SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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COMMISSION FILE NO. 0-21931
AMPLIDYNE, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3440510
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(STATE OF OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
144 BELMONT DRIVE
SOMERSET, NEW JERSEY 08873
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(ADDRESS OF PRINCIPAL ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (732) 271-8473
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
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SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, PAR VALUE $.0001 PER SHARE
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(TITLE OF CLASS)
CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT
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(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of the Regulation S-B is not contained in this form, and no disclosure
will 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-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $2,433,310.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the closing price of such stock as
of March 31, 1998, was approximately $2,460,000.
Number of shares outstanding of the issuer's common stock, as of March
31, 1998 was 4,460,000.
Documents Incorporated by Reference: None
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PART I
ITEM 1. BUSINESS
GENERAL
Amplidyne, Inc., a Delaware corporation ("Amplidyne" or the "Company")
designs, manufactures and sells ultra linear power amplifiers and related
subsystems to the worldwide wireless, local loop and satellite uplink
telecommunications market. These power amplifiers, which are a key component in
cellular base stations, increase the power of radio frequency ("RF") and
microwave signals with low distortion, enabling the user to significantly
increase the quality and quantity of calls processed by new and existing
cellular base stations. The Company's wireless telecommunications products
consist of solid-state, RF and microwave, single and multicarrier power
amplifiers that support a broad range of analog and digital transmission
protocols including advanced mobile phone services ("AMPS"), code division
multiple access ("CDMA"), time division multiple access ("TDMA"), total access
communication systems ("TACS"), extended total access communication systems
("ETACS"), nordic mobile telephone ("NMT"), global system for mobile
communications ("GSM") and digital communication service at 1800 MHz
("DCS-1800"). The products are marketed to the cellular, wireless local loop and
personal communication systems ("PCS") segments of the wireless
telecommunications industry. The PCS segment of the market is one of the fastest
growing segments and the Company has devoted significant resources in 1997 to
develop single channel and multi channel linear power amplifiers for this
market. Certain of the Company's wireless telecommunications customers are DSC
Communications and Samsung, each of which is an original equipment manufacturer
("OEM").
Amplidyne has several products covered by a patent issued by the United
States Patent and Trademark Office for Pre-Distortion and Pre-Distortion
Linearization which, the Company believes, is more effective in reducing
distortion than other currently available technology. In addition to its
presence in the wireless telecommunications industry, the Company designs and
manufactures products for uplink satellite communications and for audio and TV
transmission links. The Company also believes that its products have great
potential opportunity for the wireless communication industry in developing
countries.
In addition to the Company's product line of single channel power
amplifiers which are currently utilized by the wireless communications industry,
the Company has developed a Multicarrier Linear Power Amplifier ("MCLPA"). MCLPA
combines the performance capabilities of up to 32 single carrier amplifiers into
one unit, eliminating the need for numerous single carrier amplifiers and the
corresponding unnecessary space occupied by the cavity filters encasing the
amplifiers. Management believes that with its (i) proprietary technology (which
effectively reduces distortion), (ii) technological expertise and (iii)
established product line consisting of ultra linear single channel power
amplifiers, the Company can achieve similar performance with its MCLPAs. The
Company's linear power amplifiers and MCLPAs utilizes the Company's patented
predistortion and proprietary feed forward technology which amplifies many
channels with minimal distortion at the same time with one product.
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The Company was incorporated on December 14,1995 pursuant to the laws
of the State of Delaware as the successor to Amplidyne, Inc., a New Jersey
corporation ("Amplidyne-NJ"), which was incorporated in October 1988. The
Company was organized to effectuate a reincorporation of Amplidyne-NJ with and
into the Company on December 22, 1995. The Company maintains its executive
offices at 144 Belmont Drive, Somerset, NJ 08873 and its telephone number is
(732) 271- 8473. The Company completed its initial public offering of 1,610,000
Units (each Unit consisting of one (1) share of Common Stock and one (1)
Redeemable Common Stock Purchase Warrant ) in January 1997 pursuant to firm
commitment underwritten offering. The offering price was $5.10 per Unit. The
Common Stock and Warrants trade on the Nasdaq SmallCap Market.
