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SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the three month period ended March 31, 2002.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11685
RADYNE COMSTREAM INC.
DELAWARE
(State or other jurisdiction of incorporation or organization)
11-2569467
(IRS EMPLOYER IDENTIFICATION NO.)
3138 East Elwood Street, Phoenix, AZ 85034
(Address of principal executive offices)
602-437-9620
(Registrant’s Telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements, for the past 90 days.
YES NO
The registrant had 15,134,805 shares of its common stock, par value $.001, outstanding as of March 31, 2002.
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PART I – FINANCIAL INFORMATION
RADYNE COMSTREAM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ITEM 1
March 31, 2002 | December 31, 2001 | |||||||||
Unaudited | Audited | |||||||||
Assets | ||||||||||
Current assets: | ||||||||||
Cash & cash equivalents | $ | 7,117,520 | $ | 7,210,937 | ||||||
Accounts receivable — trade, net of allowance for doubtful accounts | 14,444,447 | 14,785,039 | ||||||||
Inventories, net | 19,055,746 | 17,825,073 | ||||||||
Prepaid expenses | 762,946 | 795,396 | ||||||||
Deferred tax assets | 2,536,562 | 2,552,549 | ||||||||
Total current assets | 43,917,221 | 43,168,994 | ||||||||
Property and equipment, net | 4,402,822 | 4,356,587 | ||||||||
Other assets: | ||||||||||
Purchased technology, net of accumulation | 1,095,000 | 1,195,000 | ||||||||
Goodwill | 4,204,986 | 4,204,986 | ||||||||
Non-compete covenants, net of accumulated amortization | 166,671 | 229,171 | ||||||||
Deposits and other | 76,203 | 85,762 | ||||||||
Total other assets | 5,542,860 | 5,714,919 | ||||||||
$ | 53,862,903 | $ | 53,240,500 | |||||||
Liabilities and Stockholders’ Equity | ||||||||||
Current liabilities: | ||||||||||
Lines of credit | $ | 21,578 | $ | — | ||||||
Current installments of obligations under capital leases | 58,981 | 77,385 | ||||||||
Accounts payable, trade | 3,180,979 | 2,472,486 | ||||||||
Accrued expenses | 3,478,649 | 3,979,084 | ||||||||
Customer advance payments | 971,942 | 601,836 | ||||||||
Taxes payable | — | 78,900 | ||||||||
Total current liabilities | 7,712,129 | 7,209,691 | ||||||||
Deferred rent | 114,477 | 145,582 | ||||||||
Obligations under capital leases, excluding current installments | 36,772 | 36,195 | ||||||||
Accrued stock option compensation | 496,602 | 501,809 | ||||||||
Total liabilities | 8,359,980 | 7,893,277 | ||||||||
Stockholders’ equity: | ||||||||||
Preferred Stock, $.001 par value, 10,000,000 shares authorized; shares issued and outstanding: 0 at March 31, 2002 and December 31, 2001 | — | — | ||||||||
Common Stock, $.001 par value, 50,000,000 shares authorized; Shares issued and outstanding: 15,134,805 at March 31, 2002 and 15,020,676 at December 31, 2001 | 15,135 | 15,021 | ||||||||
Additional paid-in capital | 50,482,541 | 50,022,868 | ||||||||
Accumulated deficit | (4,975,833 | ) | (4,671,746 | ) | ||||||
Foreign currency translation adjustment | (18,920 | ) | (18,920 | ) | ||||||
Total stockholders’ equity | 45,502,923 | 45,347,223 | ||||||||
$ | 53,862,903 | $ | 53,240,500 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Radyne ComStream Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended | ||||||||||
March 31, 2002 | March 31, 2001 | |||||||||
Net sales | $ | 15,193,637 | $ | 15,998,637 | ||||||
Cost of sales | 9,124,971 | 9,388,073 | ||||||||
Gross profit | 6,068,666 | 6,610,564 | ||||||||
Operating expenses: | ||||||||||
Selling, general and administrative | 3,578,666 | 3,324,949 | ||||||||
Research and development | 2,819,060 | 2,209,723 | ||||||||
Total operating expenses | 6,397,726 | 5,534,672 | ||||||||
Earnings (loss) from operations | (329,060 | ) | 1,075,892 | |||||||
Other income/expense: | ||||||||||
Interest expense | 13,307 | 7,575 | ||||||||
Other income | 38,280 | 247,408 | ||||||||
Earnings (loss) before income taxes | (304,087 | ) | 1,315,725 | |||||||
Income taxes | — | 460,137 | ||||||||
Net earnings (loss) | $ | (304,087 | ) | $ | 855,588 | |||||
Basic net earnings (loss) per share | $ | (0.02 | ) | $ | 0.06 | |||||
