,000,000 available for borrowing and facilities of up to $500,000
for bank guarantees and/or standby letters of credit. All loans pursuant to the
bank line of credit are short term loans with maturities no later than
September 28, 2000. The bank could demand repayment at any time after the
maturity date of the loans in which case we might have to use the proceeds of
this offering and 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 the 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 (rates of 6.125% and
6.938% on balances owed at December 31, 1998 and 1997, respectively).
Since December 31, 1998 we have not been in compliance with the covenant in
our prior and current credit agreements with the bank which requires us to limit
our indebtedness to no more than twice our tangible net worth. Our failure to
comply with this covenant or any other covenant contained in our loan agreement
with the bank could cause the bank to demand repayment of our loan. Our current
credit agreement does not require us to comply with this covenant until
March 31, 2000. We expect to be in compliance with this covenant upon completion
of this offering, but we cannot assure you that this will be the case.
Our current credit agreement expires on September 28, 2000. The credit
agreement is renewable annually at the option of Citibank. We owed principal of
approximately $12,920,000, at interest rates from 6.59% to 6.94%, under the line
of credit as of December 31, 1999.
During 1999, we also had a note payable to Spar Aerospace Limited in the
amount of $7,000,000. This note was issued on October 15, 1998 as partial
consideration for the acquisition of ComStream. 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
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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 erronously carried on ComStream's pre-closing balance sheet. Because
these discrepencies 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 in 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 accrued in prior periods and has been reported as
extraordinary income in the quarter ended September 30, 1999).
We have financed the repayment of debt incurred for the ComStream
acquisition, certain restructuring costs, and our ongoing working capital needs
through (a) the rights offering pursuant to which we sold $16,860,584 of common
stock to our existing shareholders of record as of April 16, 1999, and (b) 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 these funds, along with $932,200 of cash on
hand, to pay the accrued interest due to ST as of September 30, 1999.
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 aggregate purchase of 4,300,800 shares at an
aggregate purchase price of $16,041,984.
We believe that the proceeds of this offering, 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.
YEAR 2000 COMPLIANCE
The Year 2000 issue concerns the fact that certain computer systems and
processors may recognize the designation '00' as 1900 when it is intended to
mean 2000, resulting in system failure or miscalculations. Other potential date
related errors may result from computer systems' inability to recognize the year
2000 as a leap year and a date such as January 1, 2001 (1-1-01). All of these
date-related issues are commonly referred to as the Year 2000 issue, the Y2K
problem or the Millennium Bug. Commencing in 1997, we began a comprehensive
review of our information technology systems, upon which our day to day business
operations depend, in order to determine the adequacy of those systems in light
of future business requirements. Year 2000 readiness was one of the factors
considered in the review process. Prior to December 31, 1999, we completed that
review and certain upgrading and we believe that all of our mission critical
systems are now Year 2000 compliant.
Our Year 2000 readiness plan also involved the review of our
non-information technology systems, a review that we consider to be complete.
The only noncompliance which we discovered relates to certain date functions in
diagnostic equipment, which functions we do not employ. To date, we have not
encountered any significant problems in our information technology systems or
non-information technology systems related to the Year 2000 issue, but we cannot
assure you that we will not encounter such problems in the future.
As part of our comprehensive review, we have verified the Year 2000
readiness of third parties (vendors and customers) with whom we have material
relationships. A Year 2000 readiness survey was sent to all of our material
vendors and customers. We have received acceptable responses from all of our
mission critical vendors. We received responses from approximately 70% of our
non-critical vendors. To date, we have not encountered any significant problems
with our vendors related to the Year 2000 issue, but we cannot assure you that
we will not encounter such problems in the future.
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We have completed a review of our products and determined that all but one
older ComStream product are Year 2000 ready. This product has a feature that
sequences dates incorrectly after January 1, 2000. We are notifying purchasers
and potential purchasers of this product, relatively few of which have been
sold, that they may have to reset certain features to correct this problem or
de-activate that particular feature.
While we believe our efforts to date are adequate to prevent any Year 2000
issue from having a material adverse effect on us, our assessment may turn out
to be inaccurate.
<TABLE>
<CAPTION>
YEAR 2000 READINESS COSTS
-------------------------
<S> <C>
Project Statistics:
Cost (labor)............................ $110,000
</TABLE>
<TABLE>
<CAPTION>
SYSTEM
INVENTORY ASSESSMENT REMEDIATION UNIT TESTING TESTING
--------- ---------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
Percentage Completed.................... 100% 100% 100% 100% 100%
Completion Date......................... 4/30/99 6/30/99 7/31/99 11/15/99 11/15/99
</TABLE>
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 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, 'Reporting Comprehensive Income' (SFAS
No. 130) which became effective for us on January 1, 1998. SFAS No. 130
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. We had no
items of comprehensive income. Therefore, the adoption of SFAS No. 130 had no
effect on us.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, 'Disclosures about Segments of an
Enterprise and Related Information' (SFAS No. 131) which became effective for us
on January 1, 1998. SFAS No. 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim reports issued to stockholders. The adoption of
SFAS No. 131 did not have a material impact on us.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, 'Employer's Disclosures about
Pensions and Other Postretirement Benefits' (SFAS No. 132) which became
effective for us on January 1, 1998. SFAS No. 132 establishes standards for the
information that public enterprises report in annual financial statements. The
adoption of SFAS No. 132 did not have a material impact on us.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, 'Accounting for Derivative Instruments
and Hedging Activities' (SFAS No. 133) which became effective for us on July 1,
1999. The adoption of SFAS No. 133 did not have a material impact on us.
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 September 30, 1999
consisted of notes payable under a line of credit agreement.
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BUSINESS
OVERVIEW
We design, manufacture, and sell equipment used in the ground-based portion
of satellite communication systems to receive data from, and transmit data to,
satellites. 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:
The world's highest capacity domestic, digital satellite telephone
network -- PT Telkom, Indonesia.
Italy's first digital telephone/data network -- Telespacio, Italian
Railways.
Colombia's first alternate telecommunications network -- Americatel.
Earth stations for the first international satellite links in China,
India, Pakistan, Brazil, Haiti and Zambia.
The world's largest private satellite broadcast network -- Reuters.
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
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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:
Global deregulation and privatization of government-monopolized
telecommunications carriers, which will stimulate growth in the
communications industry in general.
Growing worldwide demand for communications services in general,
including data communications services over the Internet and
corporate intranets.
The relative cost-effectiveness of satellite communications for many
applications, such as digital television delivery.
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
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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:
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.
All areas within a satellite beam receive the same level of service,
making it highly attractive in rough terrain or underdeveloped
regions.
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.
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.
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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:
Satellites provide television broadcasters with an efficient and
economical method to distribute their programming to cable service
providers and direct broadcast satellite operators.
Compressed video encoding and decoding make satellites available for
less demanding video transmissions, including business
teleconferencing, private business networks, and telemedicine.
The economics of compressed video allow the use of satellite
transmission for long-distance teaching applications.
Digital cinema distribution is emerging as a viable alternative to
the physical distribution of feature length films.
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. According to 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.
34
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INTERNET SERVICE PROVIDERS CONNECTIONS BY REGION
AS OF JANUARY 1999
<TABLE>
<CAPTION>
% ISPS
GEOGRAPHIC AREA NO. OF ISPS NO. SATELLITE LINKS CONNECTED VIA SATCOMS*
--------------- ----------- ------------------- ----------------------
<S> <C> <C> <C>
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%
----- --- ----
----- --- ----
</TABLE>
Source: DTT Consulting
- ------------
* 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.
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<PAGE>
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.
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:
Satellite modems and earth stations.
Frequency converters.
Data, audio, and video broadcast equipment.
Digital video broadcast (DVB) and high speed modems.
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
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<PAGE>
equipment connected to the modems and earth stations, collection of network
status and alarm information, remote channel monitoring, and dial-up control.
The following diagram illustrates the operation of a standard satellite
telephony system:
[Picture titled 'Typical Telephony Application' that depicts the use of
our products to transmit data from a user through an earth station to a
satellite, from the satellite to a remote earth station, and finally to the
end user.]
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 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
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<PAGE>
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.
[Picture titled 'Typical Broadcast Applications' depicting various uses of
our data broadcast receivers to transmit data from a single broadcast source to
a satellite from the satellite to multiple receiver sites.]
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,
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<PAGE>
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.
Research and development expenses amounted to $6,730,000 for the nine
months ended September 30, 1999, $4,296,000 for the year ended December 31, 1998
and $2,262,000 for the year ended December 31, 1997, $808,000 for the six months
ended December 31, 1996 and $1,795,000 for the year ended June 30, 1996. A
number of new products were either launched or reached an advanced stage of
development during these periods.
We estimate that our total research and development expenditures for fiscal
1999 were $9,127,000 and we plan to increase our expenditures for research and
development in fiscal 2000. Much of the increase is due to developmental
products acquired in the ComStream acquisition, 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 of this offering
to fund our research into Internet-related products for satellite ISP links, and
other new telecommunications products. We also plan to target our research and
development activities at digital audio, video, and data products.
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.
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.
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<PAGE>
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 nine months ended September 30, 1999 and the year ended
December 31, 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
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 our principal foreign markets for the periods indicated
consisted of the following percentages of our total net sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
REGION 1999* 1998 1997
- ------ ----- ---- ----
<S> <C> <C> <C>
Asia................................................. 23% 7% 32%
Latin America........................................ 3% 9 12
Europe............................................... 23% 31 7
Others............................................... 7% 3 5
-- -- --
Total Exports................................... 56% 50% 55%
-- -- --
-- -- --
</TABLE>
- ------------
* Estimated
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.
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>
SATELLITE DIGITAL VIDEO
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>
- ------------
* 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
40
<PAGE>
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:
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.
Our expansive line of well-known, well-respected, off-the-shelf,
state-of-the-art equipment that enables us to meet our customers'
requirements.
Our ability to custom design products for our customers' special
applications and to provide a one-stop shopping option to our
customers.
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.
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.
Our October 1998 acquisition of ComStream, which:
significantly expanded our product lines,
enhanced our sales force,
increased our market share, and
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
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<PAGE>
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 September 30, 1999, we had 179 full-time employees, including three
executive officers, 120 in engineering and manufacturing, 31 in marketing
operations, and 28 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.
FACILITIES
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 Beijing, Singapore,
London, Jakarta, and Amsterdam. All of these facilities are leased.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our executive
officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert C. Fitting......................... 64 Director, Chief Executive Officer and
President
Steven W. Eymann.......................... 46 Executive Vice President and Chief
Technical Officer
Garry D. Kline............................ 49 Vice President of Finance, Chief Financial
Officer and Secretary
Ming Seong Lim............................ 51 Chairman of the Board
Yip Loi Lee............................... 55 Director
Robert A. Grimes.......................... 46 Director
Dennis W. Elliott......................... 57 Director
Kum Chuen Tang............................ 44 Director
</TABLE>
------------------------
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
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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
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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.
CERTAIN KEY EMPLOYEES
Alan Potter has been the Vice President for new business development since
December 1995. His duties include market research, neoteric product concepts,
new corporate alliances, and distribution systems in Europe and the Middle East.
He joined our company after 10 years with EFData as Sales Manager. Mr. Potter
graduated from the University of Houston with honors, holding a Bachelor of Arts
in Communications. After post graduate studies at the University of
Massachusetts, Amherst, he began his professional career as an Associate
Professor of Communications at the University of Texas at Houston. While there,
in 1973, he developed and operated the first practical bi-directional coaxial
cable network to simultaneously carry voice, data, and video communications. He
then designed, developed, and managed a series of broadband cable television and
data networks for Columbia Cable Television, Michelson Media, and Cox Cable
Communications. Mr. Potter joined Comtech Data in 1984 and, two years later, he
followed Messrs. Fitting and Eymann to initiate the Sales and Marketing
Department at EFData.
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.
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.
45
<PAGE>
Fitting, $98,900 to Steven W. Eymann, and $46,700 to Garry D. 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) on the first and second anniversaries of the loan and we will provide
sufficient bonus compensation at those times to enable the employee 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 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 for the period from the year ended June 30, 1996 through December 31,
1998 of our Chief Executive Officer and our Executive Vice President. No other
executive officer or employee received total annual salary and bonus of more
than $100,000 during the periods presented.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
YEAR ALL OTHER
NAME AND PRINCIPAL POSITION ENDED(1) SALARY OPTIONS(#) COMPENSATION(2)
- --------------------------- -------- ------ ---------- ---------------
<S> <C> <C> <C> <C>
Robert C. Fitting, CEO.......................... 12/31/98 $144,234 30,000 $1,186
12/31/97 116,529 0 1,165
12/31/96 40,000 279,085 435
06/30/96 80,000 0 738
Steven Eymann, Exec. Vice Pres.................. 12/31/98 $133,543 30,000 $1,174
12/31/97 111,620 0 1,112
12/31/96 40,000 279,085 435
06/30/96 80,000 0 738
</TABLE>
- ------------
(1) As a result of a change in fiscal year end, the amounts shown for the year
ended December 31, 1996 reflect a period of six months.
(2) Matching 401(k) plan contributions.
OPTION GRANTS
The following table sets forth information regarding options granted to
Messrs. Fitting and Eymann during the year ended December 31, 1998.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF TOTAL OPTIONS
OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION GRANT DATE
NAME GRANTED IN FISCAL YEAR PRICE DATE PRESENT VALUE(1)
- ---- ------- -------------- ----- ---- ----------------
<S> <C> <C> <C> <C> <C>
Robert C. Fitting............. 15,000 3% $2.50 2/5/08 $3.37
15,000 3% $3.125 10/15/08 $2.48
Steven Eymann................. 15,000 3% $2.50 2/5/08 $3.37
15,000 3% $3.125 10/15/08 $2.48
</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 105%
and a risk-free interest rate of 6.125%. 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.
AGGREGATE OPTION EXERCISES IN 1998 AND HOLDINGS AT YEAR-END
The following table sets forth information concerning option holdings as of
December 31, 1998 with respect to Robert C. Fitting, our Chief Executive Officer
and President, and Steven Eymann, our Executive Vice President. Messrs. Fitting
and Eymann did not exercise any options during fiscal 1998.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED,
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert C. Fitting............................. 182,585 62,500 $157,418 $47,656
Steven Eymann................................. 182,585 62,500 157,418 47,656
</TABLE>
- ------------
(1) Based on the December 31, 1998 closing price of our common stock of $3.375
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, on
January 8, 1997, as a means of rewarding certain 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 and method by which the options may be
exercised. As of December 31, 1999, options to purchase 1,542,706 shares of
common stock were outstanding at a weighted average exercise price of $3.10 per
share and options have been exercised to purchase 390,372 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 1,790,670. Under the plan,
we may not grant options after November 12, 2006.
47
<PAGE>
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 (110% 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.
An option grantee must exercise any option no more than ten years after the
date of the grant, except that options granted to persons who own more than 10%
of the total combined voting power of our stock or that of an affiliate must be
exercised within five years of the grant.
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.
1999 EMPLOYEE STOCK PURCHASE PLAN
On June 15, 1999, our shareholders adopted the 1999 Employee Stock 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. We expect to activate the
purchase plan 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 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 $69,403 for the nine months ended
September 30, 1999 and $31,690, for the year ended December 31, 1998. 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 up to
1% of the employee's salary.
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 $91,691
for the nine months ended September 30, 1999 and $30,450 for the period
October 15, 1998 through December 31, 1998. 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.
48
<PAGE>
EMPLOYMENT AGREEMENTS
Under the respective employment agreements between Radyne ComStream and
each of Messrs. Fitting and Eymann, they will serve as our Chief Executive
Officer and President and Executive Vice President, respectively, until the
earlier of June 30, 2000 or such time as our adjusted earnings before interest
and taxes exceeds $6,000,000 for a period of four calendar quarters. Pursuant to
the agreements, we presently pay Mr. Fitting and Mr. Eymann annual salaries of
$200,000 and $150,000, respectively, and have granted them certain of the stock
options described in the above table. Each of Mr. Fitting and Mr. Eymann has
also agreed that he will not engage in any competitive business until after the
second anniversary of his termination of employment, 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. 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.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation contains a provision that eliminates the
personal liability of the members of our Board of Directors for violations of
their fiduciary duty of care as a director. However, this provision does not
apply where there has been any of the following:
bad faith, intentional misconduct, or a knowing violation of law;
the payment of a dividend or approval of a stock repurchase which is
deemed illegal, or any other violation of Section 719 of the New York
Business Corporation Law; or
a financial profit or advantage to which the director was not legally
entitled.