FORWARD LOOKING STATEMENTS
Certain information contained in this Annual Report on Form 10-KSB,
including, without limitation, information appearing under Part I, Item I
(Business), and Part II, Item 6 (Management's Discussion and Analysis of
Financial Condition and Results of Operations) are forward-looking statements
(within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended). Factors set
forth that appear with the forward-looking statements, or in the Company's other
Securities and Exchange Commission filings, including its Registration Statement
on Form SB-2 dated January 21, 1997, could affect the Company's actual results
and could cause the Company's actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company in this Annual Report on Form 10-KSB. Such potential risks and
uncertainties include, but are not limited to: dependence on a limited number of
customers including those in the Korean marketplace; reductions, delays or
cancellations in orders from new or existing customers; potential deterioration
of business and economic conditions in the Company's customers marketplaces,
including the Korean marketplace; new product development and product
obsolescence; potential deterioration of the Company's customers credit quality
due to deteriorating economic conditions in the Company's customers
marketplaces, including the Korean marketplace; a limited number of potential
customers; intensely competitive industry with increasing price competition; new
product development and product obsolescence; variability in gross margins on
new products and resulting impacts on operating results; continued success in
the design of new amplifier products and the ability to manufacture in quantity
such new products; continued favorable business conditions and growth in the
wireless communications market; and dependence on certain suppliers for
single-sourced components. In addition, prior financial performance and customer
orders are not necessarily indicative of the results that may be expected in the
future and the Company believes that such comparisons cannot be relied upon as
indicators of future performance. Due to the foregoing factors, the Company
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and that such comparisons cannot be relied upon as
indicators of future performance. Additionally, the Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
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INDUSTRY BACKGROUND
The market for wireless communication services has grown substantially
during the past decade. Cellular service has been one of the fastest growing
segments of the wireless telecommunications market. The worldwide wireless
revolution exploded in 1994, adding 24 million new subscribers bringing the
total global subscriber count in 1995 to approximately 55 million, a growth rate
of more than 70%. However, this represents a worldwide penetration of only
1.35%. Industry officials project a worldwide market penetration of 8% going
into the next century, a 50% compounded annual growth rate ("CAGR"). By 2002,
the Strategy Group projects that there will be nearly 500 million cellular and
PCS subscribers worldwide, more than tripling the end-year 1996 cellular and PCS
subscriber base of nearly 146 million. The growth in cellular communications has
required, and will continue to require, substantial investment by cellular
service providers in wireless infrastructure equipment. Moreover, management
believes that intensified competition among cellular service providers is
resulting in declining costs to end-users as well as new types of service
offerings. This demand, coupled with unprecedented growth, will, in management's
belief, require new infrastructure equipment and technology that will allow
better coverage for higher-density networks. Carriers also need to have the
flexibility to place cell sites anywhere, provide speedier deployment without
regard to frequency allocation or planning with lower installation, maintenance
and operational costs. In order for carriers to meet their demands, new
technologies and base station equipment must be deployed.
The PCS market is also one of the fastest growing segments in the
wireless telecommunications market. PCS service providers are attracting more
subscribers than analysts had projected. The attraction to consumers is lower
prices than cellular and as well as the fact that PCS phones use more powerful
digital technology, which improves call quality compared with cellular service.
This result is due to the fact that PCS transmits at a higher radio frequency.
It is also easier to program PCS phones for advanced features (i.e., sending
electronic mail and news headlines). Amplidyne has developed PCS linear
amplifiers and PCS MCLPAs. Management believes that these products will produce
increased sales for the Company during the next few years.
The Company has supplied prototype quantities and samples of its single
channel and multichannel PCS amplifiers to major North American OEMs for
evaluation. Typically it can take between 6 months to 1 year to become qualified
on a program with such OEMs. The Company has devoted considerable resources to
satisfy these OEMs. The Company believes that its products have been well
received and the Company continues to monitor the situation to develop
relationships with these customers. No assurances can be made that the Company
will be successful in becoming qualified on a program with such OEMs.
The PCS hardware market suppliers are dominated by a few large OEMs.