Diluted net earnings (loss) per share | $ | (0.02 | ) | $ | 0.06 | |||||
Weighted average number of common shares — basic | 15,093,103 | 14,884,732 | ||||||||
Weighted average number of common shares — diluted | 15,093,103 | 15,501,639 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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RADYNE COMSTREAM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended | ||||||||||||
March 31, 2002 | March 31, 2001 | |||||||||||
Cash flows from operating activities: | ||||||||||||
Net earnings (loss) | $ | (304,087 | ) | $ | 855,588 | |||||||
Adjustments to reconcile net earnings (loss) to cash flows provided by (used in) operating activities: | ||||||||||||
Depreciation and amortization | 600,723 | 855,627 | ||||||||||
Increase (decrease) in cash resulting from changes in: | ||||||||||||
Accounts receivable | 340,592 | (70,128 | ) | |||||||||
Inventories | (1,230,673 | ) | (2,295,109 | ) | ||||||||
Prepaid expenses | 32,450 | (25,408 | ) | |||||||||
Deposits and other | 9,559 | 2,108 | ||||||||||
Deferred tax assets | 15,987 | 306,299 | ||||||||||
Accounts payable, trade | 708,493 | 642,151 | ||||||||||
Accrued expenses | (494,435 | ) | (1,248,880 | ) | ||||||||
Customer advance payments | 370,106 | (416,755 | ) | |||||||||
Taxes payable | (78,900 | ) | (1,100 | ) | ||||||||
Deferred rent | (31,105 | ) | (12,116 | ) | ||||||||
Accrued stock option compensation | (5,207 | ) | (3,604 | ) | ||||||||
Net cash used in operating activities | (74,597 | ) | (1,411,327 | ) | ||||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures | (482,358 | ) | (429,347 | ) | ||||||||
Net cash used in investing activities | (482,358 | ) | (429,347 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from line of credit | 21,578 | — | ||||||||||
Net proceeds from sale of common stock through employee stock purchase plan | 243,184 | 252,517 | ||||||||||
Net proceeds from exercise of stock options and warrants | 216,603 | 34,407 | ||||||||||
Principal payments on capital lease obligations | (17,827 | ) | (4,141 | ) | ||||||||
Net cash provided by financing activities | 463,538 | 282,783 | ||||||||||
Effects of exchange rate changes on cash and cash equivalents | — | (18,920 | ) | |||||||||
Net increase (decrease) in cash | (93,417 | ) | (1,576,811 | ) | ||||||||
Cash and cash equivalents, beginning of year | 7,210,937 | 16,244,591 | ||||||||||
Cash and cash equivalents, end of period | $ | 7,117,520 | $ | 14,667,780 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid for interest | $ | 13,307 | $ | 7,575 | ||||||||
Cash paid for taxes | $ | — | $ | 1,100 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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RADYNE COMSTREAM INC.
Notes to Condensed Consolidated Financial Statements
(Information for March 31, 2002 and March 31, 2001 is unaudited)
1 Organization and Acquisition
Radyne ComStream Inc. (the Company) is incorporated in Delaware and has operations in Phoenix and Chandler, Arizona and in San Diego, California. The Company designs, manufactures, sells, integrates and installs products, systems and software used for the transmission and reception of data over satellite, microwave and cable communication networks.
ComStream Holdings, Inc. (ComStream), a major subsidiary acquired in 1998, 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.
Armer Communications Engineering Services, Inc. (“Armer”), acquired in 2000, specializes in the integration and installation of ground segment equipment and networks for a wide range of satellite-based telecommunications systems and applications.
Description of Acquisitions
On April 19, 2001, Tiernan Radyne ComStream Inc. (“TRC”), a wholly owned subsidiary of the Company, obtained all of the assets of Tiernan Communications, Inc. (“TCI”) through a private foreclosure sale relating to a secured note TRC had purchased for $3.9 million in cash. Product lines acquired include standard digital TV encoders, high definition TV encoders, and ATM video network adapters as well as integrated receiver/decoders. TRC offered employment to most of the employees of TCI. The acquisition was recorded in accordance with the “purchase method” of accounting.
