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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-K þ
    
    Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2003
Or o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from            to 
  
 Radyne ComStream Inc.  Delaware
(State or other jurisdiction of incorporation or organization)
    
    11-2569467
(I.R.S. Employer Identification No.)3138 East Elwood Street, Phoenix, Arizona
(Address of Principal Executive Offices)
    
    85034
(Zip Code)
 Registrants telephone number including area code: (602) 437-9620 Securities Registered Under Section 12(b) of the Exchange Act: None Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value
Common Stock Purchase Warrants Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $11 million based on the closing price of
$2.04 per share of common stock as reported on the Nasdaq National
Market on 30 June, 2003. For purposes of this determination, shares of common stock held by
each officer and director and by each person who owns 5% or more of the
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates of the registrant. This determination of affiliate status is
not necessarily a conclusive determination for other purposes. The number shares of the registrants common stock, which were outstanding
as of the close of business on March 4, 2004 was 16,445,745. DOCUMENTS INCORPORATED BY REFERENCE Items 10, 11, 12, 13 and 14 of Part III incorporate information by
reference from the definitive proxy statement for the registrants Annual
Meeting of Stockholders to be held on May 13, 2004 at 2:00 p.m. in the Phoenix
office.    1




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TABLE OF CONTENTS  Part IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataIndependent Auditors ReportConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Stockholders Equity and Comprehensive Income (Loss)Consolidated Statements of Cash FlowsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresPART IIIItem 10. Directors, Executive Officers and Key EmployeesItem 11. Director and Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accounting Fees and ServicesPART IVItem 15. Exhibits, Financial Statement Schedules And Reports On Form 8-KSIGNATURESEXHIBIT INDEXEX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-99.1    Table of Contents  Disclosure Concerning Forward-Looking Statements This Annual Report on Form 10-K, includes statements that constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the Reform Act) and Radyne ComStream claims
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 this
Annual Report on Form 10-K in the Notes to Consolidated Financial Statements
and under the captions Business and Managements Discussion and Analysis of
Financial Condition and Results of Operations include, but are not limited to:
(i) growth in demand for satellite system ground-based equipment and
satellite-delivered communications services, (ii) continued global deregulation
and privatization of telecommunications carriers, (iii) worldwide demand for
Internet over Satellite connectivity and communications services in general,
(iv) an increase in total foreign sales, (v) an increase in market share, and
(vi) sufficient cash reserves and cash from operations to fund planned future
operations and capital requirements through the end of 2004. Forward-looking statements involve risks, uncertainties and other factors,
which may cause actual results, performance or achievements of Radyne ComStream
to be materially different from those expressed or implied by such
forward-looking statements. Factors that could affect Radyne ComStreams
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;
    
    product developments, introductions and pricing of competitors;
    
    timing of substantial customer orders;
    
    availability of qualified personnel;
    
    the impact of local political and economic conditions and foreign exchange fluctuations on international sales;
    
    performance of suppliers and subcontractors;
    
    market demand and industry and general economic or business conditions;
    
    availability, cost and terms of capital;
    
    the Risk Factors set forth in Exhibit 99.1, which is attached
hereto and incorporated by reference into this Annual Report on Form
10-K; and
    
    other factors that Radyne ComStream is currently unable to identify or
quantify, but may exist in the future. In addition, the foregoing factors may affect generally Radyne ComStreams
business, results of operations and financial position. Forward-looking statements speak only as of the date the statement was
made. Radyne ComStream does not undertake and specifically declines any
obligation to update any forward-looking statements. 2




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Part I 
 Item 1. Business Overview Our web site is www.radn.com. We design, manufacture, integrate, install and
sell capital equipment used in the ground-based portion of satellite
communication systems and cable communications networks to receive and transmit
data, telephone, television, video and telephone-over-Internet. 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 and network broadcast. We design, manufacture,
integrate, install and sell capital equipment used for upgrading existing
analog point-to-point microwave radios to handle digital signals. We design,
manufacture, integrate, install and sell capital equipment for High Definition
Television (HDTV) and other digital encoding and transmission and our Armer
subsidiary provides innovative solutions for the integration and installation
of turnkey communications systems. Information contained on the foregoing
website is not a part of this report. Through our network of international
sales and service offices, agents and sales representatives, we serve customers
in over 80 countries, including customers in the television broadcast industry,
international telecommunications companies, Internet service providers, private
communications networks, network and cable television and the United States
government. Our products have been utilized in major communication systems worldwide,
including the following:  
    
    HDTV Encoders and Integrated Receiver Decoders (IRDs) for a Major Korean Communications company.
    
    Earth stations for the first international satellite links in China, India, Pakistan, Brazil, Haiti and Zambia.
    
    We have provided numerous microwave modems to convert existing analog TV distribution systems to handle Digital TV.
    
    Supplied complete Data Broadcast network for Shanghai Stock Exchange-over 4,000 sites throughout mainland China.
    
    International Cablecasting Technologies  utilizing 40,000 digital audio broadcast receivers.
    
    Supply of Ground equipment for delivery of IP over Satellite to major satellite bandwidth providers.
    
    First major Internet over Satellite network with 300 terminals
deployed in the Dominican Republic for a distance learning application.
    
    Major private audio network in Mexico and Central America for a
department store chain, which transmits music, advertising and product
announcements to all its store locations.
    
    High-Speed DVB Modulators for Hughes Direct to PC Network and Hughes
DirecTV.
    
    HDTV encoders and IRDs for major international sporting events (2002
winter Olympics through NBC, 2002 World Cup through Korea Telecom and
various programming through ESPN-Star TV in Singapore).
    
    Selected by PamAmSat, Intelsat and ChinaSat for the deployment of IP over satellite solutions.
    
    Major expansion of U.S. Government Satellite Communications Network. Industry Overview Satellite technology has been established as a key element in the
worldwide infrastructure of communications systems. Satellites enable
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. 3




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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
under-served 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.Satellite communication systems that are
used to provide these services consist of two elements: satellites (the space
segment) and ground-based transmission and reception systems (the ground
segment). The space segment consists of a single satellite or a constellation
of satellites in earth orbit, which typically provide continuous communications
coverage over a wide geographic area. These satellites typically contain
multiple transponders, each of which is capable of simultaneously receiving and
transmitting one or more signals to or from multiple users. The satellite
ground segment, the segment of the industry that the Company operates within,
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 converter, redundancy
switches and voice, data, and/or video network interface equipment. Earth
stations provide a communications link to the end user either directly or
through land-based networks. Digital Encoding of TV Signals.Digital Encoding of TV Signals through the
use of our encoders take analog TV signals from cameras or other sources and
first convert to digital to preserve the quality eternally and second to
compress the signals so they can be transmitted over much smaller bandwidths. Conversion of Existing Analog Point-to-point Radios.Conversion of
existing analog point-to-point radios can be converted to handle digital
signals for digital TV, telephone, and Internet backhaul through the use of our
microwave modems. Industry Growth We believe that 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. We believe that future demand for
satellite communications services will be driven principally by the following
major factors:  
    
    Worldwide demand for Internet over Satellite connectivity. A large
number of the World Wide Web sites reside in North America and
high-speed access to the web from abroad will continue to be a major
emphasis.
    
    Worldwide demand for communications services, including data
communications, high-speed digital television/HDTV and corporate
Intranets.
    
    The cost-effectiveness of satellite communications for many
applications, such as digital television delivery, distance learning and
IP over satellite.
    
    Technological advancements and capital equipment upgrades that
broaden applications and increase the capacity in satellite networks.
    
    Lack of global ground-based infrastructure to support increased
demand for Broadband and Internet applications and services.
    
    Digital TV encoding is driven by The U.S. Federal Communications
Commission mandate for Television Broadcasters to adopt DTV standards by
January 2006 and the increased sales of HDTV sets being marketed today. 4




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
    
    There are thousands of analog point-to-point microwave radios in
operation that are candidates for upgrade to digital to handle digital
TV, telephone, and Internet traffic. 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. Worldwide Demand for Communications Services.Factors contributing to the
demand for communications services include worldwide economic development and
the increasing globalization of commerce. Businesses have a 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. Because of current concerns with international terrorism, the Militaries
of many countries have increased requirements for communications as their
forces are spread around the world in such places as Afghanistan and Iraq. The
U.S. Governments needs, such as maintaining communications with embassies, and
the U.S. militarys worldwide Command and Control requirements, continue to
drive more demand for satellite communications. 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
significant distances separate population concentrations, require a technology
whose cost and speed of implementation is relatively insensitive to distance.
Unlike the cost of land-based networks, the cost to provide services via
satellite does not increase with the distance between sending and receiving
stations. Technological Advances.Technological advances continue to increase the
capacity of a single satellite and reduce the overall cost of a system and the
service it delivers. This increases the number of potential end-users for the
services and expands the available market. We believe that recent technological
developments such as complex bandwidth efficient modulation schemes, turbo
error correcting codes, bandwidth on demand, digital television compression
technology, and signal processing methods will continue to stimulate 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 of 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, such as in developing countries where the infrastructure
is not in place and 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.
    
    Satellite earth stations can be deployed much more rapidly to offer
international services for third world countries and, additionally, for
military deployment. 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. 5




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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. 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. 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 eternally preserves the
quality of TV signals and 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 and special media
events.
    
    Television is distributed to affiliate stations from broadcasters
through the use of point-to-point analog microwave radios that are
candidates for upgrade with our microwave modem equipment. This option
provides a solution at a much lower cost than replacing the analog radio
with a digital radio. 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. Growth in this sector 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. 6




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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 a
few thousand websites represent a majority 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 Satellites allow the military to have instant secure communications when
deploying rapidly to troubled parts of the world and further support the
infrastructure necessary for military tactical deployments. The United States government provides a significant market opportunity for
satellite equipment manufacturers as 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 sizable customer that
is likely to provide consistent business. Strategy Our business goals are to expand market share in our ground-based
satellite systems business and improve profitability. We expect to achieve
these goals through the following strategies: Capitalize On Our Existing Technology Leadership.We believe that the
global satellite communications services and equipment market presents a number
of attractive opportunities to apply our advanced technologies and
capabilities. We plan to develop new products and enhance existing products by
leveraging our technology to capture a significant share of these growth
opportunities. 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. 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. Continued Emphasis on Operational Efficiency and Financial Performance.
We have historically maintained a strong emphasis on operation efficiency and
financial performance. We believe that continuing to focus our operational
focus is essential to future success while continuing to grow our business.
As part of this continued emphasis, we plan to devote significant time and
resources to key components of our business, such as our manufacturing
processes, design systems and customer relationships. 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 lines, improve our sales force and
increase our profitability. Products and Services 7




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We offer the following product families:  
    
    Satellite modems and earth stations.
    
    Internet via satellite terminal equipment.
    
    Frequency converters.
    
    Data, audio, and video broadcast equipment.
    
    Digital video broadcast (DVB) and high-speed modems.
    
    Cable and microwave modems.
    
    Digital Standard Definition and HDTV encoders and IRDs (Integrated Receivers / Decoders). We offer the following services:  
    
    Design, integration and installation of turnkey communication systems. 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. Weve recently introduced a major addition to our satellite modem line, the
Turbo Forward Error Correction Codec. The turbo product provides customers
with greatly improved satellite and bandwidth performance, which directly
translates to space segment cost savings. This product also affords our
large, worldwide installed base of customers the opportunity to improve their
performance at a significant operational cost saving. Our earth stations commonly consist of several components, including a
satellite modem, a frequency converter, a transceiver, a transmitter,
redundancy switches 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. Frequency Converters We currently market a variety of converters used to transmit and receive
signals over satellites in the commercial satellite frequency ranges of
C-Band, Ka_Band, and Ku_Band. 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 8




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as Reuters, to distribute financial information, up-to-date news stories or
image files of weather information and database updates from a central
location to many remote outlets. Two-way Internet Satellite Terminal Equipment Our IPSat Internet Satellite Terminal is designed as a fully integrated
modular system capable of receive-only, transmit-only or full duplex
satellite connectivity to the Internet anywhere in the world. Utilizing the
IPSats modularity and integrated routing capabilities end users can take
advantage of hybrid configurations in situations where terrestrial return
resources such as telephone, cable or other upstream technologies are
available to be used in conjunction with satellite broadcasting. Where such
return resources are not available, or too expensive, the IPSat system can
support the return channel over satellite. The IPSat can offer the most
flexible, cost efficient performance for high-speed satellite downloads from
the World Wide Web for Internet service providers, corporations, educational
institutions and government agencies. 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 HDTV. 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 are used with point-to-point microwave radios
and usually feature high-speed and multidata-rate capabilities that provide a
complete point-to-multipoint communication link that facilitates microwave
link upgrades. For example, television stations use our microwave modems to
transmit audio and video over a microwave link to and from digital
newsgathering trucks. Standard and High Definition Digital TV Encoders We offer a complete product line of Standard and High Definition TV encoders
for professional applications. Our encoders are used throughout the world to
provide distribution, contribution and broadcast services. Encoders are used
in satellite, cable and terrestrial applications. Many U.S. broadcasters rely
on our encoders to provide news gathering and direct to home service. Our
encoders are recognized for their outstanding picture quality, ease of use
and rugged design. Digital TV Integrated Receivers / Decoders Our IRDs complement the encoder products enabling us to provide complete
system solutions. Receivers and decoders support DVB and ATSC standards for
use in both domestic and international markets. One of our receiver/decoders,
the TDR6 has been adopted by ABC and NBC as a standard. The modular TDR6 is
unique, in that it supports both standard definition and high definition TV. Digital TV ATM and Network Interface Adapters There is an increasing demand to transport TV terrestrially via common and
private carriers. Terrestrial transport of video introduces technical
requirements relating to interface types, stability and jitter. Interface
adapters allow encoders and decoders to operate in circuit-switched and ATM
networks. Our products are widely accepted for these applications. For
example, the TUI10 Universal Interface Adapter has been certified by AT&T and
is an industry standard. 9