The companies purchase their amplifiers from the Company's competitors who were
approved into OEM programs, in most instances, at least 1 year prior to
production. The Company expects to penetrate this market with its single or
multichannel linear power amplifiers during fiscal 1998. However, no assurance
can be made that the Company will be successful in its attempt to penetrate this
market.
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A cellular system consists of a number of cell sites which are
networked to form a cellular system operator's geographic coverage area. Each
cell site has a base station which houses the equipment that transmits and
receives telephone calls between the cellular subscriber within the cell and the
switching office of the local wireline telephone system. Such base station
equipment includes an antenna and a series of transceivers, power amplifiers and
cavity filters. Large cell sites, which generally cover a geographic area of up
to five miles in radius, are commonly referred to as "macrocells."
Cellular system operators in densely populated areas are able to expand
the capacity of their existing cellular systems by incorporating smaller cells,
commonly referred to as "microcells," that divide macrocells into several
smaller cell sites, typically one to three miles in radius. The base stations
for microcells are substantially smaller physically than base stations for
macrocells. Microcells require less expensive equipment at each base station,
but require greater numbers of these smaller base stations to maintain service
quality and system capacity.
The ability of cellular system operators to increase system capacity
through the use of microcells is largely dependent on their ability to broadcast
multiple signals with acceptable levels of interference and distortion. In
cellular systems, the amplifier is generally the greatest source of signal
interference and distortion, particularly with multi carrier high power
amplifiers. Consequently, obtaining amplifiers which can transmit and receive
multiple signals with low distortion or interference from adjacent signals
("high spectral purity") is critical to a cellular system operator's ability to
increase system capacity. Substantial resources and technical expertise are
required to design and manufacture multi carrier power amplifiers with high
spectral purity. To achieve high spectral purity, multi carrier amplifier
systems must have high interference cancellation properties.
In addition to cellular/ PCS system operators' need for base station
equipment, in many developing countries, where access to the public switch
telephone network ("PSTN") by the general population is significantly less than
in developed countries, the Company believes that wireless telecommunications
systems are the most economic means to provide basic telephone service. The
expense, difficulty and time requirements of building and maintaining a cellular
or PCS network is generally less than the cost of building and maintaining a
comparable wireline network. Thus, in many less developed countries, wireless
service may provide the primary service platform for both mobile and fixed
telecommunications applications. In a wireless local loop system, use is made of
wireless radio systems instead of wireline networks to connect telephone
subscribers to the PSTN. The Company believes that the potential opportunities
for wireless communication services in countries without reliable or extensive
wireline systems may be even greater than in countries with developed
telecommunication systems. The Company has developed and refined its products
for this market such as the 2.4 ghz and 3.5 ghz wireless local loop amplifier.
As a result of these developments, the Company received purchase orders for
these products from its customers, such as DSC Communications.
The Company's satellite amplifier products are used to amplify the
signal which is being transmitted from the ground up to the satellite. The
manufacturers of satellite communications equipment operate in commercial
markets such as television broadcast services and commercial military
communications. Amplidyne has also provided amplifiers for terrestrial radio
systems which are used for television and audio signal transmission.
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COMPANY STRATEGY
Utilizing its proprietary, patented technology and experience in
interference cancellation, the Company is pursuing a strategy, focused on the
need of cellular, wireless local loop and PCS system operators, to develop
technologically advanced amplifier based products. The Company has recently
developed products which address the technical issues faced by such system
operators as a result of the rapid growth in wireless telephone use (cellular,
PCS and wireless local loop) and the resulting need to increase systems
capacity.
Since early 1995 the Company has been involved in research, design and
development of linear power amplifiers and MCLPAs for the wireless
communications industry and most recently for the emerging PCS industry. The
Company has received a patent from the United States Patent and Trademark Office
on its predistortion technology which has enabled the Company to provide ultra
linear amplifiers with its proprietary feed forward technology. Since early 1996
the Company has allocated substantial engineering resources to develop linear
power amplifiers and MCLPAs for the emerging PCS market. The Company has focused
on establishing working relationships with major OEMs to develop products for
the PCS market. As a result of these efforts, the Company has received prototype
purchase orders for its PCS multicarrier linear power amplifiers during 1997.
These units have been delivered to major North American OEMs and are presently
being evaluated.