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 March 31, 2002 and the results of operations and cash flows for the three months ended March 31, 2002 and 2001. Such adjustments are of a normal recurring nature. This information should be read in conjunction with the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2001.
The results of operations for the interim periods 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 accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions that affect the
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reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates the estimates and assumptions based upon historical experience and various other factors and circumstances. The Company believes that the estimates and assumptions are reasonable in the circumstances; however, actual results could differ from these estimates under different future conditions.
(c) Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Radyne Comstream Inc. and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in the consolidation.
(d) Cash Equivalents
All money market accounts with a maturity of 90 days or less are considered cash equivalents.
(e) Revenue Recognition
The Company recognizes revenue upon transfer of title and shipment of product.
(f) Inventories
Inventories, consisting of satellite modems and related products, are valued at the lower of cost (first-in, first-out) or market.
(g) Property and Equipment
Property and equipment are stated at cost. Equipment held under capital leases is stated at the present value of future minimum lease payments. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements which extend the useful lives of the assets are capitalized. Depreciation and amortization of machinery and equipment are computed using the straight-line method over an estimated useful life of three to ten years. Equipment held under capital leases and leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful lives of the assets.
(h) Intangible Assets
Goodwill, which represents the excess of purchase price over fair value of net assets acquired in the ComStream acquisition, was amortized on a straight-line basis over ten years through December 31, 2001. Goodwill acquired as a result of the purchase of Armer was amortized on a straight-line basis over 12 years through December 31, 2001. Covenants not to compete are being amortized on a straight-line basis over the contractual term of the covenants of two 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
Management 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 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
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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 our 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 Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings 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 of the Company.
(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.
(q) Employee Stock Options
Management 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 design, manufacture, sale and installation of equipment for satellite, microwave and cable communications networks.
(s) New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141,Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets.Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
Any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 are not amortized, but continues to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized through December 31, 2001.
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Statement 141 requires, upon adoption of Statement 142, that we evaluate our existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, we were required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, we are required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation, Statement 142 requires us to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. SFAS No. 142 also requires us to complete a transitional goodwill impairment test on or before June 30, 2002. We are in the process of completing this analysis. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in our statement of operations.
As of December 31, 2001, we have unamortized goodwill of approximately $4.2 million, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was approximately $449,000 for the year ended December 31, 2001 and $81,000 for the first quarter of 2001.
On October 3, 2001, the FASB issued Statement No, 144,Accounting for the Impairment or Disposal of Long-Lived Assets,which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supercedes Statement 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,it retains many of the fundamental provisions of that Statement.
Statement No. 144 also supercedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced management’s ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. Statement No. 144 is effective for fiscal years beginning after December 15, 2001. We adopted this statement on January 1, 2002. There was no material impact on the Company’s financial position, results of operations or liquidity as a result of this adoption.
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3 Inventories
March 31, 2002 | December 31, 2001 | |||||||
Inventories consist of the following: | ||||||||
Raw materials and components | $ | 13,590,401 | $ | 11,163,147 | ||||