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Design, Integration and Installation of Turnkey Communications Systems At our Armer Communications Engineering facility in Chandler, Arizona, we
design, integrate and test turnkey communications systems ranging from small
VSAT installations to Intelsat standard stations. We deliver products and
services from initial engineering and system development to final testing. In
addition, we sell support services to existing and new customers. Our ability
to deliver a full compliment of equipment and services to our customers is a
benefit to our customers who desire a one-stop solution to their needs. 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 and microwave communications, telecommunications, and cable
television industries. Our future growth depends on increasing the market share
of our new products, adapting our existing products/technologies 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 $6.3 million for the year
ended December 31, 2003, $8.7 million for the year ended December 31, 2002 and
$10.8 million for the year ended December 31, 2001. A number of new products
were either launched or reached an advanced stage of development during these
periods. We intend to use a significant portion of our cash flows from operations
to fund our research into products for Internet over Satellite links, Standard
Definition digital and HDTV and other new telecommunications products. We also
plan to target our research and development activities at digital audio, video,
and data products. However, there is no assurance that we will continue to have
access to sufficient capital to fund the necessary research and development or
that such efforts, even if adequately funded, will prove successful. Sales and Marketing We sell our products through an international sales force with sales
and/or service offices in San Diego, Phoenix, Beijing, Singapore, London,
Amsterdam and Bangalore, India. Our direct sales force consists of 21
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, agents
and systems integrators sell our products, supported by our sales and marketing
personnel. We participate in approximately five to seven trade shows each year. We
also generate new sales leads through advertising in trade magazines, direct
mail, and our website. We maintain a warranty department that also includes customer service and
support staff who support customers and agents and provide installation
supervision, if needed. In certain instances, we use third-party companies to
install and maintain our products at customer sites. Customers Our customers generally include national and international
telecommunications providers, digital television users, including broadcast and
cable networks, Internet service providers, financial information providers,
systems integrators, and the U.S. government. 10




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During the years ended December 31, 2003 and 2002, no single customer
represented more than 10% of our net sales. Because of the nature of our
business, we anticipate that any customer who could potentially represent 10%
or more of our total revenue will vary from period to period depending upon the
placement of significant orders by a particular customer or customers in any
given year. Our sales in principal foreign markets for the periods indicated consisted
of the following percentages of total sales. Year ended
    
    Year ended
    
    Year endedRegion
    
    12-31-03
    
    12-31-02
    
    12-31-01Asia
    
    
    21
    %
    
    
    27
    %
    
    
    20
    %Africa/Middle East
    
    
    8
    %
    
    
    5
    %
    
    
    3
    %Latin America
    
    
    2
    %
    
    
    3
    %
    
    
    7
    %Europe
    
    
    16
    %
    
    
    11
    %
    
    
    15
    %Canada
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Total Foreign Sales
    
    
    48
    %
    
    
    47
    %
    
    
    46
    %
 We believe that foreign sales will continue to make up a major portion of
our total sales 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
Comtech EFData 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: Market SegmentSatellite Modems &Principle Companies Within
    
    Small Earth
    
    BroadbandAddressable Market Segment
    
    Stations
    
    IP VSAT
    
    Datacasting
    
    Digital TV
    
    IntegrationComtech EF Data
    
    
    30
    %
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *Paradise Datacom
(Intelek)
    
    
    10
    %
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *Gilat Satellite Networks
Ltd.
    
    
    *
    
    
    
    20
    %
    
    
    15
    %
    
    
    *
    
    
    
    *Hughes Network Systems
    
    
    *
    
    
    
    30
    %
    
    
    5
    %
    
    
    *
    
    
    
    *ViaSat
    
    
    5
    %
    
    
    20
    %
    
    
    15
    %
    
    
    *
    
    
    
    *IDC
    
    
    *
    
    
    
    *
    
    
    
    25
    %
    
    
    *
    
    
    
    *Harmonic
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    10
    %
    
    
    *Scopus
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    10
    %
    
    
    *Tandberg Television ASA
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    30
    %
    
    
    *Wegener Corporation
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    5
    %
    
    
    *IDB Systems
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    20
    %Globecomm Systems Inc.
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    50
    %VertexRSI
    
    
    5
    %
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    20
    %Radyne ComStream
    
    
    30
    %
    
    
    5
    %
    
    
    5
    %
    
    
    15
    %
    
    
    5
    %
   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, quality and service. We believe that the
quality, performance, and capabilities of our products, our ability to
customize certain network functions, and the relatively lower overall cost of
our products as compared to the cost of the competing products generally
offered by our major competitors represent major factors in our ability to
compete. However, our major competitors have the resources to develop products
with features and functions that are competitive with or superior to our
products. Competition from current competitors or future entrants in the
markets in which we compete could cause us to lose orders or customers or could
force us to lower the prices we charge for our products. 11




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##### Table of Contents



We believe we are well positioned to capitalize on the 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 average over 20 years 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 Boca Raton, Beijing, Singapore, London, Jakarta,
and Amsterdam. Manufacturing We assemble and test certain products at our Phoenix and Chandler, Arizona
and San Diego, California facilities using subsystems and circuit boards
acquired from subcontractors. We obtain the remainder of our products,
completely assembled and tested, from subcontractors. Although we believe that
we maintain adequate stock to minimize the procurement lead-time for certain
components, our products use a number of specialized 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 interruptions in production while we develop alternative procurement
sources. We maintain an inventory of certain chips, components and
subassemblies to limit the exposure for such an interruption. We believe that
there are a number of alternative suppliers capable of providing replacements
for the types of chips, customized components and subassemblies used in
production. During 1999 and 2000, our Phoenix and San Diego facilities were awarded
ISO 9001 certification, the international quality control standard for research
and development, marketing, sales, manufacturing, and distribution processes.
Subsequently, we have continued to improve our processes and methods of
operations, consistent with our goals and the certification requirements. This
certification will assist in increasing the acceptance of our products in
foreign markets. 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 certain suppliers. We also control access to
and distribution of confidential information concerning our proprietary
information. We also have patents, which protect certain of our proprietary technology.
We have been cautious in seeking to obtain patent protection for our products,
since patents often provide only narrow protection that may not prevent
competitors from developing products that function in a manner similar to those
covered by our patents. In addition, some of the foreign countries in which we
sell our products do not provide the same level of protection to intellectual
property as the laws of the United States. We will continue to seek patent
protection for our proprietary technology in those cases where we think it can
be obtained and will provide us with a competitive advantage. Employees As of December 31, 2003, we had 183 full-time employees, including 4
executive officers, 108 engineering and manufacturing personnel, 34 sales and
marketing, 15 installation and customer service and 22 administration
personnel. These figures include employees who are based outside the United
States. Our employees are not represented by a labor union. We believe that our
relationships with our employees are satisfactory and in good standing. 12




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##### Table of Contents



Available Information Our website is http://www.radn.com. We make available, free of charge on
our website, our annual, quarterly, and current reports, and any amendments to
those reports, as soon as practicable after electronically filing the reports
with the Securities and Exchange Commission (the Commission). Any materials
we file with the Commission may be read and copied at the Commissions Public
Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. Information
concerning the operation of the Commissions Public Reference Room may be
obtained by calling the Commission at 1-800-SEC-0330. The Commission also
maintains a website at http://www.sec.gov at which you can view and download
copies of reports, proxy and information statements and other information filed
electronically through the Electronic Data Gathering, Analysis and Retrieval
(EDGAR) system. Information contained on our website is not a part of this
report. 
 Item 2. Properties We currently occupy approximately 40,000 square feet of building space in
Phoenix, Arizona, 16,000 square feet in Chandler, Arizona and 36,000 square
feet in our San Diego, California facility. The lease for our Phoenix facility
expires in July 2008 and has an option to renew for two consecutive terms of
five years each. The lease for our Chandler facility expires in October 2008
and has an option for a five year renewal. The lease for our San Diego facility
expires in March 2005 and has an option to renew for two consecutive terms of
five years each. We also lease facilities for our regional sales and service
offices in Beijing, Singapore, London, Jakarta, and Amsterdam. We believe that
our facilities are adequate to meet current and reasonably anticipated needs in
the immediate future. 
 Item 3. Legal Proceedings From time to time, we are party to certain legal proceedings incidental to
the conduct of our business. We believe that the outcome of pending legal
proceedings will not, either individually or in the aggregate, have a material
adverse effect on our business, financial position, results of operations, cash
flows or liquidity. 
 Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 13




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##### Table of Contents



PART II 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters Market for Common Stock Our common stock and warrants are quoted on the Nasdaq National Market
under the symbol RADN and RADNW, respectively. The following table sets
forth the range of high and low trading prices for our common stock as reported
by the Nasdaq National Market for the periods indicated. High
    
    Low2001:First Quarter.
    
    $
    8.63
    
    
    $
    4.88Second Quarter
    
    
    7.36
    
    
    
    4.44Third Quarter.
    
    
    6.17
    
    
    
    3.60Fourth Quarter
    
    
    6.10
    
    
    
    3.542002:First Quarter.
    
    
    7.50
    
    
    
    4.66Second Quarter
    
    
    4.98
    
    
    
    3.10Third Quarter.
    
    
    3.55
    
    
    
    1.25Fourth Quarter
    
    
    3.60
    
    
    
    1.552003:First Quarter.
    
    
    2.78
    
    
    
    2.14Second Quarter
    
    
    2.45
    
    
    
    1.95Third Quarter.
    
    
    4.44
    
    
    
    2.10Fourth Quarter
    
    
    8.50
    
    
    
    4.12
 Holders of Record As of February 13, 2004, we had approximately 400 holders of record of our
common stock. Dividends We have not paid dividends on our common stock since inception and we do
not intend to pay any dividends to our stockholders in the foreseeable future.
We currently intend to reinvest earnings, if any, in the development and
expansion of our business. The declaration of dividends in the future will be
at the election of our Board of Directors and will depend upon our earnings,
capital requirements and financial position, general economic conditions and
other pertinent factors. Sale of Unregistered Securities During fiscal 2003, we did not issue any equity securities that were not
registered under the Securities Act of 1933, as amended. However, on February
19, 2004 Stetsys Pte. Ltd. and Stetsys US, Inc. entered into definitive
purchase agreements to sell their unregistered shares of common stock in the
Company, an aggregate of 9,676,800 shares, to approximately 40 institutional
investors in a private transaction. The purchase price of the common stock was
$9.25 per share. The shares sold in the transaction will be subject to
securities law restrictions on their subsequent resale. However, the Company
has agreed to register the shares for resale. The Company has not received any
proceeds from this transaction. Equity Compensation Plans See Item 12. 14




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##### Table of Contents



Item 6. Selected Financial Data The following selected statement of operations data for the years ended
December 31, 2003, 2002, 2001, 2000 and 1999, 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. The following data
is not necessarily indicative of results of future operations and should be
read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial statements
and notes thereto included elsewhere in this 10-K Annual Report. Years Ended December 31,(in thousands, except share and per share data)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999STATEMENT OF OPERATIONS DATA:Net sales
    
    $
    57,991
    
    
    $
    57,662
    
    
    $
    68,471
    
    
    $
    70,107
    
    
    $
    55,840Cost of sales
    
    
    31,640
    
    
    
    38,041
    
    
    
    39,559
    
    
    
    38,280
    
    
    
    29,971Inventory write-down
    
    
    
    
    
    
    431
    
    
    
    
    
    
    
    
    
    
    
    Gross profit
    
    
    26,351
    
    
    
    19,190
    
    
    
    28,912
    
    
    
    31,827
    
    
    
    25,869Selling, general and administrative expense
    
    
    13,559
    
    
    
    13,471
    
    
    
    15,307
    
    
    
    13,573
    
    
    
    12,355Research and development expense
    
    
    6,294
    
    
    
    8,665
    
    
    
    10,812
    
    
    
    9,317
    
    
    
    9,127Stock option compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350Restructuring charge
    
    
    
    
    
    
    1,102
    
    
    
    
    
    
    
    
    
    
    
    Asset impairment charges(1)
    
    
    
    
    
    
    995
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    19,854
    
    
    
    24,233
    
    
    
    26,119
    
    
    
    22,890
    
    
    
    21,832Earnings (loss) from operations
    
    
    6,498
    
    
    
    (5,043
    )
    
    
    2,793
    
    
    
    8,937
    
    
    
    4,037Interest expense
    
    
    28
    
    
    
    62
    
    
    
    54
    
    
    
    492
    
    
    
    1,910Interest income
    
    
    (254
    )
    
    
    (236
    )
    
    
    (523
    )
    
    
    (1,077
    )
    
    
    (76
    )Earnings (loss) before income taxes
and extraordinary item
    
    
    6,724
    
    
    
    (4,869
    )
    
    
    3,262
    
    
    
    9,522
    
    
    
    2,203Income taxes (benefit)
    
    
    2,599
    
    
    
    (196
    )
    
    
    1,326
    
    
    
    (2,919
    )
    
    
    85Earnings (loss) before extraordinary item and cumulative
effect of change in accounting principle
    
    
    4,125
    
    
    
    (4,673
    )
    
    
    1,936
    
    
    
    12,441
    
    
    
    2,118Cumulative effect of change in accounting principle
    
    
    
    
    
    
    4,281
    
    
    
    
    
    
    
    
    
    
    
    Extraordinary item
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    188Net earnings (loss)
    
    $
    4,125
    
    
    $
    (8,954
    )
    
    $
    1,936
    
    
    $
    12,441
    
    
    $
    2,306Basic earnings (loss) per share:Earnings (loss) before extraordinary item
    
    $
    0.27
    
    
    $
    (0.59
    )
    
    $
    0.13
    
    
    $
    0.89
    
    
    $
    0.30Extraordinary item
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.02Net earnings (loss)
    
    $
    .27
    
    
    $
    (0.59
    )
    
    $
    0.13
    
    
    $
    0.89
    
    
    $
    0.32Diluted earnings (loss) per share:Earnings (loss) before extraordinary item
    
    $
    0.26
    
    
    $
    (0.59
    )
    
    $
    0.13
    
    
    $
    0.81
    
    
    $
    0.28Extraordinary item
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.02Net earnings (loss)
    
    $
    0.26
    
    
    $
    (0.59
    )
    
    $
    0.13
    
    
    $
    0.81
    
    
    $
    0.30Weighted average shares used in computation  Basic
    
    
    15,487,647
    
    
    
    15,180,379
    
    
    
    14,943,516
    
    
    
    13,972,078
    
    
    
    7,111,777Weighted average shares used in computation  Diluted
    
    
    15,717,856
    
    
    
    15,180,379
    
    
    
    15,411,568
    
    
    