Our certificate of incorporation also contains a provision which allows us,
to the fullest extent permitted by Sections 721 through 726 of the New York
Business Corporation Law, to indemnify our directors and officers from and
against any and all expenses or liabilities arising from or in connection with
their serving in such capacities with us. This right of indemnification
continues once such a person ceases to be a director or officer of our company.
49
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of December 31, 1999, the ownership of
our common stock by (i) each person who is known by us to own of record or
beneficially more than 5% of our outstanding common stock, (ii) each of our
directors and our Chief Executive Officer and Executive Vice President, and
(iii) all directors and executive officers of our company as a group. Except as
otherwise indicated, the shareholders listed in the table have sole voting and
investment powers with respect to the shares indicated subject to applicable
community property law.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF CLASS OF CLASS
NUMBER BEFORE THIS AFTER THIS
NAME AND ADDRESS OF SHARES(1) OFFERING(1) OFFERING(1)
---------------- ------------ ----------- -----------
<S> <C> <C> <C>
Stetsys US, Inc.(2).................................. 1,180,000 10.99% 9.27%
Stetsys Pte Ltd(2)................................... 9,676,800(3) 90.15% 75.99%
Robert C. Fitting(4)................................. 238,635(5) 2.20% 1.86%
Steven W. Eymann(4).................................. 237,835(6) 2.18% 1.84%
Garry D. Kline(4).................................... 42,493(7) * *
Ming Seong Lim(2).................................... 0 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)........................................... 558,963 5.07% 4.29%
</TABLE>
- ------------
* Less than one percent.
(1) The numbers and percentages shown include the shares of common stock
actually owned as of December 31, 1999 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
December 31, 1999 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. The percentage shown after this offering does not give
effect to exercise of the underwriters' option to purchase an additional
300,000 units in this offering to cover over-allotments or the exercise of
the warrants included in the units sold in this offering.
(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 'Principal
Shareholders -- Lock-in Agreements.'
(4) The address for each of these shareholders is: c/o Radyne ComStream Inc.,
3138 East Elwood Street, Phoenix, Arizona 85034.
(5) Includes 105,635 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 'Principal Shareholders -- Lock-in Agreements.'
(footnotes continued on next page)
50
<PAGE>
(footnotes continued from previous page)
(6) Includes 169,735 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 'Principal Shareholders -- Lock-in Agreements.'
(7) Includes 14,242 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 in
'Principal Shareholders -- Lock-in Agreements.'
(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
an aggregate of 3,998,250 shares of our common stock owned by these
shareholders, plus
any shares issued to these shareholders with respect to the locked-in
shares in any stock dividend, stock split, recapitalization or
similar transaction, plus
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 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:
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 an
amount equal to the offering price of the units sold in this offering
for each share of our common stock that they own, then
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 an amount equal to the offering price of the
units sold in this offering for each such share of common stock, then
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.
51
<PAGE>
Unless the lock-in agreements terminate sooner, as described below,
commencing one year from the date this offering is closed 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 on the second anniversary of the date this offering
is closed.
The lock-in agreements have a two year term commencing on the closing of
this offering, 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.
CERTAIN TRANSACTIONS
As disclosed under 'Management -- Director and 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
D. 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 $69,000 for the nine months ended September 30, 1999,
$65,000 for the year ended December 31, 1998, $540,000 for the year ended
December 31, 1997, $375,000 for the six-month period ended December 31, 1996,
and $118,900 for the year ended June 30, 1996. Accounts receivable from Agilis
were $5,000 at September 30, 1999 and $52,000 at December 31, 1998.
Until October 1998, ETS was a wholly owned subsidiary of ST. Sales of
products in the ordinary course of business to ETS were $50,000 for the year
ended December 31, 1998, $152,000 for the year ended December 31, 1997, $307,300
for the six-month period ended December 31, 1996, and $311,600 for the year
ended June 30, 1996.
We purchased $22,100 of machinery and equipment and $805,000 in inventory
from ETS during the six-month period ended December 31, 1996. We purchased
$2,461,000 of inventory from ETS during the year ended June 30, 1996.
Prior to January 1997, ETS provided us with management services. Fees for
these services were $60,000 for the six-month period ended December 31, 1996 and
$120,000 for the year ended June 30, 1996.
ST made an unsecured loan of $4,500,000 to us on August 12, 1996. We used
the proceeds of this loan to repay a portion of an outstanding loan payable to
ETS. We repaid the ETS loan in full on February 10, 1997 with the proceeds of
loans from Citibank, N.A. and ST.
ST made several loans, totaling $2,100,000, to us in November and December
1996. These loans earned interest of 8% per annum and we repaid them in March
1997 with the proceeds of a new loan of $4,100,000 from ST. This ST loan was
ultimately repaid with the proceeds of a rights offering that was completed on
June 16, 1997. In such rights offering, ST purchased 1,976,000 shares of our
common stock at $2.50 per share, for an aggregate purchase price of $4,940,000.
During 1998, we received loans totaling $5,618,272 from ST, 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. This note bore interest at 6.375% and was repayable out of the
proceeds of the rights offering commenced on September 30, 1999. 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 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 as of September 30, 1999.
52
<PAGE>
Interest expense on notes payable to ST was $732,000 for the nine months
ended September 30, 1999, $581,000 for the year ended December 31, 1998,
$148,000 for the year ended December 31, 1997, $205,900 for the six-month period
ended December 31, 1996, and $248,400 for the year ended June 30, 1996. Accrued
interest on notes payable to ST was $1,355,000 at September 30, 1999.
We acquired the assets of Merit Microwave, Inc. in 1995. As a part of this
transaction, we hired Peter Weisskopf, the principal shareholder and CEO of
Merit, as the president of our Microwave Products Division. We also agreed to
pay royalties to Mr. Weisskopf throughout the course of his employment. We paid
royalties to Mr. Weisskopf of $5,600 for the year ended December 31, 1997, and
$4,600 for the year ended December 31, 1996. His employment with us was
terminated in March 1998 and we paid no royalties to Mr. Weisskopf in 1998 or
thereafter.
We believe that all of the foregoing transactions were on terms no less
favorable to us than we could have obtained in arms length transactions with
unaffiliated third parties.
At the time the transactions described above were entered into we did not
have two disinterested independent directors to ratify the transactions, as
required by NASAA's Statement of Policy Regarding Loans and Other Material
Affiliated Transactions. All future material affiliated transactions and loans
will be made or entered into on terms that are no less favorable to us than
those that can be obtained from unaffiliated third parties. All future material
affiliated transactions and loans, and any forgiveness of loans, must be
approved by a majority of our independent directors who do not have an interest
in the transactions and who have access, at our expense, to our counsel or
independent legal counsel. All future loans will be for a bona fide business
purpose and will be approved by a majority of the disinterested directors.
We have agreed with certain state regulatory authorities that so long as
our securities are registered in such states, or one year from the date of this
prospectus, whichever is longer, we will not make loans to our officers,
directors, employees or principal shareholders, except for loans made in the
ordinary course of business, such as travel advances, expense account advances,
relocation advances, or reasonable salary advances.
53
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
We are incorporated in the State of New York. We are authorized to issue
20,000,000 shares of common stock, par value $.002 per share.
UNITS
Each unit being offered hereby consists of one share of common stock and
one redeemable common stock purchase warrant to purchase one share of our common
stock. The common stock and the warrants included in the units will not be
transferable until 180 days after the date of this prospectus or such earlier
date as HD Brous & Co. Inc. may determine.
COMMON STOCK
The following summary description of the common stock is qualified in its
entirety by reference to our Certificate of Incorporation.
As of December 31, 1999, there were 10,733,977 shares of common stock
issued and outstanding. Holders of common stock are entitled to one vote for
each share held of record on each matter submitted to a vote of shareholders.
There is no cumulative voting for election of directors. Holders of common stock
are entitled to receive dividends ratably when, as, and if declared by the Board
of Directors out of funds legally available therefor and, upon our liquidation,
dissolution or winding up are entitled to share ratably in all assets remaining
after payment of liabilities. Holders of common stock have no preemptive rights
and have no rights to convert their common stock into any other securities. The
outstanding shares of common stock are, and the shares of common stock being
sold in this offering and the shares of common stock issuable upon exercise of
the warrants sold in this offering will be, when issued, validly authorized and
issued, fully paid and nonassessable.
COMMON STOCK PURCHASE WARRANTS
General. The following is a brief summary of the material provisions of the
warrants included in the units offered hereby. This summary is qualified in all
respects by reference to the actual text of the warrant agreement between us and
Continental Stock Transfer and Trust Company as warrant agent. A copy of the
warrant agreement is filed as an exhibit to the registration statement of which
this prospectus forms a part.
Exercise Price and Terms. Each warrant entitles the holder thereof to
purchase one share of common stock at a price of $ per share (125% of the
public offering price of the units), subject to adjustment in accordance with
the anti-dilution and other provisions described below. The exercise price of
the warrants is not related to any objective criteria of value and should not be
regarded as an indication of any future market price of the common stock. The
warrant will become exercisable when it becomes separately transferable from the
common stock in the unit. The warrants will become separately transferable 180
days following the date of this prospectus or such earlier date as HD Brous &
Co. Inc. may determine. The warrants will remain exercisable until the earlier
of (a) the fifth anniversary of the date of this prospectus or (b) the close of
business on the day before the redemption date described below. The holder of
any warrant may exercise such warrant by surrendering the certificate
representing the warrant to our warrant agent, with the subscription form on the
reverse side of the warrant certificate properly completed and executed,
together with payment of the exercise price. The warrants may be exercised at
any time in whole or in part at the applicable exercise price until expiration
or redemption of the warrants. No fractional shares will be issued upon exercise
of the warrants.
Adjustments. The exercise price and number of shares of our common stock
purchasable upon the exercise of the warrants are subject to adjustment upon the
occurrence of certain events, including the following:
stock dividends,
stock splits,
54
<PAGE>
combinations or reclassifications of our common stock, and
the issuance of rights or warrants to all holders of our common stock
to purchase or subscribe for additional shares of our common stock or
other securities convertible into common stock at a price below the
then current market price of the common stock.
Additionally, an adjustment would be made in the case of:
a capital reorganization, reclassification or exchange of our common
stock,
our consolidation or merger with or into another corporation (other
than a consolidation or merger in which we are the surviving
corporation), or
sale of all or substantially all of our assets.
These adjustments will enable warrantholders to acquire the kind and number
of shares of stock or other securities or property that the holder would have
received if he or she had exercised his or her warrants immediately prior to the
event that causes the adjustment.
No adjustment will be made until the cumulative adjustments in the exercise
price per share amount to $.01 or more. No adjustment to the number of shares
and exercise price of the shares subject to the warrants will be made for
dividends (other than stock dividends), if any, paid on our common stock or for
common stock issued pursuant to our 1996 Incentive Stock Option Plan, our 1999
Employee Stock Purchase Plan, or any other employee option plan or employee
stock plan that may be adopted in the future, or upon exercise of the warrants,
the representative's purchase option or any other option or warrant outstanding
as of the date of this prospectus.
Redemption Provisions. Commencing one year from the date of this
prospectus, or earlier with the consent of HD Brous & Co., Inc., we can redeem
the warrants at $.01 per warrant on not less than 30 nor more than 60 days'
prior written notice. The warrants may only be redeemed if:
from the date our Board of Directors decides to redeem the warrants
until the redemption date, there is a current and effective
registration statement covering the warrants and the underlying
shares,
our common stock is listed on any Nasdaq Stock Market, the New York
Stock Exchange, or the American Stock Exchange, and
the closing sales price of our common stock as reported by Nasdaq
equals or exceeds $ per share on each of the 20 consecutive
trading days ending not earlier than 5 days prior to the date on
which the warrants are called for redemption.
In the event that we elect to redeem the warrants, the warrants will be
exercisable until the close of business on the day prior to the redemption date.
Any warrants that are not exercised by such time will cease to be exercisable
and the holder will be entitled only to the redemption price.
Transfer, Exchange, and Exercise. The warrants will be issued in registered
form and may be presented to our transfer and warrant agent for transfer,
exchange, or exercise at any time on or prior to their expiration or redemption.
If a market for the warrants develops, the holder may sell the warrants instead
of exercising them. There can be no assurance, however, that a market for the
warrants will develop or continue.
Warrantholder is not a Shareholder. Until a holder exercises his or her
warrants, he or she will not have any voting, dividend, or other rights as a
shareholder.
Modification of Warrants. We and our warrant agent may make such
modifications to the warrant agreement as are deemed necessary and desirable and
that do not adversely affect the interests of the warrantholders. No other
modifications may be made to the warrant agreement or the warrants without the
consent of the majority of the warrantholders. Modification of the number of
securities purchasable upon the exercise of any warrant, the exercise price, and
the acceleration of the expiration date with respect to any warrant will require
the consent of the holder of such warrant.
Certain Federal Income Tax Considerations. The warrantholder will not
recognize a gain or loss upon the exercise of a warrant. If a warrantholder
sells his or her warrant or if we redeem a
55
<PAGE>
warrant, the holder will recognize a gain or loss in an amount equal to the
difference between the amount realized by the holder from the sale or redemption
and the holder's adjusted basis in the warrant. Provided that the holder is not
a dealer in the warrants and that the common stock would have been a capital
asset in the hands of the holder had the warrant been exercised, any gain or
loss from the sale or redemption of the warrant will be a long-term or
short-term capital gain or loss to the holder depending on whether the warrant
had been held for more than one year. Upon the expiration of a warrant, a loss
equal to the warrantholder's adjusted basis in the warrant will be a long-term
or short-term capital loss, depending on whether the warrant has been held for
more than one year.
TRANSFER AND WARRANT AGENT
We have appointed Continental Stock Transfer & Trust Company, 2 Broadway,
19th Floor, New York, NY 10004, as transfer agent for the units, common stock,
and warrants and as warrant agent for the warrants.
NASDAQ SMALLCAP MARKET LISTING
Our units, common stock, and warrants have been approved for listing on the
Nasdaq SmallCap Market, under the symbols 'RADNU,' 'RADN' and 'RADNW,'
respectively, subject to the effectiveness of this offering.
SHARES ELIGIBLE FOR FUTURE SALE
The sale, or availability for sale, of a substantial number of shares of
common stock in the public market subsequent to this offering pursuant to Rule
144 of the Securities Act or otherwise could materially adversely affect the
market price of our common stock and could impair our ability to raise
additional capital through the sale of equity securities or debt financing. Upon
completion of this offering, there will be approximately 12,733,977 shares of
common stock issued and outstanding. Of these shares, we believe that
approximately 2,763,741 would be freely transferable immediately. ST and certain
of our officers hold 9,906,151 shares, which would be eligible for resale
subject to the volume and manner of sale limitations of Rule 144 of the
Securities Act. An additional 64,084 shares are 'restricted securities' as that
term is defined in Rule 144 and are eligible for sale under the provision of
Rule 144(k).
A total of 1,790,670 shares of common stock remain reserved for issuance
under the 1996 Incentive Stock Option Plan and options to purchase an aggregate
of 1,542,706 shares of common stock were outstanding under the plan as of
December 31, 1999. All of the shares issuable upon exercise of such options are
covered by a currently effective registration statement on Form S-8. The
issuance of 1,000,000 shares of our common stock pursuant to our 1999 Employee
Stock Purchase Plan is covered by a currently effective registration statement
in Form S-8. The shares of common stock issuable under our 1996 Incentive Stock
Option Plan and 1999 Employee Stock Purchase Plan will be freely transferable
when they are issued, except for shares that may be acquired by our affiliates.
These shares will be subject to the volume and manner of sale limitations
contained in Rule 144.
The shares of common stock outstanding that are deemed to be 'restricted
securities' (as that term is defined under Rule 144) or that are owned by our
affiliates may only be sold pursuant to an effective registration statement
under the Securities Act, in compliance with the exemption provisions of Rule
144 or pursuant to another exemption under the Securities Act. Restricted shares
and shares of common stock held by our affiliates that are not 'restricted' will
be eligible for sale, under Rule 144, subject to certain volume and manner of
sale limitations prescribed by Rule 144. In general, under Rule 144 as currently
in effect, a person (or persons whose shares are required to be aggregated),
including a person who may be deemed an 'affiliate' of the company, who has
beneficially owned restricted securities for at least one year may sell, within
any three-month period, a number of shares that does not exceed the greater of:
(1) 1% of the then outstanding shares of common stock or (2) the average weekly
trading volume of the common stock during the four calendar weeks preceding the
date on which notice of such sale was filed
56
<PAGE>
under Rule 144. Sales of shares held by our affiliates that are not 'restricted'
are subject to such volume limitations, but are not subject to the holding
period requirement. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and availability of current public
information about our company. A person who is not deemed to have been an
affiliate of our company at any time during the 90 days preceding a sale by such
person, and who has beneficially owned the restricted shares for at least two
years, is entitled to sell such shares under Rule 144(k) without regard to any
of the restrictions described above.
