| RADYNE CORP Item 1A Risk Factors In addition to the other information contained in this Form 10-K, the following risk factors should be considered in evaluating the Company’s business |
| The Company’s business, financial condition or results of operations could be materially adversely affected by any of these risks |
| Please note that additional risks not presently known to the Company or that the Company currently deems immaterial may also impair its business and operations |
| As a result of operating losses from time to time in prior years, we had an accumulated deficit of dlra9dtta5 million at December 31, 2003 |
| While the Company regained profitability during 2003 and continued to be profitable in 2004 and 2005, we are in a highly competitive business and our profitability is dependent on growth in our markets, the continued introduction and market acceptance of our products, and management of our expenses |
| There can be no assurance that we will be able to continue our earnings growth, maintain current earnings levels, or remain profitable at all |
| We anticipate that 2006 earnings will be impacted by increased general and administrative expenses, including stock option expense and a higher tax rate, and could be impacted by margin pressures |
| We may continue to experience significant quarter to quarter fluctuations in our operating results, which may result in volatility in the price of our common stock |
| These fluctuating operating results derive from a variety of factors, including the following: Ø demand for our products; Ø introduction of new or enhanced products by us or our competitors; Ø growth of demand for Internet-based products and services in developing countries; Ø timing of significant marketing programs we may implement; Ø extent and timing of hiring additional personnel; Ø competitive conditions in our industry; and Ø general economic conditions in the United States and abroad |
| The factors described above are difficult to forecast and could harm our business, financial condition and results of operations |
| Furthermore, there have been recent years that have been challenging for the telecommunication and Internet industries |
| Our business is somewhat seasonal, with the first quarter generally being the weakest, and the fourth quarter generally the strongest |
| Accordingly, we may have difficulty in accurately forecasting our revenues for any future quarter |
| 11 _________________________________________________________________ [61]Table of Contents A significant portion of business depends on sales to customers outside the United States |
| We expect that international sales will continue to account for a significant portion of our revenues for the foreseeable future |
| For example, sales to foreign customers were approximately 41prca of total sales for the year ended December 31, 2005, 47prca for the year ended December 31, 2004 and 48prca for the year ended December 31, 2003 |
| Additionally, we estimate that approximately 60prca of our domestic sales are eventually exported |
| Accordingly, we expect that our sales will continue to include a significant proportion of customers located outside the United States |
| As a result of our dependence on foreign markets, the occurrence of any negative international political, economic or geographic events could result in significant revenue shortfalls |
| These shortfalls could cause our business, financial condition and results of operations to be harmed |
| Some of the risks of doing business internationally include: Ø changing regulatory requirements; Ø fluctuations in the exchange rate for the United States dollar; Ø the availability of export licenses; Ø political and economic instability; Ø difficulties in staffing and managing foreign operations, tariffs and other trade barriers; Ø changes in diplomatic and trade relationships; Ø complex foreign laws and treaties; Ø acts of terrorism; and Ø difficulty of collecting foreign accounts receivable |
| In addition, we are subject to the Foreign Corrupt Practices Act, which prohibits us from making payments to government officials and others in order to influence the granting of contracts we may be seeking |
| Our non-US competitors are not subject to this law and this may give them a competitive advantage over us |
| We believe a substantial portion of the growth in demand for our products will depend upon customers in developing countries |
| We cannot provide assurance that such increases in demand will occur or that prospective customers will accept our products |
| The degree to which we are able to penetrate potential markets in developing countries will be affected to a large extent by the speed with which other competing elements of the communications infrastructure, such as other satellite-delivered solutions, telephone lines, television cable, and land-based solutions, are installed in these developing countries |
| The Sales And Implementation Cycles for our Products are Long and Continue to Increase, and We May Incur Substantial, Non-Recoverable Expenses or Devote Significant Resources To Sales That May Not Occur When Anticipated, If At All |
| A customer’s decision to purchase our products involves a significant commitment of its resources and a lengthy evaluation and product qualification process |
| After a customer decides to purchase our products, the timing of their deployment and implementation depends on a variety of factors specific to each customer |
| Further, prospective customers may delay purchasing our products in order to evaluate new technologies and develop and implement new wireless systems |
| Throughout the sales cycle, we spend considerable resources educating and providing information to prospective customers regarding the use and benefits of our products |
| The markets for ground segment systems are highly competitive |
| We have a number of major competitors in the satellite communications equipment field |
| These include large companies, such as Comtech EFData Corp, Paradise Datacom, Tandberg Television, Scopus, CPI (Communications & Power Industries) and Miteq Inc |
| have significantly larger and more diversified operations and greater financial, marketing, personnel and other resources than we possess |
| As a result, these competitors may develop and expand their products more quickly, adapt more quickly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing and sale of their products than we can |
| Competition from current competitors or future entrants in the markets in which we compete could cause us to lose orders or customers or could force us to lower the prices we charge for our products, all of which would have a material adverse impact on our business, financial condition, and results of operations |
| 12 _________________________________________________________________ [62]Table of Contents The telecommunications industry, including the ground-based satellite communications systems business, is characterized by rapid and continuous technological change |
| Future technological advances in the telecommunications industry may result in the introduction of new products or services that compete with our products or render them obsolete |
| Our success depends in part on our ability to respond quickly to technological changes through the improvement of our current products and the development of new products |
| Accordingly, we believe that we will need to allocate a substantial amount of capital to research and development activities in the future |
| We may not generate cash flow from operations or have access to outside financing in amounts that are sufficient to adequately fund the development of new products |