    15,426,297
    
    
    
    7,571,425
 Years Ended December 31,(in thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999BALANCE SHEET DATA:Cash and cash equivalents
    
    $
    30,130
    
    
    $
    16,230
    
    
    $
    7,211
    
    
    $
    16,245
    
    
    $
    2,948Working capital (deficit)
    
    
    41,389
    
    
    
    33,996
    
    
    
    35,959
    
    
    
    33,858
    
    
    
    (2,555
    )Total assets
    
    
    50,609
    
    
    
    44,407
    
    
    
    53,241
    
    
    
    51,844
    
    
    
    28,236Long-term liabilities
    
    
    222
    
    
    
    593
    
    
    
    684
    
    
    
    769
    
    
    
    760Total liabilities
    
    
    6,991
    
    
    
    7,118
    
    
    
    7,893
    
    
    
    10,030
    
    
    
    23,909Stockholders equity
    
    
    43,618
    
    
    
    37,288
    
    
    
    45,347
    
    
    
    41,814
    
    
    
    4,327
 Notes: (1) Consists of the write down of purchased technologies related to the
1998 ComStream acquisition in 2002. 15




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview We design, manufacture, integrate, install and sell products, systems and
software used in the ground-based portion of satellite communication systems to
receive, and transmit data, video, audio and Internet over satellite, microwave
and cable communications networks. 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 and network broadcast. Through our network of international offices and
service centers, we serve customers in over 80 countries, including customers
in the television broadcast industry, international telecommunications
companies, Internet service providers, private communications networks, network
and cable television and the United States government. We reported revenues of $58 million, $57.7 million and $68.5 million for
the years ended December 31, 2003, 2002 and 2001, respectively. The
fluctuation of revenues is due to the downturn in the telecommunications
industry over the last couple of years. Our customers trend has been to
reduce capital expenditures to the most urgent needs. We believe the urgency
for these companies to begin expending funds for new capital equipment will
increase in the near term as older products fail and as newer product
technologies improve the operating efficiencies of the users, saving them money
over use of their older technologies.
We have recently introduced new products with the latest technologies that
can help our customers reduce their operational costs while increasing their
capacity to deliver services. On April 18, 2001, we completed the acquisition of all of the assets of
Tiernan Communications, Inc. for an aggregate purchase price of $4.0 million.
We manufacture the Tiernan products, which are used in the television broadcast
industry. The acquisition has been recorded in accordance with the purchase
method of accounting and, accordingly, the purchase price has been allocated
to the assets purchased and the liabilities assumed based upon the estimated
fair value at the date of acquisition. The excess of the purchase price over
the fair value of the net assets acquired was approximately $1.4 million and
has been recorded as goodwill, which was amortized on a straight-line basis
over seven years until the adoption of SFAS No. 142 on January 1, 2001. During the third quarter of 2002, we implemented a restructuring plan to reduce
costs and address the economic slowdown and negative industry conditions. This
plan included the reduction in force of approximately 10% of our workforce in
the manufacturing, research and development and sales departments, the
abandonment of certain non-performing and under-performing product lines and a
provision for the excess space created at the San Diego facility as a result of
these cost cutting measures. This effort resulted in a charge to our operating
expenses of approximately $1.5 million; of which $431,000 was charged to cost
of sales and the balance was charged to restructuring charge. This amount
included $170,000 in severance costs. During the year ended December 31, 2002,
we paid all charges except for $645,000 in lease exit costs. During the year
ended December 31, 2003, $238,000 in lease exit costs was paid and $407,000
remained to be paid through February 2005. During the year ended December 31, 2003, we further reduced our workforce
to 183 full time employees from 205 and 259 at December 31, 2002 and 2001,
respectively. These reductions allowed the Company to reduce employee related
expenses by approximately $2 million per year. Additionally, costs of sales
were reduced which translated to higher gross margins and, because of the lower
operating costs, to higher net earnings. 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 the Companys 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 consolidated financial statements. Such
estimates and assumptions also 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, income taxes,
warranty obligations, and contingencies based upon historical results,
anticipated future events 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 conditions. Management believes the Companys most critical accounting policies and
estimates used in the preparation of its consolidated financial statements
relate to: 16




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##### Table of Contents




    
    Revenue Recognition.Revenues from product sales are recognized upon
the actual shipment of product and transfer of the risk of ownership
from us, or our contract manufacturers, to our customers in accordance
with SEC Staff Bulletin No. 101, Revenue Recognition in Financial
Statements,as amended. We do not sell through distributors and we do
not use consignment resellers as a method of selling our products.
Revenue from services principally consists of sales related to services
for installation and integration of satellite earth stations and video
and microwave hub stations and are recognized at the time the services
are performed.
    
    Valuation of Receivables. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our
customers to make required payments. Bad debt reserves are recorded
based upon historic default averages as well as through the creation of
reserves established for specific customers deemed marginal in their
ability to pay based upon factors known at that time. In general, if the
financial condition of a customer was to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may
be required.
    
    Valuation and Impairment of Intangible Assets.In assessing our
goodwill and other intangible assets for impairment in accordance with
the Financial Accounting Standards Boards (FASB) Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, we are required to make significant assumptions about the
future cash flows, overall performance, identity and allocation and
valuation of the assets including goodwill and other intangibles of our
reporting units. Market prices are not readily available for certain
businesses, unique physical assets, and most intangible assets to be
valued in goodwill impairment tests. Therefore, we estimate fair values
using estimating techniques and assumptions that are matters of
judgment. Our transitional impairment analysis of goodwill as of January
1, 2002, as required by SFAS No. 142, yielded an impairment charge of
$4.3 million, recorded in 2002 as a cumulative effect of change in
accounting principle. We have no remaining goodwill on our balance sheet
as of December 31, 2003 and 2002.
    
    Warranty Liability.We provide limited warranties on certain of our
products and systems for periods generally not exceeding two years.
Estimated warranty costs for potential product liability and warranty
claims based on our claim experience are accrued as cost of sales 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 liability is affected by product
failure rates and material usage and service delivery costs incurred in
correcting product failures. Should actual product failure rates,
material usage or service delivery costs differ from the Companys
present estimates, additional warranty liabilities may be required.
    
    Valuation of Inventories.Inventories, consisting of satellite modems
and related products, are valued at the lower of cost (first-in,
first-out) or market. Our inventories include high-technology components
and systems sold into rapidly changing and competitive markets, whereby
such inventories may be subject to early technological obsolescence. We
evaluate inventories for excess, obsolescence or other factors that may
render inventories unmarketable at normal margins. Write-downs are
recorded so that inventories reflect the approximate net realizable
value. Assumptions about future demand, market conditions and decisions
to discontinue certain product lines can impact the decision to write
down inventories. If assumptions about future demand change or actual
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required. In any case, actual
amounts could be different from those estimated.
    
    Accounting for Income Taxes.Management judgment is required in
determining the provision for income taxes, deferred tax assets and
liabilities and the valuation allowance recorded against net deferred
tax assets. The carrying value of our net operating loss carry-forwards
is dependent upon our ability to generate sufficient future taxable
income. In addition, we consider historic levels of income, expectations
and risk associated with estimates of future taxable income and ongoing
prudent and feasible tax planning strategies in assessing a tax
valuation allowance. Should we determine that we are not able to realize
all or part of our deferred tax assets in the future, a valuation
allowance is recorded against the deferred tax assets with a
corresponding charge to income in the period such determination is made.
Likewise, should we determine that we would be able to realize deferred
tax assets in the future in excess of our net recorded amount, an
adjustment to the valuation allowance for deferred tax assets would
result in an income tax benefit in the period such determination was
made. Results of Operations Year Ended December 31, 2003 Compared To The Year Ended December 31, 2002 Our net sales increased .6% to $58.0 million during the year ended
December 31, 2003 from $57.7 million during the year ended December 31, 2002.
This increase is primarily attributable to improved market conditions and
strengthening of the economy as a 17




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whole during the last half of the year ended December 31, 2003 compared to
the same period in 2002. While revenues did not increase dramatically from
year to year, the first three months of 2003 was depressed, in terms of sales,
resulting in our lowest volume of quarterly sales in 4 years. Sales during the
last three quarters of the year continuously improved and, in total, the last
nine-months of the year increased by 10% over the prior years last nine
months. We believe our customers will begin to increase orders for our
newest products and sales should increase further during the next few years. Our cost of sales as a percentage of net sales decreased by 12% to 55%
during the year ended December 31, 2003 from 67% for the year ended December
31, 2002. The change in cost of sales as a percent of net sales is primarily
due to a change in our product and services mix. Our service and installation
business, which provides lower gross margins relative to certain products such
as satellite modems, decreased to 8% of sales for the year ended December 31,
2003 from 12% in the prior year. Sales from services typically produce margins
in the 20% to 30% range compared to the satellite modem products that produce
margins in the 45% to 55% range. Our newest products enable us to sell
software upgrades over a satellite link or via email or through the use of a
CDRom or PCM-CIA card that is plugged into the product. These upgrades can
increase our sales by up to 100% of the hardware sales price without
significant increases in costs. This should help our margins increase further
during the years to come, especially after we have an established base of
product deployed in the field. Selling, general and administrative costs increased to $13.6 million, or
23% of net sales, during the year ended December 31, 2003 from $13.5 million,
or 23% of sales, for the year ended December 31, 2002. Expenses attributable to
our tender offer for Wegener Corporation amounted to approximately $385,000
during the second quarter of the year. Before these expenses, selling, general
and administrative costs decreased slightly from the prior year. Most of our
selling, general and administrative expenses are fixed and do not change when
sales fluctuate. Research and development expenditures decreased to $6.3 million, or 11% of
net sales during the year ended December 31, 2003 from $8.7 million, or 15% of
net sales, during the year ended December 31, 2002. Research and development
costs decreased during the year ended December 31, 2003 by
approximately $2.4
million, as we benefited from the cost savings initiatives put into place in
2002.     
We remain committed to invest in our future through technological advances
and our efforts to improve our older product lines for manufacturability and
lower costs. Our research and development personnel concentrate on technology
for the satellite and microwave communications, telecommunications, and cable
television industries, as well as the Tiernan product lines, which target the
digital television broadcast industry. As a result of the increase in our gross profit and our lower operating
expenses as a percentage of net sales, we recorded earnings from operations of
$6.5 million during year ended December 31, 2003 compared to an operating loss
of $5.0 million during the year ended December 31, 2002. Interest expense decreased to $28,000 in the year ended December 31, 2003
from $62,000 in the year ended December 31, 2002 due to lower capitalized lease
obligations during the current fiscal year compared to the year ended December
31, 2002. Interest income increased to $254,000 in the year ended December 31, 2003
from $236,000 in the year ended December 31, 2002. Interest income increased
as a result of our approximately $22 million average cash balance on hand
during the year ended December 31, 2003 compared to approximately $12 million
average balance during the prior year, despite lower average interest rates of
approximately 1% during the current period compared to approximately 1.5% for
the prior period. We keep our cash in money market accounts and short term AAA
rated investments maturing in seven to twenty-eight day increments. We recorded income tax expense in the year ended December 31, 2003 of $2.6
million compared to an income tax benefit of $196,000 in the year ended
December 31, 2002. The increase in expense is due to taxable income generated
in the current fiscal year compared to a loss in the prior year. At December
31, 2003, we provided a full valuation allowance against our remaining deferred
tax assets, consisting primarily of net operating loss carryforwards. To the
extent that we continue to experience profitable operations, we will evaluate
the need for the valuation allowance against our deferred tax assets in future
periods. Additionally, due to the stock sale as discussed in note 20 to our
consolidated financial statements, it is possible that the use of net operating loss
carryforwards may be limited in accordance with Section 382 of the Internal
Revenue Code. Should we determine that we would be able to realize deferred
tax assets in the future in excess of our net recorded amount, an adjustment to
the valuation allowance for deferred tax assets would result in an income tax
benefit in the period such a determination was made. New orders booked (bookings) decreased 7% to $51.9 million for the year
ended December 31, 2003 from $56.0 million for the year ended December 31,
2002. We believe this trend is due to the reluctance of our customers to place
long term capital equipment 18




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orders in the aftermath of the economic downturn of the last few years.
While we believe this trend will reverse itself over time, there can be no
assurance that the trend will reverse itself soon, if at all. Our backlog of
orders to be shipped, which are unshipped orders from the prior period plus new
orders booked less orders shipped during the period, was $8.0 million as of
December 31, 2003 a decrease of 40% from the $13.4 million in backlog as of
December 31, 2002. We believe that this reduction is a result of our
customers desires to reduce their inventory levels, shorten cycle times for
filling orders and to keep their capital equipment orders to a minimum. We
expect that this trend will continue to keep our backlog depressed but will not
reduce our backlog below $6 million to $7 million within the next year.
However, future backlogs could be reduced as we further improve our cycle times
to compete with other suppliers of our product lines. Our backlog consists of
orders as evidenced by written contracts and/or purchase orders from customers
with fixed pricing and delivery dates. We charge cancellation charges for
orders that cancel and the net difference between the backlog amount and the
cancellation charge is recorded as a negative booking. There is no guarantee
that cancellation charges will ultimately be paid to us. Year Ended December 31, 2002 Compared To The Year Ended December 31, 2001 Our net sales decreased 16% to $ 57.7 million during the year ended
December 31, 2002 from $68.5 million during the year ended December 31, 2001.
This decrease is primarily attributable to the lingering effects of the
economic slowdown over the last two years and was partially offset by full year
sales of products from the Tiernan acquisition compared to approximately 8.5
months of those sales during 2001. Our cost of sales as a percentage of net sales increased by 9% to 67%
during the year ended December 31, 2002 from 58% for the year ended December
31, 2001. The change in costs as a percent of sales is primarily due to changes
in the mix of products shipped, namely, the typically lower margins on the
Armer products and higher unabsorbed overhead from our core businesses due to
the lower sales during the current year. Other factors include a $431,000
inventory write-down taken in the third quarter, which was a result of the
abandonment of certain non-performing and under performing product lines and
was related to the reduction of our workforce related to manufacturing
activities to 77 employees at December 31, 2002 from 97 employees at December
31, 2001, and the abandonment of certain manufacturing facilities as is
discussed further below. Selling, general and administrative costs decreased to $13.5 million, or
23% of sales, during the year ended December 31, 2002 from $15.3 million, or
22% of sales, for the year ended December 31, 2001. The decrease in expenses
during the year is primarily attributed to the cost saving initiatives put in
place during the year as a result of the continued depressed market place.
These initiatives included the reduction of our workforce related to these
activities to 205 employees at December 31, 2002 from 259 employees at December
31, 2001, the reduction of our utilized work space in the San Diego facility
from approximately 66,000 square feet at December 31, 2001 to approximately
36,000 square feet at December 31, 2002. The decrease was partially offset by
increased spending on our information technologies during the year of
approximately $120,000 to upgrade our management information systems in our
Phoenix facility. The increase as a percentage of sales was due to the lower
sales amounts during the current year compared to the prior period. Research and development expenditures decreased to $8.7 million, or 15% of
sales during the year ended December 31, 2002 from $10.8 million, or 16% of
sales, during the year ended December 31, 2001. We remain committed to invest
in our future through technological advances and our efforts to improve our
older product lines for manufacturability and lower costs, however, we found it
necessary, during the current year, to scale back on these expenditures, in
light of the current market situation. Our efforts to reduce costs included the
reduction of our workforce related to our research efforts to 42 employees at
December 31, 2002 from 57 employees at December 31, 2001. Our research and
development personnel concentrate on technology for the satellite and microwave
communications, telecommunications, and cable television industries, as well as
the newly acquired Tiernan product lines, which target the digital television
broadcast industry. We recorded an asset impairment charge of $995,000 related to the write
down of Purchased Technologies. This intangible asset, which was originally
valued at $2.5 million, was identified as the fair value of proprietary
technologies purchased in the 1998 ComStream acquisition and was being
amortized on a straight line basis over the expected life of the asset, which
was originally estimated to be 6.25 years. It was determined during the third
quarter restructuring effort, that this asset had been impaired because the
products with which the technologies were associated have been slow moving and
rendered low margins and, therefore, we determined to abandon the product lines
in favor of newer technologies. This non-cash charge will eliminate the
amortization expense related to the intangible asset, which amounted to
approximately $400,000 per year. 19