Prior to this offering, the public market for our securities has been very
limited as trading in our common stock has been infrequent. Following this
offering, we cannot predict the effect, if any, that the availability for sale
of shares held by our current shareholders will have on the market price from
time to time. Nevertheless, sales by our current shareholders of a substantial
number of shares of common stock in the public market could materially and
adversely affect the market price for our common stock. In addition, the
availability for sale of a substantial number of shares of our common stock
acquired through the exercise of the warrants or outstanding options could
materially adversely affect the market price for our common stock.
UNDERWRITING
GENERAL
We intend to offer our units in the United States through HD Brous & Co.,
Inc. as the representative of the several underwriters. Subject to the terms and
conditions set forth in an underwriting agreement between us and the
underwriters, we have agreed to sell to the underwriters, and each of the
underwriters has agreed to purchase from us, the number of units listed next to
its name in the following table:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF UNITS
----------- ---------------
<S> <C>
HD Brous & Co., Inc. .......................................
---------
Total................................................ 2,000,000
---------
---------
</TABLE>
The underwriters have agreed, subject to the terms and conditions set forth
in the underwriting agreement, to purchase all of the units being sold under the
terms of the agreement if any of the units are sold. The units are being offered
by the underwriters, subject to prior sale, when, as and if issued to and
accepted by the underwriters and subject to approval of legal matters by counsel
and other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.
We have granted an option to the underwriters to purchase up to an
additional 300,000 units at the public offering price set forth on the cover of
this prospectus, less the underwriting discount. The underwriters may exercise
this option within 45 days after the date of this prospectus solely to cover
over-allotments, if any, made on the sale of our units offered by this
prospectus. If the underwriters exercise this option, they will each purchase
additional units in approximately the same proportion as the amounts set forth
in the table above. We will pay the expenses associated with the exercise of
this over-allotment option.
The underwriters will purchase the units from us at the public offering
price set forth on the cover page of this prospectus, less a discount equal to
9% of the public offering price. The underwriters propose initially to offer the
units to the public at the public offering price set forth on the cover page of
this prospectus. The underwriters may allow to some dealers a concession of not
more than $ per unit. The underwriters may allow, and such dealers may
reallow, a discount of not more than $ per unit to some other dealers.
After the initial offering, the
57
<PAGE>
underwriters may change the public offering price, concession, and discount. The
following table shows the per unit and total underwriting discounts that we will
pay to the underwriters. This information assumes either no exercise or full
exercise by the underwriters of their over-allotment option and does not include
the 3% non-accountable expense allowance payable to the representative.
<TABLE>
<CAPTION>
PAID BY
RADYNE COMSTREAM INC.
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Unit.................................................... $ $
Total....................................................... $ $
</TABLE>
In addition to the underwriting discount, we will pay all other expenses of
the offering, which we estimate will be $510,443.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or to contribute to payments the underwriters may be required to
make in respect of those liabilities.
In connection with this offering, we have agreed to sell to the
representative, for nominal consideration, a non-redeemable option to purchase
from us up to 200,000 shares of common stock at an exercise price of $
per share (125% of the offering price of the units). The representative's
purchase option will be exercisable for a period of four years beginning one
year after the effective date of this prospectus. During the term of the option,
the representative may not sell, transfer, assign, or hypothecate the option,
except to officers and employees of HD Brous who are also shareholders of HD
Brous, all of whom will be bound by such restrictions. The holders of the
representative's purchase option will have no voting, dividend or other rights
as shareholders with respect to the shares underlying the option until they
exercise such option. We have agreed to register the underlying stock at the
holder's request and will bear costs related thereto, other than underwriting
discounts and commissions. We also have agreed that for seven years after the
effective date of this prospectus, we will give the holders of the
representative's purchase option advance notice of our intention to file a
registration statement. The holders of the representative's purchase options may
require us to include the option and/or the underlying stock in such
registration statement at our expense.
The holders of the representative's purchase option can be expected to
exercise the option at a time when the market price for our common stock is
higher than the exercise price of the option. This could adversely affect the
terms on which we could obtain additional financing in the future. Any profit
that the underwriters receive upon the sale of the shares of common stock issued
upon exercise of the option may be deemed to be additional underwriting
compensation.
We, our executive officers and directors, and ST have agreed that without
the prior written consent of HD Brous, for a period of six months after the date
of this prospectus we and they will not, directly or indirectly offer, pledge,
sell (including a short sale or sale against the box), contract to sell,
establish an open 'put equivalent position' within the meaning of Rule 16a-1(h)
under the Securities Exchange Act of 1934, grant any option, right for the sale
of, or otherwise dispose of or transfer any shares of common stock or securities
convertible into or exchangeable or exercisable for shares of common stock, or
publicly announce the intention to do any of the foregoing.
Under the underwriting agreement, we have agreed that for two years after
the date of this prospectus our Board of Directors will include at least three
members who are reasonably acceptable to the representative and who are not (a)
an employee or 5% stockholder of our company or (b) an employee, officer,
director or beneficial owner of 5% or more of any person that, directly or
indirectly, beneficially owns 5% or more of our common stock. H.D. Brous has
agreed that Messrs. Lee, Grimes and Elliott are deemed to satisfy this
requirement regarding our directors. The underwriting agreement also requires
that we maintain key man life insurance policies on the lives of Robert Fitting
and Steven Eymann in the amounts of $1,000,000 and $500,000, respectively. Such
policies shall be effective for the lesser of the term of their respective
employment with our company or three years.
58
<PAGE>
Prior to this offering, our common stock has traded on a limited basis on
the OTC Bulletin Board. The public offering price of the units will be
determined through negotiations between the underwriters and us. The factors to
be considered in determining the public offering price, in addition to
prevailing market conditions, include:
the valuation multiples of publicly traded companies that the
underwriters believe to be comparable to us,
our financial condition and results,
the history of, and the prospects for, our company and the industry
in which we compete,
an assessment of our management,
our past and present operations,
an assessment of the prospects for, and timing of, our future
revenues,
the present state of our development, and
the percentage interest of our business being sold as compared to the
valuation of our business.
We cannot assure you that an active trading market will develop for our
units, common stock, and warrants or that our units, common stock and warrants
will trade in the public market subsequent to the offering at or above the
public offering price.
The underwriters do not expect sales of our units, common stock or warrants
to any accounts over which they exercise discretionary authority to exceed 5% of
the number of units being offered under this prospectus.
Until the distribution of our units, common stock, or warrants is
completed, rules of the SEC may limit the ability of the underwriters and
selling group members to bid for and purchase our units, common stock and
warrants. As an exception to these rules, the underwriters are permitted to
engage in transactions that stabilize the price of our units, common stock or
warrants. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of our units, common stock or warrants.
If the underwriters create a short position in our units, common stock, or
warrants in connection with this offering, that is, if they sell more units than
are set forth on the cover page of this prospectus, the underwriters may reduce
that short position by purchasing our units in the open market. The underwriters
may also elect to reduce any short position by exercising all or part of the
over-allotment option described above.
The representative also may impose a penalty bid on selling group members.
This means that if the underwriters purchase units in the open market to reduce
their short position or to stabilize the price of our units, the representative
may reclaim the amount of the selling concession from the selling group members
who sold those securities as part of this offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
also might have an effect on the price of our units, common stock or warrants to
the extent that it discourages resales of our units, common stock or warrants.
Neither the underwriters nor we make any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of our units, common stock or warrants. In addition,
neither the underwriters nor we make any representation that the underwriters
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
During 1998, the State of Connecticut Department of Banking and the State
of New Jersey Bureau of Securities conducted an examination of books and records
and interviewed certain personnel located in HD Brous' offices in those states.
Following that examination, the states
59
<PAGE>
alleged that HD Brous failed to enforce its procedures to reasonably supervise
certain of its sales agents' use of written sales materials, which resulted in
violations of those states' securities laws. In order to resolve issues raised
as a result of the examination without the expense and delay of an
administrative hearing, in August 1998 HD Brous entered into a joint consent
order with the states of Connecticut and New Jersey without admitting or denying
the allegations and without any hearing or presentation of evidence. Under the
consent order, HD Brous agreed to (a) cease and desist from engaging in conduct
that would violate Connecticut or New Jersey securities laws by reason of
failing to establish written supervisory procedures and a system for applying
them to prevent the use of written sales presentations that have not been
approved by HD Brous, (b) engage a consultant to review HD Brous' policies and
procedures and prepare a written report for HD Brous, and (c) pay an aggregate
of $30,000 in administrative fines to the states of Connecticut and New Jersey.
LEGAL MATTERS
Dorsey & Whitney LLP, New York, New York, will pass upon the validity of
the issuance of the units, common stock and warrants offered by this prospectus
on our behalf. Greenberg Traurig, LLP Phoenix, Arizona, will pass upon certain
legal matters in connection with this offering for the underwriters.
EXPERTS
The restated consolidated financial statements of Radyne ComStream Inc. as
of December 31, 1998 and for the year then ended have been included herein and
in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, which is included herein, and upon the
authority of said firm as experts in accounting and auditing. The financial
statements of Radyne ComStream Inc. at December 31, 1997, for the year then
ended, for the six months ended December 31, 1996, and for the year ended June
30, 1996, included in this prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report, which is included herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing. Ernst & Young LLP,
independent auditors, have audited the consolidated financial statements of
ComStream Holdings, Inc. at December 31, 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, included in our Report on
Form 8-K/A filed with the Securities and Exchange Commission on May 5, 1999, as
set forth in their report, which is included and incorporated by reference in
this prospectus. The consolidated financial statements of ComStream Holdings,
Inc. are included and incorporated by reference in reliance on the report of
Ernst & Young LLP, given on their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the information requirements of the Securities Exchange
Act of 1934 and file reports and other information with the SEC. You may read
and copy any reports or other information concerning us at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
You may also request copies of these documents upon payment of a duplicating
fee, by writing to the SEC's Public Reference Section. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from commercial document retrieval
services and at the Website maintained by the SEC at 'http://www.sec.gov.'
Information concerning us is not available from any securities exchange as our
common stock is not traded on any securities exchange.
We filed a registration statement with respect to the units, common stock,
and warrants we are offering. Pursuant to SEC rules and regulations, this
prospectus does not contain all of the information that you can find in such
registration statement. You may read and copy this information in the same way
as any other information that we file with the SEC.
60
<PAGE>
Statements in this prospectus concerning any document filed as an exhibit
to this registration statement summarize all material provisions. Each of those
statements is qualified in its entirety by reference to the complete document.
For more detailed information, you should refer to the copy of the complete
document filed as an exhibit to this registration statement. These documents,
filed with the SEC, may be inspected and copied, and obtained by mail, from the
SEC as set forth above and will be available for inspection and copying at our
principal executive offices at 3138 East Elwood Street, Phoenix, Arizona 85034
during regular business hours by any interested holder of our stock or his or
her representative who has been so designated in writing.
The SEC allows us to 'incorporate by reference' information into this
prospectus, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC, including our
annual, quarterly, and current reports. This prospectus incorporates by
reference the documents set forth below, which we previously filed with the SEC.
These incorporated documents contain important information about our finances
and us. The information incorporated by reference is deemed to be part of this
prospectus, except for any information superseded by information in this
prospectus. The information incorporated by reference is an important part of
this prospectus.
We incorporate by reference into this prospectus:
our Annual Report on Form 10-K/A for the Fiscal Year Ended December
31, 1998;
our quarterly report on Form 10-Q/A for the quarter ended March 31,
1999;
our quarterly report on Form 10-Q/A for the quarter ended June 30,
1999;
our quarterly report on Form 10-Q for the quarter ended September 30,
1999; and
our current report on Form 8-K/A filed on May 5, 1999, which contains
audited financial statements of ComStream Holdings, Inc. for its
fiscal years ended December 31, 1995, 1996 and 1997; unaudited
financial statements of ComStream Holdings, Inc. for the nine months
ended September 30, 1998; and pro forma financial information for the
year ended December 31, 1997 and the nine months ended September 30,
1998 reflecting our financial performance during these periods as if
our acquisition of ComStream Holdings, Inc. had taken place effective
January 1, 1997.
Documents incorporated by reference may be obtained through the SEC and are
available from us without charge, other than exhibits, unless we have
specifically incorporated by reference an exhibit in this document. You may
obtain documents incorporated by reference in this document from us by making a
request by telephone at (602) 437-9620 or in writing at the following address:
Director of Administration
Radyne ComStream Inc.
3138 East Elwood Street
Phoenix, AZ 85034.
61
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<PAGE>
RADYNE COMSTREAM INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports............................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets -- December 31, 1998
(Restated) and 1997................................... F-4
Consolidated Statements of Operations -- Years Ended
December 31, 1998 (Restated) and 1997, the Six-Month
Period Ended December 31, 1996 and the Year Ended
June 30, 1996......................................... F-5
Consolidated Statements of Stockholders' Capital
Deficiency -- Years Ended December 31, 1998 (Restated)
and 1997, the Six-Month Period Ended December 31,
1996 and the Year Ended June 30, 1996................. F-6
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1998 (Restated) and 1997, the Six-Month
Period Ended December 31, 1996 and the Year Ended
June 30, 1996......................................... F-7
Notes to Consolidated Financial Statements -- Years
Ended December 31, 1998 (Restated) and 1997, the
Six-Month Period Ended December 31, 1996 and the Year
Ended June 30, 1996................................... F-8
Unaudited Pro Forma Condensed Combined Statement of
Operations for the Year ended December 31, 1998....... F-23
Notes to Unaudited Pro Forma Condensed Combined
Statement of Operations............................... F-24
Condensed Consolidated Balance Sheet as of
September 30, 1999 (Unaudited)........................ F-25
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 1998 and 1999
(Unaudited)........................................... F-26
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1999
(Unaudited)........................................... F-27
Notes to Unaudited Condensed Consolidated Financial
Statements............................................ F-28
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
RADYNE COMSTREAM INC.:
We have audited the accompanying restated consolidated balance sheet of
Radyne ComStream Inc. and subsidiaries (the Company) (a 90.6%-owned subsidiary
of Singapore Technologies Pte Ltd) as of December 31, 1998, and the related
restated consolidated statements of operations, stockholders' capital
deficiency, and cash flows for the year then ended. These restated consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these restated consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the restated consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
As discussed further in Note 4, the 1998 consolidated financial statements
have been restated to reflect additional stock option compensation expense.
/S/ KPMG LLP
Phoenix, Arizona
March 19, 1999, except for
Note 4, which is as of
August 4, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
RADYNE COMSTREAM INC.
Phoenix, Arizona
We have audited the accompanying balance sheet of Radyne ComStream Inc.