Work in process | 3,647,092 | 4,228,708 | ||||||
Finished goods | 1,818,253 | 2,433,218 | ||||||
Total | $ | 19,055,746 | $ | 17,825,073 | ||||
4 Property and Equipment
March 31, 2002 | December 31, 2001 | |||||||
Property and equipment consist of the following: | ||||||||
Machinery and equipment | $ | 5,553,459 | $ | 5,473,370 | ||||
Furniture and fixtures | 3,988,598 | 3,659,236 | ||||||
Leasehold improvements | 805,721 | 786,648 | ||||||
Computers and software | 800,922 | 747,087 | ||||||
11,148,700 | 10,666,341 | |||||||
Less accumulated depreciation & amortization | (6,745,878 | ) | (6,309,754 | ) | ||||
Total | $ | 4,402,822 | $ | 4,356,587 | ||||
5 Accrued Expenses
March 31, 2002 | December 31, 2001 | |||||||
Accrued expenses consist of the following: | ||||||||
Wages and related payroll taxes | $ | 990,317 | $ | 1,299,951 | ||||
Professional fees | 170,887 | 243,224 | ||||||
Warranty reserve | 1,199,162 | 1,255,670 | ||||||
Other | 1,118,283 | 1,180,239 | ||||||
Total | $ | 3,478,649 | $ | 3,979,084 | ||||
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6 Earnings (Loss) Per Share
A summary of the reconciliation from basic earnings (loss) per share to diluted earnings per share follows:
Quarter ended | ||||||||
March 31, | ||||||||
2002 | 2001 | |||||||
Earnings (loss) available to common stockholders | $ | (304,087 | ) | $ | 855,588 | |||
Basic EPS-weighted average shares outstanding | 15,093,103 | 14,884,732 | ||||||
Basic earnings (loss) per share | $ | (.02 | ) | $ | 0.06 | |||
Basic EPS-weighted average shares outstanding | 15,093,103 | 14,884,732 | ||||||
Effect of dilutive securities | — | 616,907 | ||||||
Dilutive EPS-weighted average shares outstanding | 15,093,103 | 15,501,639 | ||||||
Diluted earnings (loss) per share | $ | (.02 | ) | $ | 0.06 | |||
Stock options not included in diluted EPS since antidilutive | 1,560,462 | 1,335,777 | ||||||
7 Concentrations of Risk
For the three months ended March 31, 2002 one customer accounted for 11% of the Company’s revenues. Outstanding receivables from this customer were $1,643,953. For the three months ended March 31, 2001 one customer accounted for 16.9% of the Company’s revenues. Outstanding receivables from this customer were $2,186,000. The above customers are not the same from 2001 and 2002.
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
This information should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2001 contained in the Company’s 2001 Annual Report on Form 10-K.
Except for the historical information contained herein, the following discussion includes statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) and we claim the protection of the safe-harbor for forward-looking statements contained in the Reform Act. These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “expects,” or “anticipates,” and do not reflect historical facts. Specific forward-looking statements contained in the following discussion include, but are not limited to: (i) the anticipated reversal of declining bookings and backlog; (ii) continuing market share gains; (iii) expected reduction in research and development expenses as a result of reduction in workforce; (iv) anticipated increases in the levels of business; (v) expansion of current product lines to address new markets and customer requirements; (vi) anticipated increases in sales volume resulting in corresponding decreases in inventory; and (vii) the belief that existing cash and cash from operations will be sufficient to meet future operational needs and capital requirements.
Forward-looking statements involve risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors that could affect our results and cause them to materially differ from those contained in the forward-looking statements include:
• | loss of, and failure to replace, any significant customers; | ||
• | timing and success of new product introductions; |
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• | product developments, introductions and pricing of competitors; | ||
• | timing of substantial customer orders; | ||
• | availability of qualified personnel; | ||
• | the impact of local political and economic conditions and foreign exchange fluctuations on international sales; | ||
• | performance of suppliers and subcontractors; | ||
• | decreasing or stagnant market demand and industry and general economic or business conditions; | ||
• | availability, cost and terms of capital; | ||
• | our level of success in effectuating its strategic plan; | ||
• | our ability to successfully integrate acquisitions; | ||
• | adequacy of our inventory, receivables and other reserves; | ||
• | the “Risk Factors” set forth in Exhibit 99.1 of our 2001 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on April 1, 2002; | ||
• | other factors that we are currently unable to identify or quantify, but may arise or become known in the future. |
In addition, the foregoing factors may affect generally our business, results of operations and financial position.
Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements.
Critical Accounting Policies And Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, income taxes, warranty obligations, and contingencies based upon historical experience and various other assumptions, factors, and circumstances. We believe that our estimates and assumptions are reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and future conditions.