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During the third quarter of 2002, we implemented a restructuring plan to
reduce costs and address the economic slowdown and negative industry
conditions. This restructuring plan included the reduction in force of
approximately 10% of our workforce in the manufacturing, research and
development and sales departments and a provision for the excess space created
as a result of these cost cutting measures. This effort resulted in a charge to
our operating expenses of approximately $1.1 million. The expense related to
the reduction in force was $170,000. As of December 31, 2002, we have reduced
our workforce from 259 employees at December 31, 2001 to 205 employees, reduced
our utilized work space in the San Diego facility from approximately 66,000
square feet at December 31, 2001 to 36,000 square feet, and paid all charges
except for $644,960 in lease exit costs, which will be paid over the lease term
expiring in February 2005. As a result of the decrease in our gross profit and our higher operating
costs, we recorded a loss from operations of $5 million during 2002 compared to
earnings of $2.8 million in 2001. Interest expense increased to $62,000 in 2002 from $54,000 in 2001, due to
higher capitalized lease obligations during the current fiscal year compared to
the year ended December 31, 2001. Interest income decreased to $236,000 in 2002 from $523,000 in 2001.
Though our average cash balance on hand during the year ended December 31, 2002
increased to $11.2 million from $10.9 million during 2001, the lower average
interest rate earned during the year reduced to 2.0% compared to 4.8% average
in the prior year. We recorded an income tax benefit in 2002 of $196,000, due to a tax
refund, compared to an income tax expense of $1.3 million in 2001. The decrease
in expense is due to the loss incurred in the current fiscal year compared to
net income in the prior year. Due to the net loss experienced in 2002 and the
priority in which net operating loss carryforwards are utilized, we provided a
100% valuation allowance against the net deferred tax assets arising in 2002. We adopted SFAS No. 142, Goodwill and Other Intangible Assets on January
1, 2002, the first day of fiscal 2002. Therefore, the amortization of goodwill,
which was approximately $449,000 for the year ended December 31, 2001, was
suspended effective on that date. We also performed our transitional impairment
analysis of goodwill as of January 1, 2002, as required by SFAS No. 142. This
analysis yielded an impairment charge of $4.3 million, recorded in 2002 as a
cumulative effect of change in accounting principle. We have no remaining
goodwill on our balance sheet as of December 31, 2002. Including restructuring and asset impairment charges and the cumulative
effect of change in accounting principle, the Company reported a net loss of
$9.0 million, or $0.59 per share on a fully diluted basis for 2002. Net income
was $1.9 million or $0.13 per fully diluted share for 2001. New orders booked (bookings) decreased 15% to $56 million for the year
ended December 31, 2002 from $65.6 million for the year ended December 31,
2001. This decrease is primarily due to the economic slowdown over the prior
year. Our backlog of orders to be shipped, which are unshipped orders from the
prior period plus new orders booked less orders shipped during the period, was
$13.4 million as of December 31, 2002, a decrease of 10% from the $14.9 million
in backlog as of December 31, 2001. This reduction is a direct result of the
lower bookings compared to sales during the current period. Our backlog
consists of orders as evidenced by written contracts and/or purchase orders
from customers with fixed pricing and delivery dates. We charge cancellation
charges for orders that cancel and the net difference between the backlog
amount and the cancellation charge is recorded as a negative booking. There is
no guarantee that cancellation charges will ultimately be paid to us. Liquidity and Capital Resources We had working capital of $41.4 million at December 31, 2003, which
represents an increase of $7.4 million, or 22%, from $34.0 million at December
31, 2002. Our working capital increased primarily as a result of an increase
in cash and cash equivalents of $13.9 million, partially offset by a decrease
in accounts receivable, inventory and deferred tax assets of $738,000, $2.9
million and $2.6 million, respectively. Please see the following discussion of
related events. Net cash provided by operating activities was $12.1 million for the year
ended December 31, 2003 compared to cash provided by operating activities of
$9.7 million for the year ended December 31, 2002. The change is primarily due
to a decrease in inventories of $2.9 million to $7.8 million for the year ended
December 31, 2003, compared to a decrease in inventories of $7.2 million during
the year ended December 31, 2002. In addition, accounts receivable decreased by
$738,000 to $9.8 million for the year ended December 31, 2003, compared to a
decrease of $4.3 million during the year ended December 31, 2002. Accounts
payable increased $300,000 during the year ended December 31, 2003 compared to
a decrease of $592,000 for the year ended December 31, 2002. We recorded a 20




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reduction in deferred tax assets of $2.6 million during the year ended
December 31, 2003. Accrued expense decreased by only $387,000 during the year
ended December 31, 2003 compared to a decrease of $79,000 during 2002. This
activity, which resulted in positive changes in the Companys cash flow was
increased by net income of $4.1 million for the year ended December 31, 2003
compared to net loss of $9.0 million for the year ended December 31, 2002.
However, the net loss during the year ended December 31, 2002 included items
that did not have an effect on cash, such as the cumulative effect of a change
in accounting principle of $4.3 million which represented the impairment of the
remaining goodwill related to prior year acquisitions, and an asset impairment
charge of $1.0 million and depreciation and amortization of $2.5 million, which
were included in the net loss for the year ended December 31, 2002 but had no
effect on cash. Net cash provided by operating activities was $12.1 million for
the year ended December 31, 2003 compared to cash provided by operating
activities of $9.7 million for the year ended December 31, 2002 and cash used
in operating activities of $3.7 million during the year ended December 31,
2001. Cash used in investing activities was $400,000 for the year ended December
31, 2003 compared to $1.5 million and $6.1 million for the years ended December
31, 2002 and 2001, respectively. The decrease in net cash used in investing
activities in the year ended December 31, 2003 was the result of a reduction in
capital expenditures of $951,000 compared to the prior year, partially offset
by an increase in proceeds from the disposal of assets of $107,000. The
decrease in net cash used in investing activities is primarily due to assets,
net of cash, acquired from Tiernan Communications in the amount of $4.0 million
during the year ended December 31, 2001. In addition, capital expenditures were
reduced to $1.5 million for the year ended December 31, 2002 compared to $2.1
million during the year ended December 31, 2001. We derived net cash from financing activities of $2.1 million, $824,000,
and $773,000 during the years ended December 31, 2003, 2002, and 2001,
respectively. During the year ended December 31, 2003, net cash from financing
activities was generated primarily through the exercise of stock options and
stock purchased through our Employee Stock Purchase Plan, which provided net
proceeds of $1.9 million and $316,000 respectively. During the year ended
December 31, 2003, the Company offered to exchange certain out-of the-money
stock options held by non-executive employees of the company and the newly
granted options under the plan accounted for $.5 million of the $1.9 million of
proceeds received in 2003 for the exercise of stock options (see also
discussion of stock option exchange program, completed during the year ended
December 31, 2003, under Note 14) During the year ended December 31, 2002, net
cash from financing activities was generated primarily through the exercise of
stock options and stock purchased through our Employee Stock Purchase Plan,
which provided net proceeds of $307,000 and $592,000, respectively. During the
year ended December 31, 2001, net cash from financing activities was generated
primarily through the exercise of stock options and stock purchased through our
Employee Stock Purchase Plan, which provided net proceeds of $310,000 and
$463,000 respectively. During the years ended December 31, 2002 and through June 1, 2003, we had
a credit arrangement with a bank for up to $10 million, based upon 80% of
eligible accounts receivable, as defined. We paid a facility fee of 0.15% for
the committed portion of the arrangement whether or not any amounts are
actually drawn on the line of credit. At December 31, 2002, we had no
borrowings against the line of credit. The credit agreement expired on June 1,
2003 and was not renewed. We believe that cash and cash equivalents on hand and anticipated future
cash receipts 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 this report. Contractual Obligations and Commitments We had the following contractual obligations and commitments outstanding as of
December 31, 2003: (in thousands)
    
    Payments due by periodContractual
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    More thanObligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsCapital Lease Obligations *
    
    $
    21
    
    
    $
    15
    
    
    $
    6
    
    
    
    
    
    
    
    Operating Leases
    
    $
    5,416
    
    
    $
    2,067
    
    
    $
    2,183
    
    
    $
    1,166
    
    
    
    Purchase Obligations
    
    $
    4,640
    
    
    $
    4,640
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term Liabilities Reflected on the Registrants Balance
 21




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(in thousands)
    
    Payments due by periodContractual
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    More thanObligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsSheet Under GAAP
    
    
    205
    
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    10,282
    
    
    $
    6,927
    
    
    $
    2,189
    
    
    $
    1,166
    
    
    
    
    *
    
    Total lease amounts are stated less interest with rates of 2.26% to
12.96% calculated to be $663 for the life of the leases. Impact Of Inflation We do not believe that inflation has had a material impact on revenues or
expenses during the last five fiscal periods reported on herein. Recently Issued and Adopted Accounting Pronouncements In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity. The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. The adoption of SFAS No. 146 did not have a material
effect on the Companys consolidated financial statements. In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, Revenue arrangements with Multiple Deliverables.
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or
rights to use assets. The provisions of EITF Issue No. 00-21
applied to
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of EITF Issue No. 00-21 did not have a material effect on
the Companys consolidated financial statements. In December 2003, the FASB issued FASB Interpretation No. (FIN) 46R,
Consolidation of Variable Interest Entities, which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in
an entity through means other than voting rights and accordingly should
consolidate the entity. FIN 44R replaces FASB Interpretation 46, Consolidation
of Variable Interest Entities,which was issued in January 2003. The Company
will be required to apply FIN 46R to variable interests in VIEs created after
December 31, 2003. For variable interests in VIEs created before January 1,
2004, the Interpretation will be applied beginning January 1, 2005. For any
VIEs that must be consolidated under FIN 46R that were created before January
1, 2004, the assets, liabilities and noncontrolling interests of the VIE
initially would be measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date FIN
46R first applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIE. The adoption of this pronouncement is not
expected to have a material effect on the Companys consolidated financial
statements. On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.The Statement
requires issuers to classify as liabilities (or assets in some circumstance)
three classes of freestanding financial instruments that embody obligations for
the issuer. Generally, the Statement is effective for financial instruments
entered into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The
Company adopted the provisions of the Statement on July 1, 2003. The
application of this statement did not have a material effect on the Companys
consolidated financial statements. In December 2003, the Securities and Exchange Commission (SEC) issued
staff accounting bulletin No. 104 (SAB 104 Revenue Recognition) which
codifies, revises and rescinds certain sections of Staff Accounting Bulletin
No. 101 Revenue Recognition, in order to make this interpretive guidance
consistent with current authoritative accounting guidance and SEC rules and
regulations. The changes noted in SAB 104 did not have a material effect on
our consolidated financial statements. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to certain market risks in the ordinary course of our
business. These risks result primarily from changes in foreign currency
exchange rates and interest rates. In addition, our international operations
are subject to risks related to differing economic conditions, changes in
political climate, differing tax structures and other regulations and
restrictions. 22




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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. The Company does not have any derivative financial
instruments. As of December 31, 2003, a change in interest rates of 10% over a
years period would not have a material impact on our interest earnings. 
 Item 8. Financial Statements and Supplementary Data Our consolidated financial statements as of December 31, 2003 and 2002 and
for each of the years in the three-year period ended December 31, 2003,
together with related notes and the report of KPMG LLP, independent auditors,
are on the following pages. Other required financial information is more fully
described in Item 14. 23




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Independent Auditors Report The Board of Directors
Radyne ComStream Inc.: We have audited the accompanying consolidated balance sheets of Radyne
ComStream Inc. and subsidiaries (the Company) (a majority-owned subsidiary of
Singapore Technologies Pte Ltd) as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders equity and
comprehensive income (loss), and cash flows for each of the years in the
three-year period ended December 31, 2003. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2003 and 2002, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States
of America. As
discussed in Note 2 to the consolidated financial statements,
the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets which changed the Companys method of
accounting for goodwill and other intangible assets effective
January 1, 2002. /s/ KPMG LLP Phoenix, Arizona
February 27, 2004 24




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Radyne ComStream Inc.
Consolidated Balance Sheets
December 31, 2003 and 2002 December 31,2003
    