(formerly Radyne Corp.) (the 'Company') as of December 31, 1997, and the related
statements of operations, stockholders' capital deficiency, and cash flows for
the year ended December 31, 1997, the six-month period ended December 31, 1996
and the year ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997, and the
results of its operations and its cash flows for the year ended December 31,
1997, the six-month period ended December 31, 1996 and the year ended June 30,
1996 in conformity with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 4, 1998
F-3
<PAGE>
RADYNE COMSTREAM INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998
RESTATED 1997
-------- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 254,956 $ 569,692
Accounts receivable -- trade, net of allowance for
doubtful accounts of $632,815 and $15,000,
respectively.......................................... 7,270,732 2,359,443
Other receivable........................................ 1,265,000 --
Inventories, net........................................ 9,380,478 5,389,920
Prepaid expenses........................................ 590,161 68,076
------------ -----------
Total current assets............................... 18,761,327 8,387,131
------------ -----------
Property and equipment, net................................. 5,533,645 1,322,551
Other assets:
Designs and drawings, net of accumulated amortization of
$705,404 at December 31, 1997......................... -- 471,935
Purchased technology, net of accumulated amortization of
$105,000 at December 31, 1998......................... 2,395,000 --
Goodwill, net of accumulated amortization of $35,960 at
December 31, 1998..................................... 2,278,300 --
Deposits and other...................................... 222,442 50,000
------------ -----------
Total other assets................................. 4,895,742 521,935
------------ -----------
$ 29,190,714 $10,231,617
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS'
CAPITAL/(DEFICIENCY)
Current liabilities:
Note payable under line of credit agreement............. $ 8,000,000 5,000,000
Note payable............................................ 7,000,000 --
Current installments of obligations under capital
leases................................................ 124,891 109,258
Accounts payable, trade................................. 3,291,915 667,202
Accounts payable, affiliate............................. 8,150 16,062
Accrued expenses........................................ 9,140,341 901,032
Taxes payable........................................... -- 38,720
------------ -----------
Total current liabilities.......................... 27,565,297 6,732,274
Notes payable to affiliates................................. 15,618,272 --
Note payable under line of credit agreement................. -- 4,500,000
Obligations under capital leases, excluding current
installments.............................................. 88,588 93,543
Accrued stock option compensation........................... 1,155,477 --
Taxes payable............................................... -- 55,861
------------ -----------
Total liabilities.................................. 44,427,634 11,381,678
------------ -----------
Commitments, contingent liabilities and subsequent events
(notes 2, 9, 10, 11 14, 18, 19 and 20)
Stockholders' capital deficiency:
Common stock; $.002 par value -- authorized, 20,000,000
shares; issued and outstanding, 5,931,346 shares at
December 31, 1998 and 1997............................ 11,862 11,862
Additional paid-in capital.............................. 6,105,404 5,694,806
Accumulated deficit..................................... (21,354,186) (6,816,643)
Notes receivable from stockholders...................... -- (40,086)
------------ -----------
Total stockholders' capital deficiency............. (15,236,920) (1,150,061)
------------ -----------
$ 29,190,714 $10,231,617
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
RADYNE COMSTREAM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH
DECEMBER 31, YEAR ENDED PERIOD ENDED YEAR ENDED
1998 DECEMBER 31, DECEMBER 31, JUNE 30,
RESTATED 1997 1996 1996
-------- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales................................. $ 21,111,704 $13,446,852 $ 4,905,059 $ 3,829,523
Cost of sales............................. 15,808,459 8,022,262 4,052,433 2,559,350
------------ ----------- ----------- -----------
Gross profit.................... 5,303,245 5,424,590 852,626 1,270,173
------------ ----------- ----------- -----------
Operating expenses:
Selling, general and
administrative..................... 5,531,213 4,242,138 1,437,971 1,843,576
Research and development............. 4,296,268 2,262,066 808,025 1,794,823
Stock option compensation expense.... 1,566,075 -- -- --
In-process research and
development........................ 3,909,000 -- -- --
Restructuring costs.................. 3,100,000 -- -- --
Asset impairment charge.............. 262,935 -- 421,000 --
------------ ----------- ----------- -----------
Total operating expenses........ 18,665,491 6,504,204 2,666,996 3,638,399
------------ ----------- ----------- -----------
Loss from operations...................... (13,362,246) (1,079,614) (1,814,370) (2,368,226)
Other (income) expense:
Interest expense, net................ 1,198,777 677,102 255,604 256,871
Other................................ (23,480) -- -- --
------------ ----------- ----------- -----------
Net loss.................................. $(14,537,543) $(1,756,716) $(2,069,974) $(2,625,097)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Basic net loss per common share........... $ (2.45) $ (0.35) $ (0.55) $ (0.70)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Diluted net loss per common share......... $ (2.45) $ (0.35) $ (0.55) $ (0.70)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Weighted average number of common shares
outstanding............................. 5,931,346 5,012,664 3,750,699 3,742,227
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
RADYNE COMSTREAM INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' CAPITAL DEFICIENCY
YEARS ENDED DECEMBER 31, 1998 AND 1997, THE SIX-MONTH PERIOD ENDED
DECEMBER 31, 1996 AND THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECIEVABLE
------------------- PAID-IN ACCUMULATED FROM
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS TOTAL
------ ------ ------- ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1995... 3,729,721 $ 7,459 545,842 (364,856) -- 188,445
Shares issued to Merit
Microwave............... 20,000 40 39,960 -- -- 40,000
Net loss.................. -- -- -- (2,625,097) -- (2,625,097)
--------- ------- --------- ----------- ------- -----------
Balances, June 30, 1996... 3,749,721 7,499 585,802 (2,989,953) -- (2,396,652)
Additional shares issued
to Merit Mircrowave..... 10,000 20 19,980 -- -- 20,000
Net loss.................. -- -- -- (2,069,974) -- (2,069,974)
--------- ------- --------- ----------- ------- -----------
Balances, December 31,
1996.................... 3,759,721 7,519 605,782 (5,059,927) -- (4,446,626)
Issuance of common stock,
net of issuance 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, December 31,
1997.................... 5,931,346 11,862 5,694,806 (6,816,643) (40,086) (1,150,061)
Payments received on
promissory notes........ -- -- -- -- 40,086 40,086
Stock option plan,
restated................ -- -- 410,598 -- -- 410,598
Net loss, restated........ -- -- -- (14,537,543) -- (14,537,543)
--------- ------- --------- ----------- ------- -----------
Balances, December 31,
1998, restated.......... 5,931,346 $11,862 6,105,404 (21,354,186) -- (15,236,920)
--------- ------- --------- ----------- ------- -----------
--------- ------- --------- ----------- ------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
RADYNE COMSTREAM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH
DECEMBER 31, YEAR ENDED PERIOD ENDED YEAR ENDED
1998 DECEMBER 31, DECEMBER 31, JUNE 30,
RESTATED 1997 1996 1996
-------- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $(14,537,543) $(1,756,716) $(2,069,974) $(2,625,097)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of assets......................... 961,069 2,122 -- --
Depreciation and amortization...................... 1,041,088 454,183 177,535 276,913
Asset impairment charge............................ 262,935 -- 421,000 --
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................................ (915,154) 374,459 (2,450,031) 251,806
Prepaid expenses and other current assets.......... (179,931) 26,222 (73,872) 73,581
Employee relocation incentives and advances........ -- -- -- 112,353
Inventories........................................ 2,833,811 (3,398,560) (840,691) (247,843)
Deposits and other................................. 242,787 (34,338) (7,650) --
Accounts payable, trade............................ (985,095) (138,077) 339,848 (113,243)
Accounts payable, affiliate........................ 113,682 (420,300) 436,362 --
Accrued expenses................................... 1,932,071 (25,924) 545,990 (253,337)
Taxes payable...................................... (94,581) (28,487) (24,053) (56,063)
------------ ------------ ----------- -----------
Net cash used in operating activities.......... (3,849,786) (4,945,416) (3,545,536) (2,580,930)
------------ ------------ ----------- -----------
Cash flows from investing activities:
Capital expenditures.................................... (543,630) (593,072) (255,118) (388,770)
Purchase of ComStream, net of cash acquired............. (10,007,369) -- -- --
------------ ------------ ----------- -----------
Net cash used in investing activities.......... (10,550,999) (593,072) (255,118) (388,770)
------------ ------------ ----------- -----------
Cash flows from financing activities:
Net borrowings from notes payable under line of credit
agreement............................................. 3,000,000 7,506,180 1,993,820 --
Payments on notes payable under line of credit
agreement............................................. (4,500,000) -- -- --
Proceeds from notes payable to affiliates............... 15,618,272 4,600,000 6,600,000 3,052,912
Payments on note payable to affiliate................... -- (11,200,000) (4,594,696) --
Net proceeds from sale of common stock.................. -- 5,053,281 -- --
Payments received on promissory notes issued in
connection with common stock.......................... 40,086 -- -- --
Principal payments on capital lease obligations......... (72,309) (37,769) (12,953) (84,350)
------------ ------------ ----------- -----------
Net cash provided by financing activities...... 14,086,049 5,921,692 3,986,171 2,968,562
------------ ------------ ----------- -----------
Net increase (decrease) in cash............................. (314,736) 383,204 185,517 (1,138)
Cash and cash equivalents, beginning of period.............. 569,692 186,488 971 2,109
Cash and cash equivalents, end of period.................... $ 254,956 $ 569,692 $ 186,488 $ 971
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid for interest.................................. $ 568,812 $ 687,626 $ 72,258 $ 3,996
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Supplemental disclosures of noncash investing and financing
activities:
In December 1996, the Company issued an additional
10,000 shares of common stock in conjunction with the
asset purchase from Merit Microwave, Inc. During 1997,
the Company incurred capital lease obligations of
$106,512 for new machinery and equipment.
In October 1998, the Company made an acquisition for
$17,000,000 plus $300,000 of other costs incurred in
connection with the acquisition. A summary of the
acquisition was as follows:
</TABLE>
<TABLE>
<S> <C>
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>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) ORGANIZATION AND ACQUISITION
Radyne Corp., a New York corporation, ('Radyne') was incorporated on
November 25, 1980. On August 12, 1996, Radyne became a 90.6%-owned subsidiary of
Singapore Technologies Pte Ltd ('STPL'), through its wholly-owned subsidiary,
Stetsys US, Inc. ('ST'). In 1996, Radyne changed its fiscal year-end to December
31.
On October 15, 1998, Radyne purchased all of the outstanding shares of
common stock of ComStream Holdings, Inc. ('ComStream') for an aggregate purchase
price of $17 million, of which $10 million was paid in cash at the closing,
using funds borrowed from its controlling stockholder, and the balance of which
was in the form of a $7 million note (the 'Note'), payable nine months from the
purchase date. The Note is convertible into Radyne common stock under certain
circumstances. In addition, the Company accrued $1.6 million of severance costs
as a result of the acquisition (note 7). This acquisition was recorded in
accordance with the 'purchase method' of accounting. The excess of the purchase
price over the net assets acquired was approximately $8.7 million of which $3.9
million was allocated to in-process research and development, $2.5 million was
valued as purchased technology, which is being amortized over 6.25 years, and
$2.3 million has been recorded as goodwill, which is being amortized over ten
years. The results of operations of ComStream have been included in the
accompanying consolidated statement of operations from October 15, 1998.
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.
Products-in-development at ComStream at the time of the acquisition were
classified as in-process technology. These include the following products with
their respective estimated completion dates:
<TABLE>
<CAPTION>
DESCRIPTION ESTIMATED COMPLETION DATE
----------- -------------------------
<S> <C>
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
</TABLE>
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, as
expected, for two of the products in the fourth quarter of 1998, and was
expected to be achieved for the remaining products within 1999.
F-8
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
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 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.
ComStream operates primarily in North America in the satellite
communications industry. ComStream designs, markets and manufacturers satellite
interactive modems and earth stations. Additionally, ComStream manufactures and
markets full-transponder satellite digital audio receivers for music providers
and has designed and developed a PC broadband satellite receiver card which is
an Internet and high-speed data networking product.
In March 1999, Radyne changed its name to Radyne ComStream Inc.
Radyne ComStream Inc. (the 'Company') has locations in Phoenix, Arizona and
San Diego, California. The Company designs, manufactures, and sells products,
systems and software used for the transmission and reception of data over
satellite and cable communication networks.
F-9
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations (unaudited) as if the acquisition had taken
place on January 1, 1997. Such pro forma amounts are not necessarily indicative
of what the actual results of operations might have been if the acquisition had
been effective on January 1, 1997:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998
RESTATED 1997
-------- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net Sales................................... $ 50,965 $ 69,369
-------- --------
-------- --------
Gross profit................................ $ 13,788 $ 28,723
-------- --------
-------- --------
Net loss.................................... $(19,908) $ (6,826)
-------- --------
-------- --------
Net loss per common share................... $ (3.36) $ (1.36)
-------- --------
-------- --------
</TABLE>
(2) LIQUIDITY
The Company has incurred significant losses from operations and has a
stockholders' accumulated deficit of $21.4 million and a working capital
deficiency of $8.8 million at December 31, 1998 and has been unable to generate
a positive cash flow from operations. These matters raise doubt about the
Company's ability to continue as a going concern. Stetsys Pte Ltd, the Company's
majority stockholder, has confirmed its ability and intent to provide such
working capital as may be necessary to ensure that the Company will continue to
operate for a reasonable period into the future. Since August 1996, the Company
has been dependent on STPL to provide cash for day-to-day operations. Management
believes that, as a result of the acquisition of ComStream and the resultant
increase in revenues, the Company can begin to generate profits. Management also
believes that with the rights offering (see note 20) expected to be finalized in
the second quarter of 1999, and through additional funding sources, the Company
will be a viable going concern. Therefore, the accompanying consolidated
financial statements have been prepared assuming the Company will continue as a
going concern.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the financial statement
date and the reported amounts of revenue and expenses during the reporting
period. The industry in which the Company operates is characterized by rapid
technological change and short product life cycles. As a result, estimates are
required to provide for product obsolescence and warranty returns as well as
other matters. Actual results could differ from those estimates.
(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.
F-10
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
(d) REVENUE RECOGNITION
The Company recognizes revenue upon shipment of product.
(e) INVENTORIES
Inventories, consisting of satellite modems and related products, are
valued at the lower of cost (first-in, first-out) or market.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment held under capital
leases is stated at the present value of future minimum lease payments.
Expenditures for repairs and maintenance are charged to operations as incurred,
and improvements which extend the useful lives of the assets are capitalized.
Depreciation and amortization of machinery and equipment are computed using the
straight-line method over an estimated useful life of three to ten years.
Equipment held under capital leases and leasehold improvements are amortized on
a straight-line basis over the shorter of the lease term or estimated useful
lives of the assets.
(g) DESIGNS AND DRAWINGS
Amortization of designs and drawings was computed using the straight-line
method over an estimated useful life of four to seven years. During 1996, the
Company recognized a design and drawing impairment charge of $421,000, with no
associated tax benefit. During 1998, the Company recognized a design and drawing
impairment charge of $262,935, with no associated tax benefit as a result of
technology used in new products.
(h) GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over ten years.
(i) PURCHASED TECHNOLOGY
In connection with the acquisition of ComStream, value was assigned to
purchased technology. Purchased technology is being amortized on a straight-line
basis over the expected period to be benefited of 6.25 years.
(j) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
(k) WARRANTY COSTS
The Company provides limited warranties on certain of its products and
systems for periods generally not exceeding two years. The Company accrues
estimated warranty costs for potential product liability and warranty claims
based on the Company's claim experience. Such costs are accrued as cost of sales
at the time revenue is recognized.
F-11
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
(l) RESEARCH AND DEVELOPMENT
The cost of research and development is charged to expense as incurred.
(m) INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future consequences
attributed to differences between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Differences between income for financial and tax reporting purposes arise
primarily from amortization of certain designs and drawings and accruals for
warranty reserves and compensated absences. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(n) CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are principally accounts receivable. The Company
maintains ongoing credit evaluations of its customers and generally does not
require collateral. The Company provides reserves for potential credit losses
and such losses have not exceeded management's expectations.
(o) NET LOSS PER COMMON SHARE
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could occur
if securities or contracts to issue common stock were exercised or converted to
common stock or resulted in the issuance of common stock that then shared in the
earnings or loss of the Company. Assumed exercise of outstanding stock options
and warrants for all periods have been excluded from the calculations of diluted
net loss per common share as their effect is antidilutive. Per share amounts
have been adjusted to reflect a 1-for-5 reverse stock split that occurred on
January 9, 1997.
(p) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of accounts receivable, accounts payable, and accrued
expenses approximates the carrying value due to the short-term nature of these
instruments. Management has estimated that the fair values of the notes payable
approximate the current balances outstanding, based on currently available rates
for debt with similar terms.
(q) EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options and to adopt the
'disclosure only' alternative treatment under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123
requires the use of fair value option valuation models that were not developed
for use in valuing employee stock options. Under SFAS No. 123, deferred
compensation is recorded for the excess of the fair value of the stock on the
date of the option grant, over the exercise price of the option. The deferred
compensation is amortized over the vesting period of the option.
(r) SEGMENT REPORTING
The Company has only one operating business segment, the sale of equipment
for satellite and cable communications networks.
F-12
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
(s) RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statement amounts to conform to the current year presentation.
(t) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, 'Reporting Comprehensive Income' (SFAS
No. 130) which became effective for the Company January 1, 1998. SFAS No. 130
established standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. The Company
had no items of comprehensive income. Therefore the adoption of SFAS No. 130 had
no effect on the Company.