We believe the following critical accounting policies affect our more significant judgements and estimates used in the preparation of our consolidated financial statements:
• | Revenue Recognition. We recognize revenues for orders of products to be shipped as we ship the products and transfer ownership to our customers. We maintain allowances for sales returns. | ||
• | Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. |
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• | Long-Lived Assets.We estimate the useful lives of our property and equipment and identifiable intangibles. We may experience losses if these assets suffered impairment due to the useful lives ultimately being shorter than they were originally estimated or if the carrying value of the long-lived assets is not recoverable from our operations. | ||
• | Warranties.We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our vendors, our warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting any product failures. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. | ||
• | Inventories.We write down our inventory for estimated obsolescence or the inability to market its inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. | ||
• | Deferred Taxes.We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. |
Results of Operations
Results of operations for the three month period ended March 31, 2002 compared to the three month period ended March 31, 2001, were as follows:
Net sales decreased 5% to $15.2 million during the period ended March 31, 2002 from $16.0 million during the period ended March 31, 2001 due to several factors. As a result of a downturn in current market conditions in the telecommunications industry, we have experienced a decline in the backlog of orders to be shipped during the current quarter compared to the first quarter of 2001. While we have realized success in introducing our new product lines into the market, bookings for our existing core product lines have decreased as the industry attempts to reduce capital expenditures. We anticipate a reversal in this trend as the supply of equipment in the field is reduced and market conditions improve. Because bookings for our new product lines did not immediately translate into sales, our legacy products continued to represent a majority of our total revenue. Although our overall backlog decreased, our marketing and business development teams continue to penetrate new markets and gain access to new customers in the markets where we already have a presence. We believe we continue to gain market share despite the current economic downturn.
Cost of sales as a percentage of net sales increased to 60% during the three month period ended March 31, 2002 from 59% during the three month period ended March 31, 2001. This increase is primarily due to the decrease in sales compared to the prior period, which resulted in an increase in overhead costs as a percentage of total costs, because of underutilization and lower absorption of fixed costs. In addition, a larger portion of our business is related to the integration and installation of equipment, which typically has lower margins than we achieve from the sale of equipment.
Selling, general and administrative costs increased 8% to $3.6 million (24% of sales) during the three month period ended March 31, 2002 from $3.3 million (21% of sales) during the three month period ended March 31, 2001. General and administrative expenses related to the Tiernan product lines, which were acquired in the second quarter of 2001, is the primary reason for the increase in selling, general and administrative costs between the respective periods and was offset by $81,000 of goodwill amortization that was not recorded in the first quarter of 2002.
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Research and development expenditures increased 28% to $2.8 million (19% of sales) during the three month period ended March 31, 2002 from $2.2 million (14% of sales) during the three month period ended March 31, 2001. These expenditures fluctuate from period to period depending on the staging of on-going projects. Also, the expenses for the three month period ended March 31, 2002 include research projects related to the Tiernan product lines, which were acquired during the second quarter of 2001. We expect these expenses to reduce in the near term as a result of the reduction in our workforce during the three month period ended March 31, 2002. However, we may rehire some of the affected personnel if the economy improves and our sales increase as a result of such improvement.
Net interest income (interest income less interest expense) decreased to $25,000 in the three month period ended March 31, 2002 from $239,000 in the three month period ended March 31, 2001. This was mainly the result of our lower cash levels and lower interest rates during the period ended March 31, 2002 compared to the three month period ended March 31, 2001.
New-orders-booked (Bookings) increased by 5% to $12.5 million for the three month period ended March 31, 2002 from $11.9 million during the three month period ended March 31, 2001. The increase in Bookings is primarily due to the acquisition of the Tiernan product lines and offset by decreases in our core product lines due to the above-mentioned downturn in market conditions.
Backlog (the level of unfilled-orders-to-ship) decreased 6% to $12.2 million at March 31, 2002 from $13.0 million at March 31, 2001 as a result of the low volume of bookings.
Liquidity and Capital Resources
Working capital was $36.2 million at March 31, 2002, an increase in working capital of $246,000 (0.7%) from $36.0 million at December 31, 2001. This increase is primarily attributed to an increase in current assets of approximately $748,000 during the first three months of the current period and offset by an increase in current liabilities of $502,000. The increase in current assets was due to greater inventory, which, in turn, resulted from the lower sales volumes.
Net cash used in operating activities was $75,000 for the three month period ended March 31, 2002, as compared to cash used of $1.4 million in the three months ended March 31, 2001. This decrease in cash used is primarily attributed to the decrease in cash used for increases in inventories of $1.2 million in the current period compared to an increase in inventories of $2.2 million in the first quarter of 2001. Other factors included cash provided by a reduction in accounts receivables of $341,000 compared to cash used for an increase in accounts receivables of $70,000 in the year earlier period; cash used in the reduction of accrued expenses during the current period compared to cash used of $1.2 million in the year earlier period; and cash provided by an increase in trade accounts payables of $708,000 during the three months ended March 31, 2002 compared to cash provided of $642,000 during the three months ended March 31, 2001.
Cash used in investing activities consisted of additions to property and equipment of $482,000 during the three month period ended March 31, 2002, as compared to additions of $429,000 during the three month period ended March 31, 2001.