    2002AssetsCurrent assets:Cash and cash equivalents
    
    $
    30,130,218
    
    
    $
    16,229,558Accounts receivable  trade, net of allowance for doubtful accounts of $488,530, and
$338,904, respectively
    
    
    9,779,724
    
    
    
    10,517,340Inventories, net
    
    
    7,765,648
    
    
    
    10,654,601Prepaid expenses and other assets
    
    
    482,575
    
    
    
    567,352Deferred tax assets
    
    
    
    
    
    
    2,552,549Total current assets
    
    
    48,158,165
    
    
    
    40,521,400Property and equipment, net
    
    
    2,268,631
    
    
    
    3,692,842Other assets
    
    
    182,236
    
    
    
    192,530$
    50,609,032
    
    
    $
    44,406,772Liabilities and Stockholders EquityCurrent liabilities:Current installments of obligations under capital leases
    
    $
    14,447
    
    
    $
    37,808Accounts payable
    
    
    2,180,483
    
    
    
    1,880,207Accrued expenses
    
    
    3,512,609
    
    
    
    3,899,676Taxes payable
    
    
    184,792
    
    
    
    Customer advance payments
    
    
    876,971
    
    
    
    707,398Total current liabilities
    
    
    6,769,302
    
    
    
    6,525,089Deferred rent
    
    
    10,844
    
    
    
    72,264Obligations under capital leases, excluding current installments
    
    
    5,414
    
    
    
    19,861Accrued stock option compensation
    
    
    205,394
    
    
    
    501,073Total liabilities
    
    
    6,990,954
    
    
    
    7,118,287Commitments, contingent liabilities and subsequent
events (note 7, 8, 13, 17 and 20)
    
    
    
    
    
    
    Stockholders equity:Common stock; $.001 par value  authorized, 20,000,000 shares; issued and outstanding,
16,130,913 and 15,308,832 shares at December 31, 2003 and 2002, respectively
    
    
    16,131
    
    
    
    15,309Additional paid-in capital
    
    
    53,102,222
    
    
    
    50,921,603Accumulated deficit
    
    
    (9,500,275
    )
    
    
    (13,625,485
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (22,942
    )Total stockholders equity
    
    
    43,618,078
    
    
    
    37,288,485$
    50,609,032
    
    
    $
    44,406,772
 See accompanying notes to consolidated financial statements. 25




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##### Table of Contents



Radyne ComStream Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2003, 2002 and 2001 Years ended December 31,2003
    
    2002
    
    2001Net sales
    
    $
    57,990,677
    
    
    $
    57,661,711
    
    
    $
    68,470,929Cost of sales
    
    
    31,639,411
    
    
    
    38,040,715
    
    
    
    39,558,792Inventory write down
    
    
    
    
    
    
    430,826
    
    
    
    Gross profit
    
    
    26,351,266
    
    
    
    19,190,170
    
    
    
    28,912,137Operating expenses:Selling, general and administrative
    
    
    13,559,480
    
    
    
    13,470,668
    
    
    
    15,307,442Research and development
    
    
    6,294,255
    
    
    
    8,665,128
    
    
    
    10,811,459Asset impairment charge
    
    
    
    
    
    
    995,000
    
    
    
    Restructuring charge
    
    
    
    
    
    
    1,101,889
    
    
    
    Total operating expenses
    
    
    19,853,735
    
    
    
    24,232,685
    
    
    
    26,118,901Earnings (loss) from operations
    
    
    6,497,531
    
    
    
    (5,042,515
    )
    
    
    2,793,236Other (income) expense:Interest expense
    
    
    27,842
    
    
    
    61,979
    
    
    
    54,186Interest income
    
    
    (254,473
    )
    
    
    (236,133
    )
    
    
    (522,527
    )Earnings (loss) before income taxes and cumulative effect of change
in accounting principle
    
    
    6,724,162
    
    
    
    (4,868,361
    )
    
    
    3,261,577Income taxes (benefit)
    
    
    2,598,952
    
    
    
    (195,827
    )
    
    
    1,326,048Earnings (loss) before cumulative effect of change in accounting
principle
    
    
    4,125,210
    
    
    
    (4,672,534
    )
    
    
    1,935,529Cumulative effect of change in accounting principle
    
    
    
    
    
    
    4,281,205
    
    
    
    Net earnings (loss)
    
    $
    4,125,210
    
    
    $
    (8,953,739
    )
    
    $
    1,935,529Basic net earnings per share:Net earnings (loss)
    
    $
    .27
    
    
    $
    (0.59
    )
    
    $
    0.13Diluted net earnings per share:Net earnings (loss)
    
    $
    .26
    
    
    $
    (0.59
    )
    
    $
    0.13Weighted average number of common shares outstanding  basic
    
    
    15,487,647
    
    
    
    15,180,379
    
    
    
    14,943,516Weighted average number of common shares outstanding  diluted
    
    
    15,717,856
    
    
    
    15,180,379
    
    
    
    15,411,568
 See accompanying notes to consolidated financial statements. 26




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##### Table of Contents



Radyne ComStream Inc.
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
Years ended December 31, 2003, 2002 and 2001 Additional
    
    
    
    
    
    
    
    
    
    AccumulatedCommon stock
    
    paid-in
    
    Deferred
    
    Accumulated
    
    other comprehensiveShares
    
    Amount
    
    capital
    
    compensation
    
    Deficit
    
    income (loss)
    
    TotalBalances, December 31, 2000
    
    
    14,822,820
    
    
    $
    14,823
    
    
    $
    49,249,999
    
    
    $
    (844,032
    )
    
    $
    (6,607,275
    )
    
    $
    
    
    
    $
    41,813,515Exercise of stock options
    
    
    84,850
    
    
    
    85
    
    
    
    309,621
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    309,706Issuance of common stock through
Employee Stock Purchase Plan
    
    
    113,006
    
    
    
    113
    
    
    
    463,248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    463,361Deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    844,032
    
    
    
    
    
    
    
    
    
    
    
    844,032Comprehensive income:Foreign translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,920
    )
    
    
    (18,920
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,935,529
    
    
    
    
    
    
    
    1,935,529Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,916,609Balances, December 31, 2001
    
    
    15,020,676
    
    
    $
    15,021
    
    
    $
    50,022,868
    
    
    $
    
    
    
    $
    (4,671,746
    )
    
    $
    (18,920
    )
    
    $
    45,347,223Exercise of stock options
    
    
    88,364
    
    
    
    88
    
    
    
    306,834
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306,922Issuance of common stock through
Employee Stock Purchase Plan
    
    
    199,792
    
    
    
    200
    
    
    
    591,901
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    592,101Comprehensive income (loss):Foreign translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,022
    )
    
    
    (4,022
    )Net earnings (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,953,739
    )
    
    
    
    
    
    
    (8,953,739
    )Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,957,761
    )Balances, December 31, 2002
    
    
    15,308,832
    
    
    $
    15,309
    
    
    $
    50,921,603
    
    
    $
    
    
    
    $
    (13,625,485
    )
    
    $
    (22,942
    )
    
    $
    37,288,485Exercise of stock options
    
    
    642,371
    
    
    
    642
    
    
    
    1,865,045
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,865,687Issuance of common stock through
Employee Stock Purchase Plan
    
    
    179,710
    
    
    
    180
    
    
    
    315,574
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    315,754Comprehensive income:Foreign translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,942
    
    
    
    22,942Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,125,210
    
    
    
    
    
    
    
    4,125,210Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,148,152Balances, December 31, 2003
    
    
    16,130,913
    
    
    $
    16,131
    
    
    $
    53,102,222
    
    
    $
    
    
    
    $
    (9,500,275
    )
    
    $
    
    
    
    $
    43,618,078
 See accompanying notes to consolidated financial statements. 27




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##### Table of Contents



Radyne ComStream Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003, 2002, and 2001 Years ended December 31,2003
    
    2002
    
    2001Cash flows from operating activities:Net earnings (loss)
    
    $
    4,125,210
    
    
    $
    (8,953,739
    )
    
    $
    1,935,529Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:Asset impairment charge
    
    
    
    
    
    
    995,000
    
    
    
    Cumulative effect of change in accounting principle
    
    
    
    
    
    
    4,281,205
    
    
    
    Provision for bad debt
    
    
    398,176
    
    
    
    434,818
    
    
    
    339,037Deferred income taxes
    
    
    2,552,549
    
    
    
    
    
    
    
    1,301,869Gain on disposal of assets
    
    
    (21,178
    )
    
    
    
    
    
    
    Depreciation and amortization
    
    
    1,853,532
    
    
    
    2,500,929
    
    
    
    3,575,253Increase (decrease) in cash resulting from changes in:Accounts receivable
    
    
    339,440
    
    
    
    3,832,881
    
    
    
    (3,200,099
    )Inventories
    
    
    2,888,953
    
    
    
    7,170,472
    
    
    
    (5,107,508
    )Prepaid expenses and other current assets
    
    
    84,777
    
    
    
    228,044
    
    
    
    (153,806
    )Other assets
    
    
    1,894
    
    
    
    (115,168
    )
    
    
    Accounts payable
    
    
    300,276
    
    
    
    (592,279
    )
    
    
    247,123Accrued expenses
    
    
    (387,067
    )
    
    
    (79,408
    )
    
    
    (1,763,885
    )Taxes payable
    
    
    184,792
    
    
    
    (78,900
    )
    
    
    (201,100
    )Customer advance payments
    
    
    169,573
    
    
    
    105,562
    
    
    
    (625,399
    )Deferred rent
    
    
    (61,420
    )
    
    
    (73,318
    )
    
    
    (32,608
    )Accrued stock option compensation
    
    
    (295,679
    )
    
    
    (736
    )
    
    
    (3,604
    )Net cash provided by (used in) operating activities
    
    
    12,133,828
    
    
    
    9,655,363
    
    
    
    (3,689,198
    )Cash flows from investing activities:Capital expenditures
    
    
    (520,997
    )
    
    
    (1,471,558
    )
    
    
    (2,100,472
    )Proceeds from disposal of assets
    
    
    121,254
    
    
    
    14,400
    
    
    
    1,720Acquisition, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (3,999,663
    )Net cash used in investing activities
    
    
    (399,743
    )
    
    
    (1,457,158
    )
    
    
    (6,098,415
    )Cash flows from financing activities:
    
    
    
    
    
    
    
    
    
    $Net proceeds from sale of common stock to
employees, net of costs
    
    
    315,754
    
    
    
    592,101
    
    
    
    463,361Exercise of stock options
    
    
    1,865,687
    
    
    
    306,922
    
    
    
    309,706Principal payments on capital lease obligations
    
    
    (37,808
    )
    
    
    (74,585
    )
    
    
    (50,188
    )Net cash provided by financing activities
    
    
    2,143,633
    
    
    
    824,438
    
    
    
    772,879Net increase (decrease) in cash and cash equivalents
    
    
    13,877,718
    
    
    
    9,022,643
    
    
    
    (9,014,734
    )Effects of exchange rate changes on cash and
cash equivalents
    
    
    22,942
    
    
    
    (4,022
    )
    
    
    (18,920
    )Cash and cash equivalents, beginning of year
    
    
    16,229,558
    
    
    
    7,210,937
    
    
    
    16,244,591Cash and cash equivalents, end of year
    
    $
    30,130,218
    
    
    $
    16,229,558
    
    
    $
    7,210,937Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    27,842
    
    
    $
    61,979
    
    
    $
    54,186Cash paid for taxes
    
    $
    
    
    
    $
    
    
    
    $
    201,100Supplemental schedule of non-cash investing and financing
activities:Acquisition of equipment through capital lease
    
    $
    
    
    
    $
    18,674
    
    
    $
    
 See accompanying notes to consolidated financial statements. 28




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##### Table of Contents



Radyne
ComStream, Inc.
Notes to the Consolidated Financial Statements
For the year Ended December 31, 2003, 2002 and 2001 (1) Organization and Acquisition Radyne Corp., a Delaware corporation, (Radyne) was incorporated on November
25, 1980. On August 12, 1996, Radyne became a subsidiary of Singapore
Technologies Pte Ltd (STPL), through its wholly-owned subsidiary, Stetsys
US, Inc. (ST). In March 1999, Radyne changed its name to Radyne ComStream
Inc. During 2000, the Company changed its state of incorporation from New
York to Delaware and changed the par value of its common stock from $.002 to
$.001. STPL beneficially owned 9,676,800 shares of the Companys common
stock at December 31, 2003. These shares represented 60% of the Companys
voting shares outstanding as of December 31, 2003 (see
note 20). Radyne ComStream Inc. (the Company) has manufacturing locations in Chandler
and Phoenix, Arizona and in San Diego, California. Additionally, the
Company has sales offices in Singapore, Beijing, Jakarta, London and
Amsterdam. The Company also contracts with representatives that provide
sales and/or service centers in Rio de Janeiro, Bangalore, Shanghai and
Moscow. The Company designs, manufactures, and sells products, systems and
software used for the transmission and reception of data over satellite,
microwave and cable communication networks. The Company operates primarily in North America in the satellite
communications industry. ComStream, the Companys San Diego manufacturing
facility, designs, and manufacturers satellite interactive modems and earth
stations. Additionally, they manufacture and market full-transponder
satellite digital audio receivers for music providers and have designed and
developed a suite of products to address Internet over satellite
applications and infrastructure and are the home to the Tiernan digital
video product lines. Description of Acquisitions On April 18, 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 $4.0 million in cash. Product lines
acquired include standard digital TV encoders, HDTV 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 and, accordingly, the
purchase price has been allocated to the assets purchased and certain
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 $1,355,000 and was recorded as
goodwill, which was amortized on a straight-line basis over seven years,
until January 1, 2002, the date of adoption of SFAS 142. The results of
operations of the acquired operations have been included in the accompanying
statements of operations from the acquisition date. 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, 2001. 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, 2001 (in thousands, except per
share amounts): Year endedDecember 31, 2001Net sales
    
    $
    71,259Other income, net
    
    $
    523Total revenues
    
    $
    71,782Net earnings (loss)
    