(4) RESTATEMENT
In October 1998, the Company amended the terms of certain stock options to
accelerate the vesting of those stock options, discussed more fully in Note 15,
which established a new compensation measurement date for such options. The
Company had originally recognized $1,155,477 of stock compensation expense
pertaining to the options' cash bonus component coincident with the date of the
amendment. Generally accepted accounting principles require that, upon
establishing a new measurement date, compensation cost be determined based upon
the market price of the underlying stock. Accordingly, the Company has restated
the accompanying 1998 consolidated financial statements to record an additional
$410,598 of compensation expense in 1998, reflecting the measurement of
compensation cost based upon the market price of the underlying stock as of the
amendment date. The net loss of the Company was increased from $14,126,945 to
$14,537,543 and basic and diluted net loss per share was increased from $2.38 to
$2.45. Additionally, accumulated deficit was increased from $20,943,588 to
$21,354,186.
(5) INVENTORIES
Inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials and components................................ $6,065,751 $2,605,397
Work-in-process............................................. 4,319,338 1,124,929
Finished goods.............................................. 546,858 1,950,594
---------- ----------
10,931,947 5,680,920
Obsolescence reserve........................................ (1,551,469) (291,000)
---------- ----------
$9,380,478 $5,389,920
---------- ----------
---------- ----------
</TABLE>
(6) PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Machinery and equipment..................................... $3,598,732 $1,298,715
Furniture and fixtures...................................... 2,661,195 373,548
Leasehold improvements...................................... 312,425 --
---------- ----------
6,572,352 1,672,263
Less accumulated depreciation and amortization.............. (1,038,707) (349,712)
---------- ----------
Property and equipment, net................................. $5,533,645 $1,322,551
---------- ----------
---------- ----------
</TABLE>
F-13
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
(7) ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Wages, vacation and related payroll taxes................... $1,355,316 $486,840
Interest.................................................... 803,929 183,968
Professional fees........................................... 378,817 85,500
Warranty reserve............................................ 679,964 105,000
Severance................................................... 1,282,761 --
Lease buyout (notes 10 and 16).............................. 2,443,110 --
Other....................................................... 2,196,444 39,724
---------- --------
Total accrued expenses...................................... $9,140,341 $901,032
---------- --------
---------- --------
</TABLE>
The severance balance included in accrued expenses at December 31, 1998
consists 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); the Company paid $1,005,000 of these
termination benefits prior to December 31, 1998.
(8) NOTES PAYABLE
In 1997, the Company had a note payable under a line of credit agreement
with a bank that permitted outstanding borrowings of $4,500,000. At December 31,
1997, outstanding borrowings against the line were $4,500,000 plus accrued
interest. In 1998, the Company repaid the note and accrued interest with
proceeds from affiliated debt (note 17).
The Company has a $20,500,000 credit agreement with a bank expiring
September 29, 1999. STPL has issued a nonbinding letter of awareness in
connection with this credit agreement. Borrowings under the line of credit bear
interest at a fluctuating rate equal to LIBOR or the bank's Quoted Rate plus 1
percent per annum (6.125 percent and 6.938 percent as of December 31, 1998 and
1997, respectively). At December 31, 1998 and 1997, outstanding borrowings
against the line were $8,000,000 and $5,000,000, respectively, plus accrued
interest. This credit facility is an uncommitted line of credit which the bank
may modify or cancel without prior notice. As of December 31, 1998, the Company
violated one debt covenant which was waived by the bank.
In connection with the purchase of ComStream, the Company executed a
$7,000,000 note payable to the former owner of ComStream. The note bears
interest at a rate of 8.0 percent per annum and is payable in full on July 15,
1999. At any time prior to July 15, 1999, the holder of the note has the option
to convert 20% of the original principal balance into shares of the Company's
common stock and at any time after July 15, 1999, prior to payment in full, the
holder of the note has the option to convert the outstanding balance into shares
of the Company's common stock at $3.73 per share.
(9) OBLIGATIONS UNDER CAPITAL LEASES
The Company leases machinery and equipment under capital leases. The cost
and accumulated depreciation of the equipment was $501,494 and $181,645,
respectively, at December 31, 1998 and is included in property and equipment in
the accompanying balance sheets and is being depreciated over the estimated
useful lives of the machinery and equipment.
F-14
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
Payments on capital lease obligations due after December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................ 131,807
2000........................................................ 55,516
2001........................................................ 37,498
2002........................................................ 9,952
--------
Total minimum lease payments................................ 234,773
Less amount representing interest at rates of 4.6% to
12.3%..................................................... (21,294)
--------
Present value of minimum lease payments..................... 213,479
Less current installments................................... 124,891
--------
Capital lease obligations due after one year................ $ 88,588
--------
--------
</TABLE>
(10) COMMITMENTS
Rent expense was approximately $517,853, $94,000, $44,000 and $95,000 for
the years ended December 31, 1998 and 1997, the six-month period ended December
31, 1996, and the year ended June 30, 1996. Future minimum rentals under leases
after December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ 1,701,129
2000........................................................ 1,636,703
2001........................................................ 1,646,834
2002........................................................ 1,712,539
2003........................................................ 1,919,934
Thereafter.................................................. 4,797,014
-----------
$13,414,153
-----------
-----------
</TABLE>
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 is due in two
equal installments of $1,000,000 on March 1, 1999 and September 1, 1999. At
December 31, 1998, accrued expenses included this $2,000,000, plus $140,000 in
related real estate commissions, $273,000 of rent on the larger building through
March 1999 and $30,000 of related legal and miscellaneous expenses.
The Company generally has commitments with certain suppliers and
subcontract manufacturers to purchase certain components and estimates its
non-cancelable obligations to be approximately $5,000,000 to $8,000,000 at any
give time.
F-15
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
(11) INCOME TAXES
Income tax expense amounted to $0 for the years ended December 31, 1998 and
1997, the six-month period ended December 31, 1996 and the year ended June 30,
1996. The actual tax expense (benefit) for these periods differs from 'expected'
tax expense for those periods as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH
DECEMBER 31, YEAR ENDED PERIOD ENDED YEAR ENDED
1998 DECEMBER 31, DECEMBER 31, JUNE 30,
RESTATED 1997 1996 1996
-------- ---- ---- ----
<S> <C> <C> <C> <C>
Computed 'expected' tax expense.... $(4,943,000) $(597,000) $(704,000) $(893,000)
State tax benefit.................. (541,000) (64,000) (75,000) (95,000)
Change in valuation allowance...... 5,190,000 613,000 775,000 988,000
Other adjustments.................. 294,000 48,000 4,000 --
----------- --------- --------- ---------
Total......................... $ -- $ -- $ -- $ --
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
Deferred tax assets at December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Cumulative tax effect of net operating loss
carryforwards....................................... $ 8,459,000 $4,620,000
Tax credits........................................... 155,000 210,000
Temporary differences................................. 3,734,000 (107,000)
Valuation allowance................................... (12,348,000) (4,723,000)
------------ ----------
$ -- $ --
------------ ----------
------------ ----------
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1998 and 1997 was $7,625,000 and $613,000, respectively. At
December 31, 1998, the Company has net operating loss carryforwards of
approximately $22,608,000 expiring in various years through 2013 and general
business credit carryforwards of $155,000 expiring in various years through 2004
for utilization against taxable income/taxes payable of future periods, if any.
Approximately $6,200,000 of the Company's net operating loss and tax credit
carryforwards are subject to an annual limitation under Internal Revenue Code
Section 382, in future years, as a result of changes in ownership of the
Company's stock. Management believes that the inability to utilize net operating
loss and tax credit carryforwards to offset future taxable income within the
carryforward periods under existing tax laws and regulations is more likely than
not. Accordingly, a 100 percent valuation allowance has been recorded against
the net deferred tax assets as of December 31, 1998 and 1997.
(12) SIGNIFICANT CUSTOMERS AND EXPORT SALES
During 1998, no customers represented greater than 10 percent of net sales.
During 1997, one customer represented 14.5 percent of net sales. For the
six-month period ended December 31, 1996, two different customers represented
18.3 percent and 15.6 percent of net sales; the latter customer represented
12.7% of net sales for the year ended June 30, 1996.
Export sales were 50 percent, 55 percent, 66 percent and 50 percent of net
sales for the years ended December 31, 1998 and 1997, the six-month period ended
December 31, 1996, and the year
F-16
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
ended June 30, 1996, respectively. Export sales (based on shipping destination)
are comprised of the following:
<TABLE>
<CAPTION>
YEAR YEAR SIX-MONTH YEAR
ENDED ENDED PERIOD ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1997 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Europe........................................ 63% 13% -- 38%
Latin America................................. 18 22 37% --
Asia.......................................... 14 58 46 46
Other......................................... 5 7 17 16
--- --- --- ---
100% 100% 100% 100%
--- --- --- ---
--- --- --- ---
</TABLE>
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 75% of 1998 net sales. Information
concerning the breakout of sales by these two product lines for periods prior to
1998 is not available.
(13) LOSS PER SHARE
A summary of the reconciliation from basic loss per share to diluted loss
per share follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX-MONTH YEAR
-------------------------- PERIOD ENDED ENDED
1998 DECEMBER 31, JUNE 30,
RESTATED 1997 1996 1996
-------- ---- ---- ----
<S> <C> <C> <C> <C>
Income (loss) available to common
stockholders.................... $(14,537,543) $(1,756,716) $(2,069,974) $(2,625,097)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Basic EPS-weighted average shares
outstanding..................... 5,931,346 5,012,664 3,750,699 3,742,227
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Basic loss per share.............. $ (2.45) $ (.35) $ (.55) $ (.70)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Basic EPS-weighted average shares
outstanding..................... 5,931,346 5,012,664 3,750,699 3,742,227
Effect of dilutive securities..... -- -- -- --
------------ ----------- ----------- -----------
Dilutive EPS-weighted average
shares outstanding.............. 5,931,346 5,012,664 3,750,699 3,742,227
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Diluted loss per share............ $ (2.45) $ (.35) $ (.55) $ (.70)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Stock options not included in
diluted EPS since
antidilutive.................... 691,559 169,818 72,563 --
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
(14) EMPLOYEE BENEFIT PLAN
The Company has a qualified contributory 401(k) plan that covers all
employees in Phoenix, Arizona, who have attained the age of 18 and are employed
at the enrollment date. Matching contributions were $31,690, $30,230, $8,576 and
$11,606 for the years ended December 31, 1998 and 1997, the six-month period
ended December 31, 1996, and the year ended June 30, 1996, respectively. Each
participant may elect to contribute up to 15 percent of his or her gross
compensation up to the maximum amount allowed by the Internal Revenue Service.
The Company matches up to 1 percent of the employee's salary.
F-17
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
The Company has a qualified contributory 401(k) plan that covers all
full-time employees in San Diego, California, who have been employed
continuously for at least 30 days before enrollment date. Matching contributions
were $30,450 for the period October 15, 1998 through December 31, 1998. Each
participant 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.
(15) STOCK OPTIONS
In November 1996, the Board of Directors adopted the 1996 Incentive Stock
Option Plan (the 'Plan'), which was approved by the stockholders on January 8,
1997. The Plan provided for the grant of options to employees of the Company to
purchase up to 1,282,042 shares of common stock. The option price per share
under the Plan may not be less than the fair market value of the stock (110
percent of the fair market value for an optionee who is a 10 percent
stockholder) on the day the option is granted. In November 1998, the Plan was
amended to increase the options available by 900,000, providing a total of
2,182,042 options available to purchase shares of common stock.
Rights Offering -- In November 1996, the Board of Directors approved the
distribution to stockholders, other than the Company's principal stockholder,
ST, of subscription rights for the purchase of up to 215,833 shares of the
Company's common stock at a price of $2.50 per share. The Board of Directors
further approved the distribution of subscription rights to an affiliate of ST
to purchase up to 2,040,000 shares of the Company's common stock at a price of
$2.50 per share. This Rights Offering became effective on May 12, 1997 and was
concluded in June 1997. ST's affiliate exercised 1,976,000 of its rights and
individuals associated with such affiliate exercised another 34,000. An
additional 51,525 rights issued to stockholders other than ST were exercised. In
a related offering under the Company's Incentive Stock Option Plan, 110,100
shares of the Company's common stock were purchased by employees at $2.50 per
share. Total proceeds received from the Rights Offering were partially offset by
approximately $336,000 of associated costs. The proceeds from the exercise of
these rights were used, in part, to satisfy notes payable to affiliates shown on
the accompanying consolidated balance sheet at December 31, 1996.
At December 31, 1997, the Company had 690,665 options outstanding at an
exercise price of $2.50 per share. 30,500 options were exercisable at the rate
of 25 percent per year on each of the first four anniversaries of the grant date
and expire on the tenth anniversary of the grant date. During 1998, 3,208 of
these stock options were forfeited. The remaining 656,957 options have been
allocated among a group of 30 key employees. These options carry the right to a
cash bonus of $1.72 per purchased share, payable upon exercise. These options
were originally exercisable, if and when the Company's earnings before interest
and taxes (calculated without regard to any charge for compensation paid or
payable under the Plan) exceeded certain levels. The 656,957 options receive
variable plan accounting that requires the Company to recognize compensation
cost based upon the market price of the underlying stock when those specific
earnings levels are probable of being achieved or at certain other measurement
dates. In October 1998, the Company amended the terms of the 656,957 stock
options to accelerate vesting of the awards, thereby creating a new compensation
measurement date and, accordingly, recognized compensation costs amounting to
$1,566,075 (restated). The Company recognized no compensation cost relative to
these stock options in 1997 or 1996.
At December 31, 1998, the Company had 1,205,957 options outstanding at
exercise prices ranging from $2.50 to $3.125 per share.
The Company applies APB Opinion 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial
F-18
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, the Company's net
loss and loss per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998
RESTATED 1997
-------- ----
<S> <C> <C> <C>
As reported $(14,537,543) $(1,756,716)
Net loss..................................... Pro forma $(15,293,957) $(2,028,121)
As reported $ (2.45) $ (.35)
Loss per Share -- Basic...................... Pro forma $ (2.58) $ (.40)
As reported $ (2.45) $ (.35)
Loss per Share -- Diluted.................... Pro forma $ (2.58) $ (.40)
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net loss amounts presented above
because compensation cost is reflected over the options' vesting period of three
years.
The fair value of options granted under the Plan was estimated on the date
of grant with vesting periods ranging from one to three years using the
Black-Scholes option-pricing model with the following weighted average
assumptions used: no dividend yield, expected volatility of 105 percent -- 118
percent, risk free interest rate of 6.125 percent -- 5.87 percent, and expected
lives of five years.
A summary of the aforementioned stock plan activity follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
NUMBER SHARE
------ -----
<S> <C> <C>
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
--------- -----
--------- -----
</TABLE>
A summary of stock options granted at December 31, 1998 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 CONTRACTUAL LIFE PRICE 1998 PRICE
--------------- ---- ---------------- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$2.50............................ 676,957 1 year $2.50 591,957 $2.50
$2.50............................ 6,500 2 years 2.50 3,250 2.50
$2.50 to 3.125................... 522,500 3 years 2.91 130,375 2.90
--------- ----- ------- -----
1,205,957 $2.82 725,582 $2.57
--------- ----- ------- -----
--------- ----- ------- -----
</TABLE>
(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
F-19
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
administrative staff. The Company paid $412,000 of these termination benefits
prior to December 31, 1998 and $688,000 is included in accrued expenses as of
December 31, 1998. The remaining $2,000,000 was comprised of $1,300,000 for the
net cost of the lease buyout discussed in note 10 and $700,000 of leasehold
improvements that were abandoned upon movement to a new building in San Diego,
California. At December 31, 1998, the remaining balance in the accrued expenses
related to the restructuring costs comprises remaining termination benefits and
costs associated with the lease buyout.
(17) RELATED PARTY TRANSACTIONS
Sales to a subsidiary of STPL for the years ended December 31, 1998 and
1997, the six-month period ended December 31, 1996 and the year ended June 30,
1996 were $50,000, $152,500, $307,300 and $311,600, respectively.
Sales to Agilis Communication Technologies Pte Ltd ('Agilis'), an affiliate
of ST, amounted to $65,000, $540,000, $375,000 and $118,900 for the years ended
December 31, 1998 and 1997, the six-month period ended December 31, 1996 and the
year ended June 30, 1996, respectively.
Prior to 1997, a former majority stockholder of the Company provided
management services to the Company, for which it charged the Company $60,000 and
$120,000 for the six-month period ended December 31, 1996 and the year ended
June 30, 1996, respectively.
Interest expense on notes payable to affiliates was $581,000, $148,000,
$205,900 and $248,400 for the years ended December 31, 1998 and 1997, the
six-month period ended December 31, 1996 and the year ended June 30, 1996,
respectively, of which $581,000, $0 and $152,400 were included in accrued
expenses in the accompanying balance sheet as of December 31, 1998, 1997 and
1996, respectively.