| Even if we are able to obtain the required funding to develop new products, we cannot assure you that we will be able to develop products that we will be able to sell successfully |
| Our inability to improve our existing products and develop new products could have a material adverse effect on our business, financial condition, and results of operations |
| Our continued growth depends on penetrating new markets, adapting existing satellite communications products to new applications, and introducing new communications products that achieve market acceptance and benefit from our established international distribution channels |
| Accordingly, we are actively applying our communications expertise to design and develop new hardware and software products and enhance existing products |
| We expended dlra8dtta8 million, or 9prca of our net sales, in fiscal 2005 on research and development activities |
| Additionally, our research and development program may not produce successful results, which would have a material adverse effect on our business, financial condition, and results of operations |
| We have pursued, and will continue to pursue, growth opportunities through internal development and acquisition of complementary businesses, products and technologies |
| Our operations have expanded significantly as a result of our acquisitions of ComStream, Armer, Tiernan, and Xicom |
| We are unable to predict whether or when any other prospective acquisition will be completed |
| However, in order to pursue successfully the opportunities presented by the ground segment and emerging satellite-delivered communications and broadcast equipment markets, we will be required to continue to expand our operations |
| This expansion could entail various risks, including the following: Ø difficulty of assimilating the operations and personnel of acquired businesses or products due to unforeseen circumstances; Ø the necessity to attract, train, motivate, and manage a significantly larger number of employees; Ø the use of a disproportionate amount of our management’s attention or our resources; Ø substantial cash expenditures, potentially dilutive issuances of equity securities, the incurrence of additional debt and contingent liabilities, and amortization expenses related to intangible assets; Ø potential disruption of our ongoing business; Ø our inability, once integrated, to achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected; and Ø our potential inability to obtain the desired financial and strategic benefits from the acquisition or investment |
| Moreover, we cannot assure that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, or expand into new markets |
| The occurrence of any of the risks described above or any failure to manage further growth in an efficient manner and at a pace consistent with our business could have a material adverse effect on our growth and our business, financial condition, and results of operations |
| We have net operating loss carryforwards that expire between the years 2018 and 2022 |
| of all of the shares of our common stock held by each company, we experienced an ownership change as defined by Section 382 of the US Internal Revenue Code of 1986, as amended |
| Because of the ownership change, we will be limited in our ability to use the net operating losses from before the date of the ownership change to offset items of taxable income realized after that date |
| The annual limitation may also result in the expiration of net operating losses before utilization |
| In addition, any future ownership change could further limit the availability of our net operating loss carryforwards to offset tax liabilities and may be viewed negatively by a prospective buyer of the stock |
| 13 _________________________________________________________________ [63]Table of Contents We rely on our proprietary technology and intellectual property to maintain our competitive position |
| Unauthorized parties could attempt to copy aspects of our technologies or to obtain information that we regard as proprietary |
| We may not be able to police unauthorized use of our intellectual property |
| Our failure to protect our proprietary technology and intellectual property could adversely affect our competitive position |
| We generally rely on confidentiality agreements with our employees and some of our suppliers to protect our proprietary technology |
| We also control access to and distribution of confidential information concerning our proprietary technology |
| We cannot guarantee that the other parties to these agreements will not disclose or misappropriate the confidential information concerning our proprietary technology, which could have a material adverse effect on our business |
| We rely on patents to protect certain of our proprietary technology |
| Patents, however, often provide only narrow protection that may not prevent competitors from developing products that function in a manner similar to those covered by our patents |
| In addition, some foreign countries in which we sell our products do not provide the same level of protection to intellectual property as the laws of the United States provide |
| We cannot assure you that any patents we currently own or control, or that we may acquire in the future, will prevent our competitors from independently developing products that are substantially similar or superior to ours |
| We may find it necessary to take legal action in the future to enforce or protect our intellectual property rights |
| Litigation can be very expensive and can distract our management’s time and attention, which could adversely affect our business |
| In addition, we may not be able to obtain a favorable outcome in any intellectual property litigation |
| We rely on subcontractors to assemble and test some of our products |
| Additionally, our products use a number of specialized chips and customized components or subassemblies produced by a limited number of suppliers |
| We maintain limited inventories of these products and do not have long-term supply contracts with our vendors |
| In the event our subcontractors or suppliers are unable or unwilling to fulfill our requirements, we could experience an interruption in product availability until we are able to secure alternative sources of supplies |
| We are also subject to price increases by suppliers that could increase the cost of our products or require us to develop alternative suppliers, which could interrupt our business |
| It may not be possible to obtain alternative sources at a reasonable cost |
| Supply interruptions could cause us to lose orders or customers, which would result in a material adverse impact on our business, financial condition, and results of operations |
| Our continued ability to attract and retain highly skilled personnel also is critical to the operation and expansion of our business |
| The market for skilled engineers and other technical personnel is extremely competitive, and recruitment and retention costs are high |
| Although we have been able to attract and retain the personnel necessary to operate our business, we may not be able to do so in the future, particularly as we continue to expand our business |
| Although Mr |
| Robert Fitting, our CEO, who is 72 years of age, and Mr |
| Steve Eymann (age 52), our CTO, are both critical to our business, the recent hiring of Carl Myron Wagner (age 50), as COO, has added a key management resource to our staff |
| Nonetheless, there can be no assurance that succession plans will be successful |
| Further, the failure to attract and retain personnel with the necessary skills when needed could materially and adversely affect our business and expansion plans |