    $
    137Basic earnings (loss) per share
    
    $
    0.01Diluted earnings (loss) per share
    
    $
    0.01
 29




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##### Table of Contents



(2) Summary of Significant Accounting Policies (a) Use of 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, the
Company evaluate its
estimates and assumptions based upon historical experience and various other
factors and circumstances. The Company believe that its estimates and assumptions are
reasonable in the circumstances; however, actual results may differ from
these estimates under different future conditions. (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 original maturities of
90 days or less to be cash equivalents. (d) Revenue Recognition The Company recognizes revenue when products have been shipped to the
customer, an agreement with the customer has been executed, transfer of
title and acceptance has occurred, pricing is fixed and collectibility is
probable. Revenue from services is recognized when the related services
have been performed. (e) Inventories Inventories, consisting of satellite modems and related products, are valued
at the lower of cost (first-in, first-out) or market. The Company writes
down its inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated
market value based on assumptions about future demand and market conditions. (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) Intangible Assets Goodwill represents the excess of costs over fair value of assets of
businesses acquired. The Company adopted the provisions of SFAS No. 142,
Goodwill and Other IntangibleAssets, as of January 1, 2002. Goodwill and
intangible assets acquired in a purchase business combination and determined
to have an indefinite useful life are not amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. In connection with SFAS No. 142s transitional goodwill impairment
evaluation, the Statement required the Company to perform an assessment of
whether there was an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company was required to identify its
reporting units and determine the 30




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carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of January 1, 2002. The Company was required to determine
the fair value of each reporting unit and compare it to the carrying amount
for each. To the extent the carrying amount of a reporting unit exceeded the
fair value of the reporting unit, the Company would be required to perform
the second step of the transitional impairment test, as this is an
indication that the reporting unit goodwill may be impaired. The second step was required for two reporting units. In this step, the
Company compared the implied fair value of the reporting unit goodwill with
the carrying amount of the reporting unit goodwill, both of which were
measured as of the date of adoption. The implied fair value of goodwill was
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit
in a manner similar to a purchase price allocation, in accordance with SAS
No. 141, Business Combinations.The residual value after this allocation was
the implied fair value of the reporting unit goodwill. The implied fair
value of these reporting units did not exceed their carrying amounts and the
Company was required to recognize an impairment loss as further discussed
below. The Company adopted Statement of Financial Accounting Standards No. 142
(SFAS 142), Goodwill and Other Intangible Assets on January 1, 2002, the
first day of fiscal 2002. Therefore, the amortization of goodwill, which was
approximately $449,000 for the year ended December 31, 2001, was suspended
effective on that date. The Company determined that it had three reporting
units under its one operating segment, largely due to the different profit
margins and product base among its reporting units. Two of the Companys
reporting
units had recorded goodwill. The Company performed its transitional
impairment test on those two reporting units. A present value technique was
utilized in determining the fair value of each of the Companys two
reporting units that had goodwill. The discount rate utilized in the present
value calculation was 20%. The most significant fundamental assumptions
utilized in the discounted cash flow were the cash flow to be generated, the
life of the asset, the stage of the product life cycle curve, and the
inherent risks in achieving the projected benefits of owning the asset. The
impairment analysis yielded an impairment charge of $4.3 million, recorded
in 2002 as a cumulative effect of change in accounting
principle. The Company has no remaining goodwill on its balance sheet at
December 31, 2003 and 2002. Prior to the adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over the expected periods to be benefited, generally 7
to 12 years, and assessed for recoverability by determining whether the
amortization of the goodwill balance over its remaining life could be
recovered through undiscounted future operating cash flows of the acquired
operations. All other intangible assets were amortized on a straight-line
basis from 3 to 8 years. The amount of goodwill and other intangible assets
were amortized on a straight-line basis from 3 to 15 years. The amount of
goodwill and other intangible asset impairment, if any, was measured based
on projected discounted future operating cash flows using a discount rate
reflecting the Companys average cost of funds. As of the date of adoption of SFAS No. 142, the Company had unamortized
goodwill with a value of $4,281,205. Had SFAS No. 142 been in effect for the
year ended December 31, 2001 the Companys net earnings would have been
increased to the following pro forma amounts: 2001Net earnings:As reported
    
    $
    1,935,000Pro forma
    
    $
    2,384,000Diluted earnings per share, as reported
    
    $
    0.13Diluted earnings per share, pro forma
    
    $
    0.15
 (h) Purchased Technology In connection with the acquisition of ComStream in 1998, value was assigned
to Purchased technology. Purchased technology was amortized on a
straight-line basis over the expected period to be benefited of 6.25 years.
Purchased technology of $995,000 was written-off during 2002 because the Company
discontinued use of the technology. (i) Impairment of Long-Lived Assets 31




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##### Table of Contents



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. (j) Warranty Costs The Company provides limited warranties on certain of its products and
systems for periods generally not exceeding two years. Estimated warranty
costs for potential product liability and warranty claims based on the
Companys claim experience are accrued as cost of sales at the time revenue
is recognized. While the Company engages in extensive product quality
programs and processes, including actively monitoring and evaluating the
quality of its vendors, the Companys warranty liability is affected by
product failure rates and
material usage and service delivery costs incurred in correcting product
failures. Should actual product failure rates, material usage or service
delivery costs differ from the Companys estimates, revisions to the
estimated warranty liability would be required. (k) Research and Development The cost of research and development is charged to expense as incurred. (l) Income Taxes The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
consequences attributed to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Differences between income for financial and tax
reporting purposes arise primarily from amortization of certain intangible
assets and accruals for warranty reserves and compensated absences. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. (m) Concentration of Credit Risk Financial instruments, which potentially subject the Company to
concentrations of credit risk, are principally accounts receivable. The
Company maintains ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains allowances for doubtful accounts for estimating losses
resulting from the inability of its customers to make required payments and
such losses have not exceeded managements expectations. If the financial
condition of the Companys customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required. Periodically during the year, the Company maintains cash in financial
institutions in excess of the amounts insured by the federal government. (n) Net Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing earnings available
to stockholders by the weighted-average number of shares outstanding for the
period. Diluted earnings (loss) per share reflects the potential dilution
that could occur if securities or contracts to issue common stock were
exercised or converted to stock or resulted in the issuance of stock that
then shared in the earnings of the Company. (o) Fair Value of Financial Instruments The fair value of accounts receivable and accounts payable approximates the
carrying value due to the short-term nature of these instruments. 32




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##### Table of Contents



(p) Employee Stock Options The Company applies the intrinsic value based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, to account for its
fixed plan stock options. Under this method, compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. FASB Statement No. 123,
Accounting for Stock Based Compensation and FASB Statement No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, an
amendment of FASB Statement No. 123, established accounting and disclosure
requirements using a fair value based method of accounting for stock based
employee compensation plans. As permitted by existing accounting standards,
the Company has elected to continue to apply the intrinsic value based
method of accounting described above, and has adopted only the disclosure
requirements of Statement 123, as amended. Had the Company
determined compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, the Companys net earnings (loss) and
earnings (loss) per share would have been reduced (increased) to the pro
forma amounts indicated below: For the Year Ended December 31,2003
    
    2002
    
    2001Net earnings (loss)
    
    As reported
    
    $
    4,125,210
    
    
    $
    (8,953,739
    )
    
    $
    1,935,529Pro forma
    
    
    3,399,076
    
    
    
    (14,136,677
    )
    
    
    (4,229,052
    )Earnings (loss) per share -Basic
    
    As reported
    
    
    0.27
    
    
    
    (0.59
    )
    
    
    0.13Basic
    
    Pro forma
    
    
    0.22
    
    
    
    (0.93
    )
    
    
    (0.28
    )Diluted
    
    As Reported
    
    
    0.26
    
    
    
    (0.59
    )
    
    
    0.13Diluted
    
    Pro forma
    
    
    0.22
    
    
    
    (0.93
    )
    
    
    (0.27
    )
 The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net earnings (loss) amounts
presented above because compensation cost is reflected (increased) over the
options vesting period of three years. The fair value of options granted under the stock option plans 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 49
percent  128 percent, risk free interest rate of 1.20 percent  4.50
percent, and expected lives of five  seven years. The per share weighted
average fair value of stock options granted under the Plan for the years
ended December 31, 2003, 2002 and 2001 were $1.65, $3.16 and $6.53,
respectively, using the Black-Scholes option-pricing model and the
assumptions listed above. (q) Segment Reporting The Company has only one operating business segment, the sale, integration
and installation of equipment for satellite, microwave and cable
communications and television networks. (r) Reclassifications Certain reclassifications have been made to the 2002 and 2001 consolidated
financial statement amounts to conform to the 2003 presentation. (3) Inventories 2003
    
    2002Inventories consist of the following at December 31:Raw materials and components
    
    $
    6,261,301
    
    
    
    8,012,011Work-in-process
    
    
    1,136,639
    
    
    
    1,836,969Finished goods
    
    
    367,708
    
    
    
    805,621$
    7,765,648
    
    
    
    10,654,601
 33




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##### Table of Contents



(4) Property and Equipment 2003
    
    2002Property and equipment consist of the following at December 31:Machinery and equipment
    
    $
    6,020,208
    
    
    
    5,889,176Furniture and fixtures
    
    
    4,053,123
    
    
    
    4,009,972Leasehold improvements
    
    
    644,630
    
    
    
    678,567Demonstration units
    
    
    673,469
    
    
    
    586,378Computers and software
    
    
    923,228
    
    
    
    889,31912,314,658
    
    
    
    12,053,412Less accumulated depreciation and amortization
    
    
    (10,046,027
    )
    
    
    (8,360,570
    )Property and equipment, net
    
    $
    2,268,631
    
    
    
    3,692,842
 (5) Accrued Expenses 2003
    
    2002Accrued expenses consist of the following at December 31:Wages, vacation and related payroll taxes
    
    $
    1,025,366
    
    
    
    966,223Professional fees
    
    
    220,353
    
    
    
    212,855Warranty reserve
    
    
    856,491
    
    
    
    968,818Restructuring costs
    
    
    406,561
    
    
    
    644,960Commissions
    
    
    385,749
    
    
    
    465,039Other
    
    
    618,089
    
    
    
    641,781Total accrued expenses
    
    $
    3,512,609
    
    
    
    3,899,676
 The following summarizes changes to restructuring related liabilities for the
years ended December 31, 2003 and 2002: Accrued Lease
    
    AccruedExit Costs
    
    Severance
    
    TotalBalance, December 31, 2001
    
    $
    
    
    
    $
    
    
    
    $
    Accrual for new activities
    
    
    791,000
    
    
    
    170,000
    
    
    
    961,000Cash payments
    
    
    (146,040
    )
    
    
    (170,000
    )
    
    
    (316,040
    )Balance, December 31, 2002
    
    $
    644,960
    
    
    $
    
    
    
    $
    644,960Cash payments
    
    
    (238,399
    )
    
    
    
    
    
    
    (238,399
    )Balance, December 31, 2003
    
    $
    406,561
    
    
    $
    
    
    
    $
    406,561
 During the third quarter of
2002, the Company implemented a restructuring plan to reduce costs and address
the economic slowdown and negative industry conditions. This plan
included the reduction in force of approximately 10% of its workforce
in the manufacturing, research and development and sales departments,
the abandonment of certain non-performing and under-performing
product lines and a provision for the excess space created at the
San Diego facility as a result of these cost cutting measures. This
effort resulted in a charge to the Companys operating expenses of
approximately $1.5 million; of which $431,000 was charged to
cost of sales and the balance was charged to restructuring charge.
This amount included $170,000 in severance costs. During the year
ended December 31, 2002, the Company paid all charges except for $645,000
in lease exit costs. During the year ended December 31, 2003,
$238,000 in lease exit costs was paid and $407,000 remained to be
paid through February 2005. (6) Line of Credit During the year ended December 31, 2003 the Companys line of credit
expired and was not renewed. (7) Obligations Under Capital Leases The Company leases machinery and equipment under capital leases. The cost
and accumulated depreciation of the equipment was $146,101 and $130,623,
respectively, at December 31, 2003 and $252,440 and $151,073, respectively,
at December 31, 2002, and is included in property and equipment in the
accompanying consolidated balance sheets and is being amortized over the
estimated useful lives of the machinery and equipment. The reductions in
amounts of equipment under capital leases is due to leases which expired in
2003. 34




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##### Table of Contents



Payments on capital lease obligations due after December 31, 2003 are as
follows: 2004
    
    $
    15,0232005
    
    
    5,501Total minimum lease payments
    
    
    20,524Less amount representing interest at rates of 2.26% to 12.96%
    
    
    663Present value of minimum lease payments
    
    
    19,861Less current installments
    
    
    14,447Capital lease obligations due after one year
    
    $
    5,414
 (8) Commitments Rent expense was $1,860,315, $1,778,557 and $1,801,765 for the years ended
December 31, 2003, 2002, and 2001, respectively. Future minimum rentals
under leases after December 31, 2003 are as follows: 2004
    
    $
    2,067,0732005
    
    
    1,205,4122006
    
    
    977,7582007
    
    
    1,009,4572008
    
    
    156,393Thereafter
    
    
    Total commitments
    
    $
    5,416,093
 The Company currently subleases a portion of its Phoenix facility to the
University of Phoenix Online. Rent expense was offset by $275,151 and
$267,098 for the years ended December 31, 2003 and 2002 for rent payments
received through this sublease. Future minimum rentals under leases after
December 31, 2003 are also offset by $283,204, $291,257, $299,311 and
$255,018 for the years ended December 31, 2004, 2005, 2006 and 2007,
respectively. This sublease agreement expires in 2007. The Company generally has commitments with certain suppliers and subcontract
manufacturers to supply certain components and estimates its non-cancelable
obligations for these commitments to be approximately $4,460,000 at December
31, 2003. (9) Income Taxes Income tax expense (benefit) amounted to $2,598,592, $(195,827) and
$1,326,048 for the years ended December 31, 2003, 2002 and 2001,
respectively. The actual tax expense (benefit) for these periods differs
from the Federal statutory tax expense for those periods as follows: Years ended December 31,2003
    
    2002
    
    2001Computed Federal statutory tax expense
    
    $
    2,286,215
    
    
    
    (1,655,243
    )
    
    
    1,108,936State tax expense (benefit)
    
    
    206,878
    
    
    
    (26,402
    )
    
    
    357,554Change in federal valuation allowance
    
    
    1,282,366
    
    
    
    1,465,538
    
    
    
    Extra territorial income exclusion
    
    
    (1,128,061
    )
    
    
    
    
    
    
    (269,739
    )Research and development credits
    
    
    
    
    