During 1998, an ST affiliate made loans of $5,618,272 to the Company. The
loans bear interest at rates ranging from 6.625 percent to 6.844 percent per
annum with the principal and accrued interest due in March 2000. The proceeds of
the loans were used in part by the Company to repay a note payable under a line
of credit agreement which was outstanding at December 31, 1997 (note 8).
During August 1998 the Company executed a note to ST for $10,000,000 the
proceeds of which were used for the purchase of ComStream. This note bears
interest at a rate of 6.375 percent per annum. The note, plus any accrued
interest, is due March 31, 2000.
The Company had notes receivable from stockholders totaling $40,086 at
December 31, 1997. These notes had an interest rate of 4 percent and were paid
in June 1998.
(18) CONTINGENCIES
The Internal Revenue Service is currently conducting examinations of the
Company with respect to income tax for the calendar year ended December 31,
1995. The State of California Board of Equalization is currently conducting
examinations with respect to personal property tax and sales tax for the
calendar years ended December 31, 1995, 1996 and 1997. The examinations are
currently in process and management does not expect a material adverse effect on
the financial position of the Company resulting from the resolutions of the
examinations. Accordingly, no provision has been made in the accompanying
consolidated financial statements for losses, if any, that might ultimately
result from the examinations.
The Company is involved in litigation and claims arising in the normal
course of operations. In the opinion of management based on consultation with
legal counsel, losses, if any, from this litigation are covered by insurance or
are immaterial; therefore, no provision has been made in the
F-20
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
accompanying consolidated financial statements for losses, if any, that might
result from the ultimate outcome of these matters.
(19) YEAR 2000 PROBLEM
In 1998, the Company developed a plan to deal with the Year 2000 problem.
The plan provides for the conversion efforts to be completed by September 30,
1999. The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. The Company has
identified all internal mission critical systems and plans to begin remediation
efforts, consisting of system upgrades, in the second quarter of 1999. The
Company has also determined that its core products do not contain date-sensitive
components; however, the Company expects to begin communicating with its
customers on the status of its products in the second quarter of 1999.
Management is currently assessing the Year 2000 remediation efforts of the
Company's significant suppliers. Although management believes its efforts
minimize the potential adverse effects on the Company of a supplier's failure to
be Year 2000 compliant on time, there can be no absolute assurance that all its
suppliers will become Year 2000 compliant on time or in a way that will be
compatible with the Company's systems. The Company does not believe expenditures
to be Year 2000 compliant will cost in excess of $100,000, and is expensing all
costs associated with these systems changes as the costs are incurred. However,
there can be no assurance that the Company will be able to completely resolve
all Year 2000 issues or that the ultimate cost to identify and implement
solutions to all Year 2000 problems will not be material to the Company.
(20) SUBSEQUENT EVENTS
In January and February 1999, the Company had additional draws on the line
of credit totaling $1,500,000 at interest rates ranging from 5.97% to 6.06%.
In January 1999, the Company filed a Form S-2 with the Securities and
Exchange Commission to register a rights offering of 4,745,076 shares of common
stock at a price of $3.73 per share. Each stockholder of record will be entitled
to purchase four shares of common stock for every five shares currently owned.
F-21
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
(21) QUARTERLY FINANCIAL DATA -- UNAUDITED
A summary of the quarterly data for the years ended December 31, 1998 and
1997 follows:
<TABLE>
<CAPTION>
FOURTH
FIRST SECOND THIRD QUARTER TOTAL
QUARTER QUARTER QUARTER RESTATED RESTATED
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
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 common share..................... $ (.08) $ (.29) $ (.09) $ (1.99) $ (2.45)
------ ------- ------ -------- --------
------ ------- ------ -------- --------
Diluted loss per common 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
------ ------- ------ -------- --------
------ ------- ------ -------- --------
Income (loss) before interest expense...... $ (302) $ (341) $ 248 $ (684) $ (1,080)
------ ------- ------ -------- --------
------ ------- ------ -------- --------
Net income (loss)..................... $ (474) $ (504) $ 86 $ (865) $ (1,757)
------ ------- ------ -------- --------
------ ------- ------ -------- --------
Basic loss per common share..................... $ (.13) $ (.11) $ .01 $ (.12) $ (.35)
------ ------- ------ -------- --------
------ ------- ------ -------- --------
Diluted loss per common share................... $ (.13) $ (.11) $ .01 $ (.12) $ (.35)
------ ------- ------ -------- --------
------ ------- ------ -------- --------
</TABLE>
F-22
<PAGE>
RADYNE COMSTREAM INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA).
<TABLE>
<CAPTION>
RAYDNE COMSTREAM COMSTREAM PRO FORMA
AUDITED UNAUDITED ADJUSTMENTS NOTES COMBINED
------- --------- ----------- ----- --------
<S> <C> <C> <C> <C> <C>
Sales............................. $ 21,112 $ 29,853 $ 50,965
Cost of sales..................... 15,809 21,368 37,177
-------- -------- --------
Gross profits..................... 5,303 8,485 13,788
Operating expenses
Selling, general &
administrative............. 5,531 9,493 $ (787) a 14,868
Research and development.......... 4,296 7,227 11,523
Stock option compensation
expense......................... 1,156 1,156
In-process research and
development..................... 3,909 (3,909) b
Restructuring costs............... 3,100 3,100
Asset impairment charge........... 263 263
-------- -------- --------
Total operating
expenses.............. 18,255 16,720 (4,065) 30,910
-------- -------- --------
Operating loss.................... (12,952) (8,235) (4,065) (17,122)
(3,240) c
Interest expense.................. 1,199 3,240 1,200 c 2,399
Other............................. (24) (24)
-------- -------- --------
Net loss.......................... $(14,127) $(11,475) $(6,105) $(19,497)
-------- -------- ------- --------
-------- -------- ------- --------
Basic net loss per common share... $ (2.38) d $ (3.29)
-------- --------
-------- --------
Diluted net loss per common
share........................... $ (2.38) d $ (3.29)
-------- --------
-------- --------
Weighted average number of common
shares outstanding.............. 5,931,346 5,931,346
</TABLE>
The accompanying notes are an integral part of these
unaudited pro forma condensed combined financial statements
F-23
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) BASIS OF ACCOUNTING
On October 15, 1998, Radyne Corp. ('Radyne') completed the acquisition of
all of the outstanding shares of common stock of ComStream Holdings, Inc.
('ComStream') from Spar Aerospace Limited ('Spar') for an aggregate purchase
price of $17.0 million consisting of $10.0 million in cash and a $7.0 million
convertible promissory note.
The pro forma unaudited condensed combined statement of operations for the
year ended December 31, 1998 is presented using the Radyne ComStream Inc.
audited statement of operations for the year ended December 31, 1998 combined
with the ComStream unaudited consolidated statement of operations for the period
from January 1, 1998 through October 14, 1998, as if the transaction had taken
place on January 1, 1998.
The pro forma condensed combined financial statement should be read in
conjunction with the audited financial statements and notes thereto of Radyne
ComStream Inc. for the year ended December 31, 1998.
The pro forma combined statement of operations is not necessarily
indicative of the future results of operations of Radyne ComStream or the
results of operations which would have resulted had Radyne and ComStream been
combined during the period presented. In addition, the pro forma results are not
intended to be a projection of future results.
(2) PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
The accompanying pro forma adjustments reflect adjustments for the
following items:
a) Amortization expense related to goodwill on ComStream's balance
sheet has been eliminated. Amortization of purchased technology and
goodwill related to the ComStream acquisition has been recorded based on
estimated useful lives of 6.25 years and 10 years, respectively.
b) The fair value of acquired in-process research and development of
$3,909,000 was expensed in the period in which the acquisition was
completed. This amount was shown as an increase in the accumulated deficit
and not as an expense in the accompanying pro forma condensed combined
statement of operations.
c) Interest expense incurred by ComStream, primarily relating to
borrowings pursuant to a revolving line of credit arrangement with Spar has
been eliminated. Interest expense has been recorded as if the companies had
been combined during the same periods after giving effect to the
$7,000,000, 8% convertible promissory note due to Spar and the $10,000,000,
6.375% note payable to Stetsys US, Inc. Interest expense has also been
adjusted to reflect the 1.0% facility fee payable to Citibank, N.A. in
connection with the increase in the uncommitted line of credit facility
with Citibank, N.A. from $5,500,000 to $20,500,000.
d) At December 31, 1998 pro forma loss per share would have been $1.90
after giving effect to the use of proceeds of the previously announced
rights offering, where the Company will capitalize approximately $15.6
million of debt now owed to its majority stockholder and issue 4,300,800
additional shares of common stock to that stockholder.
F-24
<PAGE>
RADYNE COMSTREAM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents................................ $ 1,622,256 $ 254,956
Accounts receivable -- trade, net of allowance for
doubtful accounts of $784,958 and $632,815............ 6,827,761 7,270,732
Other receivable....................................... 0 1,265,000
Inventories, net....................................... 8,238,202 9,380,478
Prepaids and other current assets...................... 430,536 590,161
------------ ------------
Total current assets.............................. 17,118,755 18,761,327
------------ ------------
Property and equipment -- net............................... 3,961,371 5,533,645
------------ ------------
Other assets................................................ 3,888,029 4,895,742
------------ ------------
Total assets................................. $ 24,968,155 $ 29,190,714
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' CAPITAL/(DEFICIENCY)
Current liabilities:
Notes payable under line of credit agreement........... $ 12,920,000 $ 8,000,000
Note payable........................................... 0 7,000,000
Current installments of obligations under capital
leases................................................ 64,561 124,891
Accounts payable -- trade.............................. 2,512,724 3,291,915
Accounts payable -- affiliates......................... 0 8,150
Accrued expenses....................................... 7,255,518 9,140,341
Income taxes payable................................... 15,000 0
------------ ------------
Total current liabilities......................... 22,767,803 27,565,297
Notes payable to affiliates................................. 0 15,618,272
Obligations under capital leases, excluding current
installments.............................................. 76,572 88,588
Accrued stock option compensation........................... 1,108,804 1,155,477
------------ ------------
Total liabilities................................. 23,953,179 44,427,634
------------ ------------
Stockholders' capital/(deficiency)
Common stock, $.002 par value, 20,000,000 shares
authorized, Shares issued and outstanding, 10,151,026
at September 30, 1999 and 5,931,340 at December 31,
1998.................................................. 20,303 11,862
Additional paid-in capital............................. 21,435,312 6,105,404
Accumulated deficit.................................... (20,440,639) (21,354,186)
------------ ------------
Total stockholders' capital/(deficiency).......... 1,014,976 (15,236,920)
------------ ------------
Total........................................ $ 24,968,155 $ 29,190,714
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-25
<PAGE>
RADYNE COMSTREAM INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $39,261,814 $ 9,973,611
Cost of sales............................................... 21,090,713 7,704,856
----------- -----------
Gross profit........................................... 18,171,101 2,268,755
----------- -----------
Operating expenses:
Selling, general and administrative.................... 9,138,897 2,543,986
Research and development............................... 6,730,223 1,944,809
----------- -----------
Total operating expenses.......................... 15,869,120 4,488,795
----------- -----------
Income (loss) from operations before interest expense and
extraordinary income...................................... 2,301,981 (2,220,040)
----------- -----------
Interest expense, net....................................... 1,561,616 568,592
----------- -----------
Net Income (loss) before extraordinary income and taxes..... 740,365 (2,788,632)
Extraordinary income........................................ 188,182 0
----------- -----------
Net Income (loss) before provision for income taxes......... 928,547 (2,788,632)
----------- -----------
Provision for income taxes.................................. 15,000 0
----------- -----------
Net income (loss) available for common stockholders......... $ 913,547 $(2,788,632)
----------- -----------
----------- -----------
Basic Earnings (loss) per share:
Income (loss) before extraordinary items............... $0.12 $(0.47)
Extraordinary item..................................... 0.03 --
Net income (loss)...................................... $0.15 $(0.47)
----- ------
----- ------
Diluted Earnings (loss) per share:
Income (loss) before extraordinary items............... $0.11 $(0.47)
Extraordinary item..................................... 0.03 --
Net income (loss)...................................... $0.14 $(0.47)
----- ------
----- ------
Weighted average shares used in computation
Basic.................................................. $ 5,961,937 $ 5,931,340
----------- -----------
----------- -----------
Diluted................................................ $ 6,401,161 $ 5,931,340
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-26
<PAGE>
RADYNE COMSTREAM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Operating activities:
Net income (loss)...................................... $ 913,547 $ (2,788,632)
Adjustments to reconcile net income (loss) to cash
flows used in operating activities:
Forgiveness of interest on debt................... (188,182) 0
Depreciation and amortization..................... 1,812,551 395,653
Increase (decrease) in cash resulting from changes in:
Accounts and other receivables......................... 1,707,971 161,417
Inventories............................................ 1,142,276 1,120,380
Prepaids and other current assets...................... 159,625 (384,813)
Other assets........................................... 35,024 0
Accounts payable -- trade.............................. (779,191) 354,746
Accounts payable -- affiliates......................... (8,150) (16,062)
Accrued expenses....................................... (1,884,823) 223,070
Accrued stock option compensation...................... (46,673) 0
Income taxes payable................................... 15,000 (40,736)
----------- ------------
Net cash (used in) provided by operating
activities..................................... 2,873,975 (974,977)
----------- ------------
Cash flows from investing activities:
Investment in restricted cash.......................... 0 (10,000,000)
Net proceeds from sale of fixed assets................. 144,597 0
Capital expenditures................................... (256,404) (390,098)
----------- ------------
Net cash used in investing activities............. (111,807) (10,390,098)
----------- ------------
Cash flows from financing activities:
Net borrowing (payment) on notes payable under line of
credit agreements..................................... 4,920,000 (4,000,000)
Proceeds from notes payable to affiliates.............. 0 15,618,272
Payment of Rights Offering costs....................... (363,629) 0
Payments on note payable............................... (5,962,599) 0
Notes receivable -- employees.......................... 0 40,086
Net proceeds from sale of common stock................. 83,706 0
Principal payments on capital lease obligations........ (72,346) (87,143)
----------- ------------
----------- ------------
Net cash (used in) provided by financing
activities..................................... (1,394,868) 11,571,215
----------- ------------
Net increase in cash........................................ 1,367,300 206,140
Cash and cash equivalents, beginning of year................ 254,956 569,692
----------- ------------
----------- ------------
Cash and cash equivalents, end of period.................... $ 1,622,256 $ 775,832
----------- ------------
----------- ------------
Supplemental disclosure of cash flow information:
Interest paid.......................................... $ 813,096 $ 698,201
Purchase price adjustment to notes payable and
goodwill.............................................. $ 515,940 $ 0
Conversion of notes payable to affiliate to common
stock in connection with rights offering.............. $15,618,272 $ 0
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-27
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED)
1. BUSINESS
Radyne ComStream Inc. (the 'Company') was incorporated on November 25, 1980
and commenced operations on May 22, 1981. On August 12, 1996 the Company became
a majority owned subsidiary of Singapore Technologies Pte Ltd, through its
wholly owned subsidiary, Stetsys US, 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. This acquisition was recorded in accordance with the 'purchase
method' of accounting. The excess of the purchase price over the net assets
acquired was approximately $8.7 million of which $3.9 million was allocated to
in-process research and development, $2.5 million was valued as purchased
technology, which is being amortized over 6.25 years, and $2.3 million has been
recorded as goodwill, which is being amortized over ten years. On September 29,
1999, the Company negotiated a reduction in the note due to the seller. This
reduction is discussed in Note 9, and resulted in a $516,000 reduction to the
purchase price, therefore reducing the original goodwill balance of $2.3 million
to $1.784 million.
ComStream operates primarily in North America in the satellite
communications industry. ComStream designs, markets and manufactures satellite
interactive modems and earth stations. Additionally, ComStream manufactures and
markets full-transponder satellite digital audio receivers for music providers
and has designed and developed a PC broadband satellite receiver card which is
an Internet and high-speed data networking product.
In March 1999, Radyne Corp. changed its name to Radyne ComStream Inc. The
Company's principal locations are in Phoenix, Arizona and San Diego, California.
The Company designs, manufactures, and sells products, systems and software used
for the transmission and reception of data over satellite and cable
communication networks.