Net cash provided by financing activities increased to $464,000 from $283,000 for the three month periods ended March 31, 2002 and March 31, 2001, respectively. Cash provided by financing activities primarily consisted of proceeds received from the exercise of employee stock options and the Company’s employee stock purchase plan, which provided proceeds of $217,000 and $243,000, respectively during the three month period ended March 31, 2002, compared to proceeds provided of $34,000 and $253,000, respectively during the period ended March 31, 2001.
As a result of the foregoing, our cash balances decreased by $93,000 during the three month period ended March 31, 2002, compared to a decrease in cash balances of $1.6 million during the three month period ended March 31, 2001.
In addition, we have secured a committed line of credit with a bank in the amount of $10.0 million. As of March 31, 2002, there was a $21,578 outstanding balance on this line of credit.
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Our future debt and lease obligations are summarized by year as follows (in thousands):
Minimum Lease | Total Cash | ||||||||||||
Debt Maturities | Commitments | Obligations | |||||||||||
2002 | $ | — | 2,122 | 2,122 | |||||||||
2003 | — | 2,127 | 2,127 | ||||||||||
2004 | — | 2,122 | 2,122 | ||||||||||
2005 | — | 1,291 | 1,291 | ||||||||||
2006 | — | 1,063 | 1,063 | ||||||||||
Thereafter | — | 1,879 | 1,879 | ||||||||||
Total | $ | — | 10,604 | 10,604 | |||||||||
We believe that cash and cash equivalents on hand, anticipated future cash receipts, and borrowings available under our credit facility will be sufficient to meet our obligations as they become due for the next twelve months. However, a decrease in our sales or demand for our products or services would likely affect our working capital amounts. As part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. These potential transactions may require substantial capital resources, which, in turn, may require us to seek additional debt or equity financing. There are no assurances that we will be able to consummate any of these transactions. For more detailed information, see our Risk Factors contained in Exhibit 99.1 to our Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Item 3 — Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk on our financial instruments from changes in interest rates. We do not use financial instruments for trading purposes or to manage interest rate risk. As of March 31, 2002, a 1% change in interest rates would, over a year’s period, have a potential pretax impact of $100,000, which is immaterial to our consolidated financial statements.
PART II — OTHER INFORMATION
Item 6 — Exhibits and Reports on Form 8-K
(a) Exhibit Description
3.1(1) | Certificate of Incorporation | |
3.2(2) | Bylaws | |
10.1(3) | Change of Control Agreement, dated as of March 20, 2002, by and between the Registrant and Robert C. Fitting. | |
10.2(3) | Change of Control Agreement, dated as of March 20, 2002, by and between the Registrant and Steven Eymann. | |
10.3(3) | Change of Control Agreement, dated as of March 20, 2002, by and between the Registrant and Brian Duggan. |
(1) | Incorporated by reference from exhibit 3.1 to registrant’s description of capital stock on form 8-A12G, filed on July 13, 2000. | |
(2) | Incorporated by reference from exhibit 3.2 to registrant’s description of capital stock on form 8-A12G, filed on July 13, 2000. | |
(3) | Filed herewith. |
(b)Registrant did not file any reports on Form 8-K during the three month period ended March 31, 2002.
Items 1,2,3,4, and 5 are not applicable and have been omitted.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 15, 2002 | RADYNE COMSTREAM INC. | |||
By: | /s/ Garry D. Kline | |||
Garry D. Kline Vice President, Finance (Chief Financial Officer and Accounting Officer) |
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EXHIBIT INDEX
(a) Exhibit Description
3.1(1) | Certificate of Incorporation | |
3.2(2) | Bylaws | |
10.1(3) | Change of Control Agreement, dated as of March 20, 2002, by and between the Registrant and Robert C. Fitting. | |
10.2(3) | Change of Control Agreement, dated as of March 20, 2002, by and between the Registrant and Steven Eymann. | |
10.3(3) | Change of Control Agreement, dated as of March 20, 2002, by and between the Registrant and Brian Duggan. |
(1) | Incorporated by reference from exhibit 3.1 to registrant’s description of capital stock on form 8-A12G, filed on July 13, 2000. | |
(2) | Incorporated by reference from exhibit 3.2 to registrant’s description of capital stock on form 8-A12G, filed on July 13, 2000. | |
(3) | Filed herewith. |
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