    
    
    
    
    
    (70,000
    )Other adjustments
    
    
    (48,446
    )
    
    
    20,280
    
    
    
    199,297Total
    
    $
    2,598,592
    
    
    
    (195,827
    )
    
    
    1,326,048
 The income
tax benefit of $195,827 in 2002 was the result of the recovery of
income tax payments made in previous periods. Components of income tax expense (benefit) for 2003, 2002 and 2001
follows: Current
    
    Deferred
    
    Total2003:Federal
    
    $
    (10,097
    )
    
    
    2,295,597
    
    
    
    2,285,500State
    
    
    56,500
    
    
    
    256,952
    
    
    
    313,452Total
    
    $
    46,403
    
    
    
    2,552,549
    
    
    
    2,598,952
 35




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##### Table of Contents



Current
    
    Deferred
    
    Total2002:Federal
    
    $
    (155,824
    )
    
    
    
    
    
    
    (155,824
    )State
    
    
    (40,003
    )
    
    
    
    
    
    
    (40,003
    )Total
    
    $
    (195,827
    )
    
    
    
    
    
    
    (195,827
    )2001:Federal
    
    $
    9,605
    
    
    
    774,695
    
    
    
    784,300State
    
    
    14,574
    
    
    
    527,174
    
    
    
    541,748Total
    
    $
    24,179
    
    
    
    1,301,869
    
    
    
    1,326,048
 2003
    
    2002Deferred tax assets consisted of the following at December 31:Deferred tax assets:Cumulative tax effect of net operating loss carryforwards
    
    $
    6,966,344
    
    
    
    7,940,778Tax credits
    
    
    388,747
    
    
    
    351,258Reserves and accruals
    
    
    1,583,862
    
    
    
    2,121,069Depreciation
    
    
    318,830
    
    
    
    1,334Amortization of goodwill and intangibles
    
    
    624,750
    
    
    
    719,307Valuation allowance
    
    
    (9,882,533
    )
    
    
    (8,581,197
    )$
    
    
    
    
    2,552,549
 The net change in the total valuation allowance for the years ended December
31, 2003 and 2002 was $1,301,336 and $1,775,085, respectively. The
valuation allowance includes approximately $1,327,000 for net operating loss
carryforwards that relate to stock option compensation expense for income
tax reporting purposes. Any utilization of these net operating loss
carryforwards would be recorded, in the amount of its tax benefit to the
Company, as an increase to Additional Paid-In-Capital. At December 31,
2003, the Company has net operating loss carryforwards of approximately
$18,960,000 expiring in various years from 2018 through 2022, and federal
tax credits of $388,000, of which approximately $64,000 expires in 2017 and
the balance of which do not expire. These net operating losses and federal
tax credits are available for utilization against taxable income/taxes
payable of future periods, if any. Due to the sale of stock (note 20) it is
possible the use of the Companys net operating loss carryforwards may be limited in
accordance with Section 382 of the Internal Revenue Code. A determination
as to this limitation will be made at a future date as the net operating
losses are utilized. The Company recorded a valuation allowance on the
deferred income tax assets to reduce the total to an amount that management
believes is more likely than not to be realized. Should the Company determine that
it would be able to realize deferred tax assets in the future in excess of
its net recorded amount, an adjustment to the valuation allowance for
deferred tax assets would result in an income tax benefit in the period such
determination was made. (10) Significant Customers and Foreign and Domestic Sales No customer represented greater than 10% of net sales during any of the
years ended December 31, 2003, 2002 or 2001. The Company sales in principal foreign and domestic markets as a percentage of total
sales for the years ended December 31, 2003, 2002 and 2001: Years ended December 31,2003
    
    2002
    
    2001Asia
    
    
    21
    %
    
    
    27
    %
    
    
    20
    %Africa/Middle East
    
    
    8
    
    
    
    5
    
    
    
    3Latin America
    
    
    2
    
    
    
    3
    
    
    
    7Europe
    
    
    16
    
    
    
    11
    
    
    
    15Canada
    
    
    1
    
    
    
    1
    
    
    
    1Total foreign
    
    
    48
    
    
    
    47
    
    
    
    46Domestic
    
    
    52
    
    
    
    53
    
    
    
    54100
    %
    
    
    100
    %
    
    
    100
    %Foreign assets
    
    $
    
    
    
    $
    319,000
    
    
    $
    388,000
 The Company has two primary product lines: 1) satellite modems and earth
stations (including services related to integration and installation of
this type of equipment), and 2) broadcast products. The sales of 36




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##### Table of Contents



satellite modems and earth stations accounted for approximately 80% of
2003, 63% of 2002 and 73% of 2001 net sales, respectively. In 2003, the Company transferred all of the assets of the ComStream UK
Ltd. entity to the San Diego operating facility. Prior to 2003, the
Company maintained the subsidiary entity under the registration of the
United Kingdom. In 2003, it was decided that the original reasons to
establish the legal entity in the UK no longer existed. Therefore,
effective January 1, 2003 the legal entity was dissolved. The Company
maintains a sales office in the UK which is a branch of Radyne ComStream
Inc. (11) Stockholders Equity In February 2000, the Company completed an offering of 2,400,000 units, each
consisting of one share of common stock and one five-year common stock
purchase warrant, plus an additional 360,000 units sold pursuant to the
underwriters over-allotment option, for a total of approximately
$16,340,000 cash, net of issuance costs. Each warrant is exercisable to
purchase one share of common stock at a price of $8.75, subject to
adjustment in certain circumstances, at any time after the warrants are
issued until February 7, 2005. Commencing February 7, 2001, the Company may
redeem the warrants for $0.01 per warrant upon no less than 30 days or more
than 60 days notice mailed within five days after the closing sales price of
the common stock has equaled or exceeded $10.9375 for each of 20 consecutive
trading days. (12) Earnings (Loss) Per Share A summary of the reconciliation from basic earnings (loss) per share to
diluted earnings (loss) per share follows: Years ended December 31,2003
    
    2002
    
    2001Earnings (loss) available to common stockholders
    
    $
    4,125,210
    
    
    $
    (8,953,739
    )
    
    $
    1,935,529Basic EPS-weighted average shares outstanding
    
    
    15,487,647
    
    
    
    15,180,379
    
    
    
    14,943,516Basic earnings (loss) per share:Net earnings
    
    $
    .27
    
    
    $
    (0.59
    )
    
    $
    0.13Basic EPS-weighted average shares outstanding
    
    
    15,487,647
    
    
    
    15,180,379
    
    
    
    14,943,516Effect of dilutive securities
    
    
    230,209
    
    
    
    
    
    
    
    468,052Dilutive EPS-weighted average shares outstanding
    
    
    15,717,856
    
    
    
    15,180,379
    
    
    
    15,411,568Diluted earnings (loss) per share:Net earnings (loss)
    
    $
    .26
    
    
    $
    (0.59
    )
    
    $
    0.13Stock options not included in diluted EPS since antidilutive.
    
    
    1,647,781
    
    
    
    3,322,461
    
    
    
    1,692,527Stock warrants not included in diluted EPS since antidilutive
    
    
    2,143,537
    
    
    
    2,143,537
    
    
    
    1,183,166
 (13) Employee Benefit Plan The Company has a qualified contributory 401(k) plan that covers all employees who
have attained the age of 18 and are employed at the enrollment date.
The Company
provided contributions of $183,957, $266,881 and $319,457 respectively, for
the years ended December 31, 2003, 2002 and 2001. Each participant may elect
to contribute any portion of his or her gross compensation up to the maximum
amount allowed by the Internal Revenue Service. During the years ended
December 31, 2003, 2002 and 2001, the Company matched 50% of each employee
contribution to the plan up to a maximum annual match of $2,000. (14) Stock Options In June 2000, the Board of Directors adopted the 2000 Long-Term Incentive
Stock Options Plan (the 2000 Plan), which was approved by the stockholders
on June 29, 2000. The 2000 Plan provided for the grant of options to
employees of the Company to purchase 2,500,000 shares of common stock. In
May 2002, the shareholders approved an amendment to the plan that increased
the shares available for issuance under the plan by 1,500,000 to 4,000,000
            shares. The option price per share under the 2000 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. At December 31, 2003, the Company had 2,012,087 options outstanding
under this plan. 37




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##### Table of Contents



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, of which 110,100 shares
were used for a stock rights offering to employees in 1997. 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 2,071,942 options available to purchase shares of common stock. At
December 31, 2003, the Company had 591,369 options outstanding under this
plan. At December 31, 2003, the Company had a total of 2,603,456 options
outstanding at exercise prices ranging from $2.25 to $14.625 per share. Of
the total options, the Company had 117,072 options outstanding at an
exercise price of $2.50 per share that carry the right to a cash bonus of
$1.719 per purchased share, payable upon exercise. The stock option
compensation accrual related to the bonus is $205,394 and $501,073 at
December 31, 2003 and 2002, respectively. A summary of the aforementioned
stock plan activity follows: WeightedAveragePrice PerNumber
    
    ShareBalance, December 31, 2000
    
    
    2,678,266
    
    
    
    8.48Granted
    
    
    1,411,100
    
    
    
    6.60Forfeited
    
    
    (434,814
    )
    
    
    9.61Exercised
    
    
    (84,850
    )
    
    
    4.23Balance, December 31, 2001
    
    
    3,569,702
    
    
    $
    7.71Granted
    
    
    432,000
    
    
    
    4.27Forfeited
    
    
    (605,291
    )
    
    
    8.17Exercised
    
    
    (88,364
    )
    
    
    3.45Balance, December 31, 2002
    
    
    3,308,047
    
    
    $
    7.29Granted
    
    
    1,167,429
    
    
    
    3.61Cancelled
    
    
    (999,615
    )
    
    
    9.90Forfeited
    
    
    (230,304
    )
    
    
    4.21Exercised
    
    
    (642,101
    )
    
    
    2.92Balance, December 31, 2003
    
    
    2,603,456
    
    
    $
    5.99
 A summary of stock options outstanding at December 31, 2003 follows: Options Outstanding
    
    Options ExercisableWeighted-Number
    
    Average
    
    Weighted-
    
    Number
    
    Weighted-Outstanding
    
    Remaining
    
    Average
    
    Exercisable
    
    AverageRange of
    
    at
    
    Contractual
    
    Exercise
    
    at
    
    ExerciseExercise Prices
    
    12/31/03
    
    Life
    
    Price
    
    12/31/03
    
    Price$2.50
    
    
    117,072
    
    
    3 years
    
    $
    2.50
    
    
    
    117,072
    
    
    $
    2.50$2.50 to 3.13
    
    
    242,127
    
    
    4.5 years
    
    
    2.93
    
    
    
    242,127
    
    
    
    2.93$3.00 to 4.19
    
    
    166,850
    
    
    5.5 years
    
    
    3.37
    
    
    
    166,850
    
    
    
    3.37$5.03 to 14.63
    
    
    528,095
    
    
    6.5 years
    
    
    12.38
    
    
    
    528,095
    
    
    
    12.38$4.25 to 7.41
    
    
    431,811
    
    
    7.5 years
    
    
    6.64
    
    
    
    336,871
    
    
    
    6.65$2.43 to 5.07
    
    
    284,300
    
    
    8.5 years
    
    
    4.22
    
    
    
    136,300
    
    
    
    4.21$2.25 to
5.21
    
    
    833,201
    
    
    9.5 years
    
    
    4.12
    
    
    
    370,290
    
    
    
    3.43$2.25 to
14.63
    
    
    2,603,456
    
    
    7.44 years
    
    $
    5.99
    
    
    
    1,897,605
    
    
    $
    6.42
 Non-Executive Employee Stock Option Exchange Offer On December 23, 2002, the Company offered to exchange certain out of the
money non-executive employee stock options. As a result of the volatility
in the stock market reflecting the current economic climate, many employees
held stock options with an exercise price that significantly exceeded the
market price of the Companys common stock. Because the Company believed
that these options were not providing the appropriate level of performance
incentives, it offered a voluntary option exchange program allowing eligible
employees to cancel their current stock options with exercise prices ranging
between $6.00 and $8.25 and 38




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##### Table of Contents



between $14.00 and $14.63 per share in exchange for a lesser amount of new
options that would be granted no earlier than six months and one day after
the options were accepted for exchange and canceled by the Company. The
participating employees were to receive an amount of new options in
accordance with the following exchange ratio schedule, subject to
adjustments for any future stock splits, dividends and similar events: Exercise Price Range
    
    Exchange Ratio$6.00  $8.25
    
    0.67 shares covered by a new option for every 1
share covered by a
cancelled option$14.00  $14.63
    
    0.40 shares covered by a new option for every 1
share covered by a
cancelled option
 Executive officers, directors, and non-employees were not eligible for this
offer. Additionally, employees who received options within six months and a
day of the commencement of the exchange offer were not permitted to
participate. The offer expired on January 22, 2003. The Company accepted for
exchange, options to purchase an aggregate of approximately 999,615 shares
of the Companys common stock, representing approximately 89% of the shares
subject to options that were eligible to be exchanged under the offer.
Subject to the terms and conditions of the offer, the Company granted new
options to purchase 496,429 shares of common stock on July 23, 2003 at an
exercise price of $2.26. (15) Employee Stock Purchase Plan On
June 15, 1999, the Companys shareholders adopted the 1999 Employee Stock Purchase
Plan (the Purchase Plan), as a means of rewarding and retaining existing
employees. The purchase plan allows employees, including officers and
directors who are employees, to purchase shares of the Companys common stock at
semi-annual intervals through periodic payroll deductions. The purchase
price per share, in general will be 85% of the lower of the fair market
value of the common stock on the participants entry date into the offering
period or 85% of the fair market value on the semi-annual purchase date. 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. There were 1,000,000 shares authorized for issuance
under the plan. As of December 31, 2003, 439,342 shares remain unissued
under the plan. (16) Related Party Transactions Sales to Agilis Communication Technologies Pte Ltd (Agilis), an affiliate of
ST, amounted to $0, $96,655 and $244,022 for the years ended December 31,
2003, 2002 and 2001, respectively. (17) Contingencies The Company is involved in litigation and claims arising in the normal
course of operations. In the opinion of management based on consultation
with legal counsel, losses, if any, from this litigation are covered by
insurance or are immaterial; therefore, no provision has been made in the
accompanying consolidated financial statements for losses, if any, which
might result from the ultimate outcome of these matters. (18) Supplemental Financial Information A summary of additions and deductions related to the allowance for doubtful
accounts for the years ended December 31, 2003, 2002 and 2001 follows: Balance at
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    
    