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations (unaudited) as if the acquisition had taken
place on January 1, 1998. Such pro forma amounts are not necessarily indicative
of what the actual results of operations might have been if the acquisition had
been effective on January 1, 1998:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C>
Net sales...................................... $ 39,825
--------
--------
Gross profit................................... $ 10,738
--------
--------
Net loss....................................... $(12,186)
--------
--------
Net loss per common share...................... $ (2.05)
--------
--------
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The interim unaudited condensed consolidated financial statements furnished
reflect all adjustments which are, in the opinion of management, necessary for a
fair presentation of financial position as of September 30, 1999 and the results
of operations for the three and nine months ended September 30, 1999 and 1998
and cash flows for the nine months ended September 30, 1999 and 1998. Such
adjustments are of a normal recurring nature. This information should be read in
F-28
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED)
conjunction with the restated consolidated financial statements included in the
Company's Form 10-K/A for the twelve month period ended December 31, 1998.
The results of operations for the interim period are not necessarily
indicative of the results to be expected for the full year.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the financial statement
date and the reported amounts of revenue and expenses during the reporting
period. Rapid technological change and short product life cycles characterize
the industry in which the Company operates. As a result, estimates are required
to provide for product obsolescence and warranty returns as well as other
matters. Actual results could differ from those estimates.
(c) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated in the consolidation.
(d) CASH EQUIVALENTS
The Company considers all money market accounts with a maturity of 90 days
or less to be cash equivalents.
(e) REVENUE RECOGNITION
The Company recognizes revenue upon shipment of product.
(f) INVENTORIES
Inventories, consisting of satellite modems and earth stations, frequency
converters, broadcast receivers and related products, are valued at the lower of
cost (first-in, first-out) or market.
(g) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment held under capital
leases is stated at the present value of future minimum lease payments.
Expenditures for repairs and maintenance are charged to operations as incurred,
and improvements that 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.
(h) GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over ten years.
F-29
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED)
(i) PURCHASED TECHNOLOGY
In connection with the acquisition of ComStream, value was assigned to
purchased technology. Purchased technology is being amortized on a straight-line
basis over the expected period to be benefited of 6.25 years.
(j) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount, or fair value, less costs to sell.
(k) WARRANTY COSTS
The Company provides limited warranties on certain of its products and
systems for periods generally not exceeding two years. The Company accrues
estimated warranty costs for potential product liability and warranty claims
based on the Company's claim experience. Such costs are accrued as cost of sales
at the time revenue is recognized.
(l) RESEARCH AND DEVELOPMENT
The cost of research and development is charged to expense as incurred.
(m) INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future consequences
attributed to differences between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Differences between income for financial and tax reporting purposes arise
primarily from accruals for warranty reserves and compensated absences. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(n) CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are principally accounts receivable. The Company
maintains ongoing credit evaluations of its customers and generally does not
require collateral. The Company provides reserves for potential credit losses
and such losses have not exceeded management's expectations.
(o) NET INCOME/(LOSS) PER COMMON SHARE
Basic income/(loss) per share is computed by dividing income/(loss)
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted income/(loss) per share reflects the
potential dilution that could occur if securities or contracts to issue common
stock were exercised or converted to common stock or resulted in the
F-30
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED)
issuance of common stock that then shared in the earnings or income/(loss) of
the Company. Assumed exercise of outstanding stock options and warrants for the
three and nine months ended September 30, 1998 have been excluded from the
calculations of diluted net loss per common share as their effect is
antidilutive.
(p) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of accounts receivable, accounts payable and accrued
expenses approximates the carrying value due to the short-term nature of these
instruments. Management has estimated that the fair values of the notes payable
approximate the current balances outstanding, based on currently available rates
for debt with similar terms.
(q) EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options and to adopt the
'disclosure only' alternative treatment under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123
requires the use of fair value option valuation models that were not developed
for use in valuing employee stock options. Under SFAS No. 123, deferred
compensation is recorded for the excess of the fair value of the stock on the
date of the option grant, over the exercise price of the option. The deferred
compensation is amortized over the vesting period of the option.
(r) SEGMENT REPORTING
The Company has only one operating business segment, the sale of equipment
for satellite and cable communications networks.
(s) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
No. 130) which became effective for the Company January 1, 1998. SFAS No. 130
established standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. The Company
had no items of comprehensive income. Therefore, the adoption of SFAS No. 130
had no effect on the Company.
3. RIGHTS OFFERING (1999)
In October 1998 the Board of Directors approved the distribution to
stockholders, other than the Company's principal stockholders, Stetsys US, Inc
and Stetsys Pte Ltd ('ST'), of subscription rights for the purchase of up to
444,276 shares of the Company's common stock at a price of $3.73 per share. The
Board of Directors further approved the distribution of subscription rights to
ST to purchase up to 4,300,800 shares of the Company's common stock at a price
of $3.73 per share. This Rights Offering became effective on September 30, 1999
upon the approval by the Securities and Exchange Commission of the amended Form
S-2 Registration Statement which was filed on September 24, 1999. ST instructed
the Company to capitalize the entire $15,618,272 principal amount of the debt
owed to ST's wholly owned subsidiary, Stetsys US, Inc., in partial exercise of
its rights. Subsequent to the end of the period reported on herein, ST exercised
the balance of its rights by paying cash to the Company in the amount of
$423,700. The Company used these funds, along with $932,200 of cash on hand to
pay the accrued interest due to ST as of September 30, 1999.
F-31
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED)
4. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED) (AUDITED)
<S> <C> <C>
Inventories consist of the following:
Raw materials and components.......................... $ 5,177,165 $ 6,065,751
Work in process....................................... 3,192,695 4,319,338
Finished goods........................................ 971,552 546,858
----------- -----------
9,341,412 10,931,947
----------- -----------
Obsolescence reserve.................................. (1,103,210) (1,551,469)
----------- -----------
----------- -----------
Total............................................ $ 8,238,202 $ 9,380,478
----------- -----------
----------- -----------
</TABLE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED) (AUDITED)
<S> <C> <C>
Property and equipment consist of the following:
Machinery and equipment............................... $ 3,492,200 $ 3,598,732
Furniture and fixtures................................ 2,417,613 2,661,195
Leasehold improvements................................ 445,127 312,425
----------- -----------
6,354,940 6,572,352
----------- -----------
Less accumulated depreciation & amortization.......... (2,393,569) (1,038,707)
----------- -----------
----------- -----------
Total............................................ $ 3,961,371 $ 5,533,645
----------- -----------
----------- -----------
</TABLE>
6. RESTRUCTURING COST
The accrued restructuring costs in the accompanying condensed consolidated
balance sheet at September 30, 1999 which are included in the accrued
liabilities include the cost of involuntary employee termination benefits for
certain employees of the Company and costs associated with the lease buyout of a
building located in San Diego, California.
These accrued restructuring costs at September 30, 1999 principally consist
of the following;
<TABLE>
<CAPTION>
TOTAL
ACCRUED
RESTRUCTURING
COSTS
-----
<S> <C>
Balance at December 31, 1998................................ $ 3,130,166
Cash paid for lease buyout.................................. (2,443,110)
Cash paid for employee termination benefits................. (577,132)
-----------
Unaudited balance at September 30,.......................... $ 109,924
-----------
-----------
</TABLE>
The $110,000 accrued restructuring charge remaining at September 30, 1999
consists of severance costs (termination of 38 of the technical, sales and
administrative staff completed in December 1998) all of which the Company
expects to be paid out in the fourth quarter of 1999.
F-32
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED)
7. ACCRUED EXPENSES
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
UNAUDITED AUDITED
<S> <C> <C>
Accrued expenses consist of the following:
Wages and related payroll taxes....................... $1,341,191 $1,355,316
Interest expense...................................... 1,432,699 803,929
Professional fees..................................... 576,253 378,817
Warranty reserve...................................... 762,086 679,964
Severance............................................. 220,731 1,282,761
Lease buyout.......................................... 0 2,443,110
Customer deposits..................................... 363,539 306,462
Other................................................. 2,559,019 1,889,982
---------- ----------
Total............................................ $7,255,518 $9,140,341
---------- ----------
---------- ----------
</TABLE>
The severance balance included in accrued expenses at September 30, 1999
consists of approximately $110,000 associated with the restructuring charge in
the fourth quarter of 1998, discussed in Note 6, and the remaining $111,000 of
severance (for 16 technical staff and management) related to the Company's
acquisition of ComStream in October 1998. This $110,000 is part of a termination
benefits cost totaling $1,600,000; the Company paid $1,005,000 of these
termination benefits prior to December 31, 1998 and an additional $485,000 prior
to September 30, 1999.
8. RELATED PARTY TRANSACTIONS
Sales to Agilis Communication Technologies Pte Ltd, a company under common
control with Radyne ComStream, for the three months ended September 30, 1999 and
1998 were $29,000 and $14,000, respectively. Cost of such sales for the same
periods were $15,000 and $5,000, respectively. For the nine months ended
September 30, 1999 and 1998 sales were $69,000 and $163,000, respectively. Cost
of such sales for the same periods were $28,000 and $87,000, respectively.
Accounts receivable from affiliates at September 30, 1999 and December 31,
1998 was $5,000 and $52,000, respectively.
Notes payable to ST and affiliates outstanding at September 30, 1999 and
December 31, 1998 were $0 and $15,618,000 respectively. These notes carried
interest at rates from 6.375% to 6.844% and were capitalized as part of the
Rights Offering.
Interest expense on notes payable to affiliates was $261,000 and $100,000
for the three months ended September 30, 1999 and 1998, respectively. For the
nine months ended September 30, 1999 and 1998, interest expense on notes payable
to affiliates was $732,000 and $266,000, respectively.
Accrued interest on notes payable to affiliates was $1,355,000 at
September 30, 1999 compared to $581,000 at December 31, 1998.
F-33
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED)
9. NOTES PAYABLE
The Company has a $20,500,000 credit agreement with Citibank, N.A. that
includes $20,000,000 available under an uncommitted line of credit facility and
facilities for bank guarantees and/or standby letters of credit up to $500,000.
An affiliate of ST has issued a nonbinding letter of awareness in connection
with this credit agreement. Borrowings under the line of credit bear interest at
a fluctuating rate equal to LIBOR plus 1% per annum or an alternative Citibank
Quoted Rate plus 1% per annum (rates varied from 5.97% to 6.94% on balances owed
at September 30, 1999). The credit agreement requires the Company to maintain
certain financial leverage ratios. At September 30, 1999, the Company was in
violation of one such covenant which was waived by the bank. The availability of
additional borrowings under the credit agreement expired September 29, 1999, but
has been extended verbally, pending preparation of a renewal agreement. The
Company owed principal of $12,920,000 under the line of credit as of
September 30, 1999 and $8,000,000 as of December 31, 1998.
Notes payable to affiliate (ST) outstanding at September 30, 1999 and
December 31, 1998 were $0 and $15,618,272 respectively. These notes accrued
interest at rates ranging from 6.375% to 6.844% and were paid from the proceeds
of the Rights Offering. Of the amount owed at December 31, 1998, $10,000,000 was
borrowed in September 1998 for the acquisition of ComStream Holdings, Inc.
The Company also had a note payable to Spar Aerospace Limited in the amount
of $7,000,000. This note was issued on October 15, 1998 as partial consideration
for the acquisition of ComStream Holdings, Inc. The note matured on July 15,
1999 with interest at 8% per annum. 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 purpose of all of the above described loans has been to finance or
refinance the capital needs associated with the Company's acquisition of
ComStream Holdings, Inc., recent rapid sales and backlog growth and the cost of
research and development. To date, the Company's capital resources (as
supplemented by loans from ST and its affiliates) have been sufficient to fund
its operations and increased level of business. The Company believes that its
bank credit lines and cash from operations are likely to be sufficient to fund
its planned future operations and capital requirements for continued growth for
the next twelve months.
F-34
<PAGE>
RADYNE COMSTREAM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 IS UNAUDITED)
10. INCOME/(LOSS) PER SHARE
A summary of the reconciliation from basic income/(loss) per share to
diluted income/(loss) per share follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
SEPTEMBER SEPTEMBER
1999 1998
---- ----
<S> <C> <C>
Net earnings (loss)......................................... 913,547 (2,788,632)
--------- ----------
--------- ----------
Basic EPS -- weighted average shares outstanding............ 5,961,937 5,931,340
--------- ----------
--------- ----------
Basic earnings (loss) per share............................. 0.15 (0.47)
--------- ----------
--------- ----------
Basic weighted average shares............................... 5,961,937 5,931,340
Effect of diluted stock options............................. 439,224 --
--------- ----------
Diluted EPS -- weighted average shares outstanding.......... 6,401,161 5,931,340
--------- ----------
--------- ----------
Diluted earnings (loss) per share........................... 0.14 (0.47)
--------- ----------
--------- ----------
Stock options not included in diluted EPS since
antidilutive.............................................. 1,026,086 830,559
--------- ----------
--------- ----------
</TABLE>
F-35
<PAGE>
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<PAGE>
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<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[Color picture insert titled 'Internet Infrastructure' depicting the use
of our products to connect an Internet service provider, to a satellite
and from the satellite to various end users.]
[Color picture insert titled 'Sales and Manufacturing Facilities' consisting
of a worldwide map which indicates the locations of both our sales and service
offices.]
<PAGE>
__________________________________ __________________________________
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER
THE UNDERWRITERS NOR WE HAVE AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH
DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT
INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE UNDERWRITERS NOR WE ARE
MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS
PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS
ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY
HAVE CHANGED SINCE THAT DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 6
Use Of Proceeds............................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Price Range of Common Stock................................. 17
Dilution.................................................... 18
Selected Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition
and Result of Operations.................................. 21
Business.................................................... 31
Management.................................................. 43
Principal Shareholders...................................... 50
Certain Transactions........................................ 52
Description of Securities................................... 54
Shares Eligible for Future Sale............................. 56
Underwriting................................................ 57
Legal Matters............................................... 60
Experts..................................................... 60
Where You Can Find More Information......................... 60
Index to Financial Statements............................... F-1
</TABLE>
__________________________________ __________________________________
2,000,000 UNITS
[LOGO]
RADYNE
COMSTREAM INC.
CONSISTING OF 2,000,000
SHARES OF COMMON STOCK
AND 2,000,000 REDEEMABLE
COMMON STOCK PURCHASE
WARRANTS TO PURCHASE
2,000,000 SHARES OF
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
HD BROUS & CO., INC.
, 2000
__________________________________ __________________________________
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Except as set forth below, the following fees and expenses will be paid by
Radyne ComStream Inc. in connection with the issuance and distribution of the
securities registered hereby and do not include underwriting commissions and
discounts. All such expenses, except for the SEC registration, NASD filing and
Nasdaq listing fees, are estimated.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 7,135
NASD filing fee............................................. 1,960
Nasdaq SmallCap Market listing fee.......................... 10,000
Legal fees and expenses..................................... 300,000
Blue Sky legal and filing fees.............................. 33,770
Accounting fees and expenses................................ 80,000
Transfer and Warrant Agents' fees........................... 3,500
Printing and engraving expenses............................. 73,500
Miscellaneous............................................... 578
--------
Total.................................................. $510,443
--------
--------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
New York Business Corporation Law, Article 7, enables a corporation in its
original certificate of incorporation, or an amendment thereto validly approved
by shareholders, to eliminate or limit personal liability of members of its
Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been bad
faith, intentional misconduct or a knowing violation of law, the payment of a
dividend or approval of a stock repurchase which is deemed illegal, any other
violation of Section 719 of the New York Business Corporation Law, or a
financial profit or other advantage to which the director was not legally
entitled. Radyne ComStream's Certificate of Incorporation includes the following
language:
'SEVENTH: A director of the Corporation shall not be personally liable
to the Corporation or its shareholders for damages for any breach of duty
as a director; provided that, except as hereinafter provided, this Article
SEVENTH shall neither eliminate nor limit liability: (a) if a judgment or
final adjudication adverse to the director establishes that (i) the
director's acts or omissions were in bad faith or involved intentional
misconduct or a knowing violation of law, (ii) the director personally
gained in fact a financial profit or other advantage to which the director
was not legally entitled, or (iii) the director's acts violated Section 719
of the New York Business Corporation Law; or (b) for any act or omission
prior to the effectiveness of this Article SEVENTH. If the Corporation
hereafter may by law be permitted to further eliminate or limit the
personal liability of directors, then pursuant hereto the liability of a
director of the Corporation shall, at such time, automatically be further
eliminated or limited to the fullest extent permitted by law. Any repeal of
or modification to the provisions of this Article SEVENTH shall not
adversely affect any right or protection of a director of the Corporation
existing pursuant to this Article SEVENTH immediately prior to such repeal
or modification.
EIGHTH: The Corporation may, to the fullest extent permitted by
Sections 721 through 726 of the Business Corporation Law of New York,
indemnify any and all directors and officers whom it shall have power to
indemnify under the said sections from and against any and all of the
expenses, liabilities or other matters referred to in or covered by such
section of the Business Corporation Law, and the indemnification provided
for herein shall not be deemed exclusive of any other rights to which the
persons so indemnified may be entitled under any By-Law, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in
his/her official capacity and as to action in another capacity by holding
such office, and shall continue as to a person who has
II-1
<PAGE>
ceased to be a director or officer and shall inure to the benefit of the
heirs, executors and administrators of such a person.'
ITEM 16. EXHIBITS
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
1.1'D'D'D' -- Form of Underwriting Agreement
2.1* -- Stock Purchase Agreement dated August 28, 1998 between
Spar Aerospace Limited and Radyne ComStream Inc.
4.1'D'D'D' -- Form of Common Stock Certificate
4.2'D'D'D' -- Form of Warrant Agreement
4.3'D'D'D' -- Form of Warrant Certificate
4.4'D'D'D' -- Form of Representative's Purchase Option
4.5'D'D'D' -- Form of Lock-Up Agreement
4.6'D'D'D'D' -- Form of Unit Certificate
4.7 -- Form of promotional shares lock-in agreement between
Radyne ComStream Inc. and each of Stetsys Pte Ltd, Stetsys
US Inc., Robert Fitting, Steven Eymann and Garry Kline.
5.1'D'D'D' -- Form of Opinion of Dorsey & Whitney LLP
10.1** -- 1996 Incentive Stock Option Plan
10.2*** -- Employment Agreement with Robert C. Fitting and Steven W.
Eymann (Radyne Termsheet)
10.3**** -- Lease for facility in Phoenix, Arizona
10.4***** -- Amendment to 1996 Incentive Stock Option Plan
10.5'D' -- Lease between ADI Communication Partners, L.P. and
ComStream dated April 23, 1997
10.6'D' -- First Amendment to lease between ADI Communication
Partners L.P. and ComStream dated July 16, 1997
10.7'D' -- Second Amendment to Lease between Kilroy Realty, L.P. and
ComStream dated November 18, 1998
10.8'D' -- Indemnity Agreement between Pacific Bell Corporation and
ComStream dated November 18, 1998
10.9'D' -- Letter Agreement between Spar and Radyne ComStream Inc.
dated November 18, 1998
10.10'D'D'D'D'D' -- 1999 Employee Stock Purchase Plan
10.11'D'D'D' -- Uncommitted Line of Credit Facility Letter Agreement,
dated as of May 18, 1998, and amended as of September 28,
1998 and September 30, 1999
10.12'D'D'D' -- Stock Purchase Loan Agreement executed by Robert Fitting,
dated October 8, 1999
10.13'D'D'D' -- Promissory Note executed by Robert Fitting, dated
October 8, 1999 in the amount of $200,000
10.14'D'D'D' -- Stock Purchase Loan Agreement executed by Garry Kline,
dated October 8, 1999
10.15'D'D'D' -- Promissory Note executed by Garry Kline, dated
October 11, 1999 in the amount of $50,000
10.16'D'D'D' -- Stock Purchase Loan Agreement executed by Steven Eymann,
dated November 11, 1999
10.17'D'D'D' -- Promissory Note executed by Steven Eymann, dated
November 1, 1999 in the amount of $100,000
10.18'D'D'D' -- General Release and Settlement Agreement between Spar
Aerospace Limited and Radyne ComStream Inc. dated
September 29, 1999
13.1'D'D' -- Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1998
13.2'D'D' -- Report on Form 10-Q/A for the quarter ended March 31,
1999
13.3'D'D' -- Report on Form 10-Q/A for the quarter ended June 30, 1999
13.4'D'D' -- Report on Form 10-Q for the quarter ended September 30,
1999
23.1 -- Consent of KPMG LLP
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Ernst & Young LLP
23.4'D'D'D' -- Consent of Dorsey & Whitney LLP (contained in the opinion
filed as Exhibit 5.1)
24.1'D'D'D' -- Power of Attorney (contained in signature section of
Registration Statement)
</TABLE>
- ------------
* Incorporated by reference from Registrant's Form 8-K filed on August 28,
1998.
(footnotes continued on next page)
II-2
<PAGE>
(footnotes continued from previous page)
** 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-8, dated and declared effective on November 18, 1998 (File No.
333-67469).
'D' Incorporated by reference from Registrant's amended Registration
Statement on Form S-2, filed on January 11, 1999 and declared effective
on September 30, 1999 (File No. 333-70403).
'D'D' Previously filed with Commission and incorporated by reference from
Registrant's previously filed documents.
'D'D'D' Previously filed with this Registration Statement.
'D'D'D'D' Incorporated by reference from Registrant's Form 8-A filed
November 19, 1999 (File No. 000-11685)
'D'D'D'D'D' Incorporated by reference from Registrant's Form S-8, filed
November 5, 1999.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers of sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(30) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the 'Calculation of Registration Fee' table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;'
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statements.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
II-3
<PAGE>
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer and the terms of any subsequent reoffering
thereof.
(5) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(6) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Phoenix, state of Arizona on January 21, 2000.
RADYNE COMSTREAM INC.
By: /s/ ROBERT C. FITTING
................................
ROBERT C. FITTING, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
By: /s/ GARRY KLINE
...................................
GARRY KLINE, VICE PRESIDENT-FINANCE
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/S/ ROBERT C. FITTING Chief Executive Officer, President, and January 21, 2000
.......................................... Director (Principal Executive Officer)
ROBERT C. FITTING
/S/ GARRY D. KLINE Vice President-Finance, Chief Financial
......................................... Officer and Secretary (Principal January 21, 2000
GARRY D. KLINE Financial and Accounting Officer)
*
......................................... Director January 21, 2000
ROBERT A. GRIMES
*
......................................... Chairman of the Board of Directors January 21, 2000
MING SEONG LIM
*
......................................... Director January 21, 2000
YIP LOI LEE
*
......................................... Director January 21, 2000
KUM CHUEN TANG
*
......................................... Director January 21, 2000
DENNIS ELLIOTT
</TABLE>
- ------------
* The undersigned by signing his name hereto, does hereby sign this Registration
Statement or amendment thereto on behalf of the above indicated directors and
officers of Radyne ComStream Inc. pursuant to the power of attorney executed
on behalf of each such director and officer.
By: /s/ ROBERT C. FITTING
.......................
ROBERT C. FITTING
ATTORNEY-IN-FACT
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
---
<S> <C>
4.7 -- Form of promotional shares lock-in agreement between
Radyne ComStream Inc. and each of Stetsys Pte Ltd, Stetsys
US Inc., Robert Fitting, Steven Eymann and Garry Kline.
23.1 -- Consent of KPMG LLP
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Ernst & Young LLP
</TABLE>
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as.................. 'r'
The dagger symbol shall be expressed as................................ 'D'
The trademark symbol shall be expressed as............................. 'TM'
<PAGE>
FORM OF
PROMOTIONAL SHARES LOCK-IN AGREEMENT
I. This Promotional Shares Lock-In Agreement ("Agreement"), which was entered
into on the __ day of February, 2000, by and between Radyne ComStream Inc., a
New York corporation, ("Issuer"), whose principal place of business is located
in Phoenix, Arizona, and _________________ (the "Security Holder" and, together
with the other parties signing substantially similar agreements with Issuer, the
"Security Holders") witnesses that:
A. The Issuer has filed an application with the Securities Administrators of
the States listed on Schedule A hereto ("Administrators") to register
shares of its common stock, par value $.002 per share ("Equity
Securities") for sale to public investors who are residents of those
states ("Registration");
B. The Security Holder is the owner of shares of common stock or similar
securities and/or possesses convertible securities, warrants, options or
rights (collectively, "derivative securities") which may be converted
into, or exercised to purchase shares of, common stock or similar
securities of Issuer.
C. As a condition to Registration, the Issuer and Security Holder
("Signatories") agree to be bound by the terms of this Agreement.
II. THEREFORE, the Security Holder agrees not to sell, pledge, hypothecate,
assign, grant any option for the sale of, or otherwise transfer or dispose of,
whether or not for consideration, directly or indirectly, (a) _______________
PROMOTIONAL SHARES as defined in the North American Securities Administrators
Association ("NASAA") Statement of Policy on Corporate Securities Definitions,
(b) all certificates representing stock dividends, stock splits,
recapitalizations, and the like, that are granted to, or received by, the
Security Holder with respect to such PROMOTIONAL SHARES while the PROMOTIONAL
SHARES are subject to this Agreement, and (c) 40% of all PROMOTIONAL SHARES
acquired by the Security Holder in respect of derivative securities while the
PROMOTIONAL SHARES are subject to this Agreement (collectively, and together
with the similarly restricted PROMOTIONAL SHARES of the other Security Holders,
the "Restricted Securities").
Beginning one year from the completion date of the public offering
which is the subject of the Registration, two and one-half percent (2 1/2%) of
the Restricted Securities may be released from this Agreement each quarter pro
rata among the Security Holders. All remaining Restricted Securities shall be
released on the second anniversary of the completion date of the public
offering.
<PAGE>
III. THEREFORE, the Signatories agree and will cause the following:
A. In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or proceeding
with a person who is not a Promoter (as defined in the NASAA Statement of
Policy on Corporate Securities Definitions), which results in the
distribution of the Issuer's assets or securities ("Distribution"), while
this Agreement remains in effect that:
1. All holders of the Issuer's Equity Securities, except the Security
Holders to the extent of the Restricted Securities, will initially
share on a per share basis in the Distribution until such shareholders
have received, or have had irrevocably set aside for them, an amount
that is equal to one hundred percent (100%) of the public offering's
price per share times the number of shares of Equity Securities which
they hold at the time of the Distribution, adjusted for stock splits,
stock dividends, recapitalizations and the like;
2. The Security Holders shall thereafter share among themselves on a per
share basis in the Distribution, until they have received, or have had
irrevocably set aside for them, an amount that is equal to one hundred
percent (100%) of the public offering's price per share times the
number of shares of Restricted Securities which they hold at the time
of the Distribution, adjusted for stock splits, stock dividends,
recapitalizations and the like;
3. All holders of the Issuer's Equity Securities shall thereafter
participate on an equal, per share basis times the number of shares of
Equity Securities they hold at the time of the Distribution, adjusted
for stock splits, stock dividends, recapitalizations and the like; and
4. The Distribution may proceed on lesser terms and conditions than the
terms and conditions stated in paragraphs 1, 2 and 3 above if a
majority of the Equity Securities that are not held by Security
Holders, officers, directors or Promoters of the Issuer or their
associates or affiliates vote, or consent by consent procedure, to
approve the lesser terms and conditions.
B. In the event of a dissolution, liquidation, merger, consolidation,
reorganization, sale or exchange of the Issuer's assets or securities
(including by way of tender offer), or any other transaction or proceeding
with a person who is a Promoter, which results in a Distribution while
this Agreement remains in effect, the Restricted Securities shall remain
subject to the terms of this Agreement.
C. Restricted Securities may be transferred by will, the laws of descent and
distribution, the operation of law, or by order of any court of competent
jurisdiction and proper venue.
D. Restricted Securities of a deceased Security Holder may be hypothecated to
pay the expenses of the deceased Security Holder's estate. The
hypothecated Restricted Securities shall remain subject to the terms of
this Agreement. Restricted Securities may not be pledged to secure any
other debt.
2
<PAGE>
E. Restricted Securities may be transferred by gift to the Security Holder's
family members, provided that the Restricted Securities shall remain
subject to the terms of this Agreement.
F. With the exception of paragraph A.4 above, the Restricted Securities shall
have the same voting rights as similar Equity Securities not subject to
the Agreement; provided, however, that the Security Holders hereby agree
that during the term of this Agreement, they will not vote any of their
Equity Securities in favor of a transaction described in paragraph A
above, unless such transaction shall have been approved by a majority of
the Issuer's Independent Directors (as defined in the NASAA Statement of
Policy on Corporate Securities Definitions).
G. A notice shall be placed on the face of each stock certificate of the
Restricted Securities covered by the terms of the Agreement stating that
the transfer of the stock evidenced by the certificate is restricted in
accordance with the conditions set forth on the reverse side of the
certificate; and
H. A typed legend shall be placed on the reverse side of each stock
certificate of the Restricted Securities representing stock covered by the
Agreement which states that the sale or transfer of the shares evidenced
by the certificate is subject to certain restrictions until __ (insert
date of termination of the Agreement) pursuant to an agreement between the
Security Holder (whether beneficial or of record) and the Issuer, which
agreement is on file with the Issuer and the stock transfer agent from
which a copy is available upon request and without charge.
I. The term of this Agreement shall begin on the date that the Registration
is declared effective by the Administrators ("Effective Date") and shall
terminate on the soonest to occur of the following:
1. On the second anniversary of the completion date of the public
offering; or
2. On the date the Registration has been terminated if no securities were
sold pursuant thereto; or
3. If the Registration has been terminated, the date that checks
representing all of the gross proceeds that were derived therefrom
and addressed to the public investors have been placed in the U.S.
Postal Service with first class postage affixed; or
4. On the date the Equity Securities become "Covered Securities," as
defined under the National Securities Markets Improvement Act of 1996.
J. This Agreement may be modified only with the written approval of the
Administrators.
IV. THEREFORE, the Issuer will cause the following:
A. A manually signed copy of the Agreement signed by the Signatories to be
filed with the Administrators prior to the Effective Date;
B. Copies of the Agreement and a statement of the per share initial public
offering price to be provided to the Issuer's stock transfer agent;
C. Appropriate stock transfer orders to be placed with the Issuer's stock
transfer agent against the sale or transfer of the Restricted Securities
covered by the
3
<PAGE>
Agreement prior to its expiration, except as may otherwise be provided
in this Agreement; and
D. The above stock restriction legends to be placed on the periodic statement
sent to the registered owner if the securities subject to this Agreement
are uncertificated securities.
Pursuant to the requirements of this Agreement, the Signatories have entered
into this Agreement, which may be written in multiple counterparts and each of
which shall be considered an original. The Signatories have signed the Agreement
in the capacities, and on the dates, indicated.
IN WITNESS WHEREOF, the signatories have executed this Agreement.
RADYNE COMSTREAM INC. [SECURITY HOLDER]
By____________________________ By: __________________________
Robert C. Fitting, President
<PAGE>
SCHEDULE A
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Arizona
California
Connecticut
Indiana
Kansas
Maryland
Massachusetts
Michigan
Nevada
New Jersey
New Mexico
Ohio
Oregon
Pennsylvania
Texas
Virginia
Washington
West Virginia
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Radyne ComStream Inc.:
We consent to the use of our report dated March 19, 1999, except for Note 4,
which is as of August 4, 1999, relating to the restated consolidated balance
sheet of Radyne ComStream Inc. and subsidiaries as of December 31, 1998 and the
related restated consolidated statements of operations, stockholders' capital
deficiency and cash flows for the year then ended, included herein and to the
reference to our firm under the headings "Selected Financial Data" and
"Experts" in the prospectus.
KPMG LLP
Phoenix, Arizona
January 21, 2000
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion and incorporation by reference in this Amendment No.
2 to the Registration Statement No. 333-90731 of Radyne ComStream Inc. (formerly
Radyne Corp.) on Form S-2 of our report dated February 4, 1998, appearing in the
annual report on Form 10-K/A of Radyne ComStream Inc. for the year ended
December 31, 1998, and to the reference to us under the heading "Experts" in the
Prospectus, which is part of such Registration Statement.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
January 21, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Amendment No. 2 to the Registration Statement (Form S-2) and related Prospectus
of Radyne ComStream Inc. for the registration of 2,300,000 units, consisting of
2,300,000 shares of common stock and 2,300,000 redeemable common stock purchase
warrants to purchase 2,300,000 shares of common stock, and to the use and
incorporation by reference therein of our report dated February 16, 1998 (except
for Note 11, as to which the date is April 16, 1998), with respect to the
consolidated financial statements of ComStream Holdings, Inc. included in Radyne
ComStream Inc.'s report on Form 8-K/A filed with the Securities and Exchange
Commission on May 5, 1999.
ERNST & YOUNG LLP
San Diego, California
January 20, 2000