    
    
    
    
    
    
    End ofof Year
    
    Additions
    
    Deductions
    
    YearYears ended December 31:2003
    
    $
    338,904
    
    
    
    398,176
    
    
    
    248,550
    
    
    
    488,5302002
    
    $
    1,172,523
    
    
    
    434,818
    
    
    
    1,268,437
    
    
    
    338,9042001
    
    $
    1,014,813
    
    
    
    339,037
    
    
    
    181,327
    
    
    
    1,172,523
 (19) Quarterly Financial Data  Unaudited 39




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A summary of the quarterly data for the years ended December 31, 2003 and
2002 follows (in thousands): First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Total2003:Total revenues
    
    $
    10,880
    
    
    
    14,792
    
    
    
    15,791
    
    
    
    16,528
    
    
    
    57,991Gross profit
    
    $
    3,666
    
    
    
    6,632
    
    
    
    7,135
    
    
    
    8,918
    
    
    
    26,351Operating expenses
    
    $
    5,168
    
    
    
    5,313
    
    
    
    4,532
    
    
    
    4,841
    
    
    
    19,854Earnings (loss) from operations
    
    $
    (1,503
    )
    
    
    1,318
    
    
    
    2,605
    
    
    
    4,077
    
    
    
    6,497Net earnings (loss)
    
    $
    (1,448
    )
    
    
    1,372
    
    
    
    1,624
    
    
    
    2,577
    
    
    
    4,125Basic earnings (loss) per share
    
    $
    (0.09
    )
    
    
    .09
    
    
    
    .11
    
    
    
    .16
    
    
    
    .27Diluted earnings (loss) per share
    
    $
    (0.09
    )
    
    
    .09
    
    
    
    .10
    
    
    
    .16
    
    
    
    .262002:Total revenues
    
    $
    15,194
    
    
    
    15,909
    
    
    
    12,841
    
    
    
    13,718
    
    
    
    57,662Gross profit
    
    $
    6,069
    
    
    
    3,554
    
    
    
    4,003
    
    
    
    5,565
    
    
    
    19,191Operating expenses
    
    $
    6,398
    
    
    
    5,699
    
    
    
    6,912
    
    
    
    5,224
    
    
    
    24,233Earnings (loss) from operations
    
    $
    (329
    )
    
    
    (2,145
    )
    
    
    (2,909
    )
    
    
    340
    
    
    
    (5,043
    )Net earnings (loss)
    
    $
    (4,585
    )
    
    
    (1,905
    )
    
    
    (2,895
    )
    
    
    431
    
    
    
    (8,954
    )Basic earnings (loss) per share
    
    $
    (0.30
    )
    
    
    (0.13
    )
    
    
    (0.19
    )
    
    
    .03
    
    
    
    (0.59
    )Diluted earnings (loss) per share
    
    $
    (0.30
    )
    
    
    (0.13
    )
    
    
    (0.19
    )
    
    
    .03
    
    
    
    (0.59
    )
 (20) Subsequent Event On February 19, 2004, Stetsys Pte. Ltd. and Stetsys US, Inc. entered into
definitive purchase agreements to sell their shares of common stock in the
Company, an aggregate of 9,676,800 shares, to approximately 40 institutional
investors in a private transaction. The purchase price of the common stock was
$9.25 per share. The shares sold in the transaction will be subject to
securities law restrictions on their subsequent resale. However, the Company
has agreed to register the shares for resale. The Company has not received any
proceeds from this transaction. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. 
 Item 9A. Controls and Procedures The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in its periodic reports filed with
the Commission is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Commission and that such
information is accumulated and communicated to its management. In designing and
evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on their most recent evaluation, which was completed within 90 days
of the filing of this Annual Report on Form 10-K, the Companys chief executive officer
and chief financial officer believe that the Companys disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended) are effective. There were not any significant changes in
internal controls or in other factors that could significantly affect these
internal controls subsequent to the date of their most recent evaluation. 
 PART III 
 Item 10. Directors, Executive Officers and Key Employees Information regarding directors and executive officers of the Company is
set forth under the captions Board of Directors and Executive Officers and
Compensation in the Companys Proxy Statement relating to its 2004 Annual
Meeting of Stockholders (the 2004 Proxy Statement), which has been filed with
the Commission within 120 days after the end of the Companys fiscal year ended
December 31, 2003, and such information is incorporated by reference in this
Form 10-K. The Compensation Committee Report on Executive Compensation, The
Report of 40




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##### Table of Contents



the Audit Committee and the Stock Price Performance Graph contained in
the 2004 Proxy Statement are not incorporated by reference in this Form 10-K. The Company has adopted a code of ethics that applies to all directors,
officers and employees of the Company, including the Chief Executive Officer,
Chief Financial Officer, Chief Operating Officer and Chief Technical Officer.
A copy of the Companys Code of Ethics will be mailed, at no charge, upon request
submitted to Linda Gardner, Investor Relations, Radyne ComStream Inc, 3138 East
Elwood St., Phoenix, Arizona 85034. If the Company makes any amendment to, or grant any
waivers of, a provision of the code of ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller where such amendment or waiver is required to be disclosed under
applicable SEC rules, the Company intends to disclose such amendment or waiver and the
reasons therefore on its Internet website at www.radn.com. The Board has determined that there is a financial expert, within the
meaning defined under the rules of the NASDAQ National Market Rules, that
serves on the Audit Committee of the Board of Directors. 
 Item 11. Director and Executive Compensation Information regarding director and executive compensation is set forth
under the captions Election of Directors and Executive Officers and
Compensation in the 2004 Proxy Statement, which information is incorporated in
this Form 10-K by reference. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management Information regarding security ownership of certain beneficial owners and
management is set forth under the caption Security Ownership of Principal
Stockholders and Management in the 2004 Proxy Statement, which information is
incorporated in this Form 10-K by reference. Disclosure with Respect to the Companys Equity Compensation Plans
as of December 31, 2003 The Company maintains the 1996 Employee Incentive Stock Option Plan (the 1996
Plan), the 2000 Long-Term Incentive Plan (the 2000 Plan) and the 1999
Employee Stock Purchase Plan (the ESPP), pursuant to which it may grant
equity awards to eligible persons. The following table gives information about equity awards under the Companys
1996 Plan, the 2000 Plan and the ESPP. Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    under equityissued upon
    
    Weighted-average
    
    compensation plansexercise of
    
    exercise price of
    
    (excludingoutstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    reflected in columnPlan category
    
    and rights
    
    and rights
    
    (a))(a)
    
    (b)
    
    (c)Equity compensation plans approved by
security holders [1]
    
    
    2,603,456
    
    
    $
    5.99
    
    
    
    2,026,644
    [2]Equity compensation plans not approved
by security holders
    
    None
    
    
    N/A
    
    
    NoneTotal
    
    
    2,603,456
    
    
    $
    5.99
    
    
    
    2,026,644
    1
    
    Of the total options outstanding, 591,369 and 2,012,087 have been granted
under the 1996 Plan and the 2000 Plan, respectively.  2
    
    Of these shares, 439,342 remain available for purchase under the ESPP. 41




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions Information regarding certain relationships and related transactions of
management is set forth under the caption Certain Relationships and Related
Transactions in the 2004 Proxy Statement, which information is incorporated in
this Form 10-K by reference. 
 Item 14. Principal Accounting Fees and Services Information regarding the Companys principal accounting fees and services is set forth
under the caption Principal Accounting Fees and Services in the 2004 Proxy
Statement, which information is incorporated in this Form 10-K by reference. 
 PART IV 
 Item 15. Exhibits, Financial Statement Schedules And Reports On Form 8-K (a)(1) The following consolidated financial statements of Radyne
ComStream Inc. and subsidiaries are included in Part II, Item 8:Independent Auditors ReportsConsolidated Balance Sheets as of December 31, 2003 and 2002Consolidated Statements of Operations for the Years Ended December 31, 2003,
2002 and 2001Consolidated Statements of Stockholders Equity and Comprehensive Income
(Loss) for the Years Ended December 31, 2003, 2002 and 2001Consolidated Statements of Cash Flows for the Years Ended December 31, 2003,
2002 and 2001Notes to Consolidated Financial Statements
 (a) (2) All financial statement schedules have been omitted because they
are not applicable, not required, or the information has been disclosed in the
consolidated financial statements or notes thereto or otherwise in this Form
10-K report. (a) (3) See Exhibit Index (b) Registrant did not file any reports on Form 8-K during the period of
October 1 through December 31, 2003. 42




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized. RADYNE COMSTREAM INC.By:
    
    /s/ Robert C. Fitting

Robert C. Fitting, Chief Executive Officer
(Principal Executive Officer)By:
    
    /s/ Garry Kline
Garry Kline, Vice President, Secretary and
Interim Chief Financial Officer
(Principal Financial Officer)By:
    
    /s/ Garry D. Kline

Garry D. Kline, Vice President and Corporate Controller
(Principal Accounting Officer)
 Dated: March 16, 2004 KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Robert C.
Fitting and Garry Kline, his true and lawful attorney-in-fact and agents, with
full power of substitution, for him in any and all capacities, to sign any and
all amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact or his substitute, may do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Name
    
    Title
    
    Date/s/ Lim Ming Seong Lim
Lim Ming Seong
    
    Chairman of the Board of Directors
    
    March 16, 2004/s/ Robert C. Fitting

Robert C. Fitting
    
    Chief Executive Officer and Director
Vice President, Secretary and Acting Chief
    
    March 16, 2004/s/ Garry Kline
Garry Kline
    
    Financial Officer (Principal Financial
Officer)
Vice President and Corporate Controller
    
    March 16, 2004/s/ Garry D. Kline

Garry D. Kline
    
    (Principal Accounting
Officer)
    
    March 16, 2004/s/ C.J. Waylan

C.J. Waylan
    
    Director
    
    March 16, 2004/s/ Lee Yip Loi
Lee Yip Loi
    
    Director
    
    March 16, 2004/s/ Dennis Elliott
Dennis Elliott
    
    Director
    
    March 16, 2004/s/ Michael A. Smith

Michael A. Smith
    
    Director
    
    March 16, 2004
 43




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EXHIBIT INDEX Exhibit No.
    
    Exhibit3.1 (1)
    
    Restated Certificate of Incorporation3.2 (2)
    
    By-Laws, as amended and restated10.1(a)(3)
    
    1996 Incentive Stock Option Plan10.1(b)(4)
    
    Amendment to 1996 Incentive Stock Option Plan10.2 (5)
    
    1999 Employee Stock Purchase
Plan10.3(a) (6)
    
    2000 Long-Term Incentive Plan10.3(b) (7)
    
    Amendment to 2000 Long-Term Incentive Plan10.4(a)(8)
    
    Lease between ADI Communication Partners, L.P. and ComStream dated April 23, 199710.4(b)(8)
    
    First Amendment to lease between ADI Communication Partners L.P. and ComStream
dated July 16, 199710.4(c)(8)
    
    Second Amendment to Lease between Kilroy Realty, L.P. and ComStream dated
November 18, 199810.5(9)
    
    Lease for facility in Phoenix, Arizona10.6(10)
    
    Credit Agreement by and between the Registrant and Wells Fargo HSBC Trade Bank,
N.A.10.7(11)
    
    Change of Control Agreement, dated as of March 20, 2002, by and between
Registrant and
Robert C. Fitting10.8(12)
    
    Change of Control Agreement, dated as of March 20, 2002, by and between
Registrant and
Steven Eymann10.9(13)
    
    Change of Control Agreement, dated as of March 20, 2002, by and between
Registrant and
Brian Duggan21.1*
    
    Subsidiaries of the Registrant23.1*
    
    Consent of KPMG LLP31.1*
    
    Certification of the Principal Executive Officer Pursuant to Rule 13-14(a) Under
the Securities Exchange Act of 193424.1*
    
    Power of Attorney (see signature
page)31.2*
    
    Certification of the Principal Financial Officer pursuant to Rule 13-14(a) Under
the Securities Exchange Act of 193432.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 200299.1*
    
    Cautionary Statement Regarding Forward-Looking Statements and Risk Factors
    *
    
    filed herewith
    
    furnished herewith(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)
    
    Incorporated by reference to Exhibit 4.1 to Registrants Registration
Statement on Form S-8, dated and declared effective on March 12, 1997
(File No. 333-23159).(4)
    
    Incorporated by reference to Exhibit 4.1 to Registrants Registration
Statement on Form S-8, dated and declared effective on November 18, 1998
(File No. 333-67469).(5)
    
    Incorporated by reference to Exhibit 4.1 to Registrants Registration
Statement on Form S-8, dated and declared effective on November 5, 1999
(File No. 333-90383).(6)
    
    Incorporated by reference to Exhibit 4.1 to Registrants Registration
Statement on Form S-8, dated and declared effective on July 19, 2000
(File No. 333-41704) 44




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(7)
    
    Incorporated by reference to Exhibit 4.1 to Registrants Registration
Statement on Form S-8, dated and declared effective on May 29, 2002
(File No. 333-89316).(8)
    
    Incorporated by reference from Registrants Registration Statement on
Form S-2, filed January 11, 1999 (File No. 333-70403).(9)
    
    Incorporated by reference to Exhibit 10.3 to Registrants Annual
Report on Form 10-K for the year ended December 31, 1997, as filed with
the SEC on March 27, 1998 (File No. 000-11685).(10)
    
    Incorporated by reference to Exhibit 10.6 to Registrants Annual
Report on Form 10-K for the year ended December 31, 2001, as filed with
the SEC on April 1, 2002 (File No. 000-11685).(11)
    
    Incorporated by reference to Exhibit 10.1 to Registrants Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002, as filed with
the SEC on May 15, 2002 (File No. 000-11685).(12)
    
    Incorporated by reference to Exhibit 10.2 to Registrants Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002, as filed with
the SEC on May 15, 2002 (File No. 000-11685).(13)
    
    Incorporated by reference to Exhibit 10.3 to Registrants Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002, as filed with
the SEC on May 15, 2002 (File No. 000-11685). 45