Management believes that with its predistortion technology and the
linearity capability of its core amplifier technology, the Company can achieve
similar performance from a multicarrier amplifier which others achieve by using
dual feed forward loops; this results in much higher component count within the
amplifier unit and may result in poor reliability for such products, compared to
predistortion based feed forward amplifiers which use fewer components and
thereby have a high reliability.
The Company's business strategy focuses primarily on the wireless
communication market and consists of the following elements:
INCREASE PENETRATION OF WIRELESS EQUIPMENT MANUFACTURERS. Since 1991,
the Company has positioned itself as a supplier of amplifier products to large
wireless telecommunications OEMs, such as DSC Communications. Amplidyne seeks to
capitalize on its existing customer relationships and become a more significant
source of its customers' amplifiers by working closely with OEM customers to
offer innovative solutions to technical requirements and problems. Amplidyne has
demonstrated its PCS single and multichannel products to major U.S. OEM's and
attended trade shows to promote its products. As a result of this, the Company
has received favorable feedback from the engineering evaluation of its products.
The Company has prototype orders for its PCS single channel amplifiers.
Typically it takes 6 months to 1 year for the products to be evaluated and
designed into OEM base stations. The Company is in this stage with a few major
OEM's and hopes to obtain further purchase orders during 1998. However, no
assurances can be made that the Company will be successful in receiving such
additional purchase orders.
DEVELOP RELATIONSHIPS WITH EMERGING WIRELESS EQUIPMENT MANUFACTURERS.
The Company anticipates that emerging wireless equipment manufacturers will make
an increasingly significant contribution to the growth of the wireless
telecommunications industry particularly the PCS and cellular segments.
Management believes that its linear power amplifiers and MCLPAs will assist
these equipment manufacturers in providing high capacity, low distortion low
cost per channel products and has supplied amplifiers to several emerging
wireless equipment manufacturers during 1997.
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DEVELOP PRODUCTS FOR MULTIPLE PROTOCOLS. The Company intends to
continue to invest resources in the research and development of new products for
various protocols. For cellular systems, the Company currently supports the AMPS
and TACS analog protocols, and the CDMA, TDMA, E-TACS, NMT and GSM digital
protocols. For PCS systems, Amplidyne currently supports CDMA, TDMA, DCS-1800
and PCS-1900 digital protocols. Amplidyne is continuing to develop products that
incorporate protocols which it believes will address the needs of established
and emerging wireless systems. Management believes the development of products
for multiple protocols will enable Amplidyne to benefit from the continuing
growth of existing wireless systems and other emerging wireless
telecommunications markets while reducing the risks associated with relying on
the success of one or a limited number of existing or emerging industry
protocols.
MAINTAIN A TECHNOLOGY LEADERSHIP POSITION. In management's belief the
Company, with its innovative products, has been addressing the needs of its
customers for products that solve significant technical problems. The Company
believes its interference cancellation technologies are among the most advanced
that are commercially available in the industry, both in performance and
diversity of methodology. The Company utilizes proprietary and patented
predistortion technology and proprietary feed forward interference cancellation
technology in its linear power amplifiers and MCLPAs to enable the user to
significantly increase the quality and quantity of calls processed by new and
existing cellular base stations. The Company intends to continue to invest
substantial resources in research and development associated with its
interference cancellation technologies. See "Technology". The Company has
emphasized research and development on PCS products during 1997 which management
believes will be a growth area for the Company during 1998.
DEVELOP INNOVATIVE PROPRIETARY PRODUCTS. To date, the Company has
focused its efforts in the development of amplifier products which are highly
innovative and are not the standard "commodity" type product. In addition, the
Company believes that it has compiled an extensive design library in the
solid-state, high power amplifier industry utilizing its proprietary and
patented technology and expertise in interference cancellation. The Company has
developed and intends to continue to develop products which combine basic
components in unique and high performance configuration to command higher prices
in the wireless communications market. In addition, the Company has adapted this
expertise for new commercial market applications and product requirements and
develop products for the emerging DCS-1800 and PCS-1900 markets. The Company has
developed amplifier products during 1997 which can be used in PCS repeater
subsystems. This segment of the business has shown increased growth during 1997.
PROVIDE SUPPORT FROM PRODUCT DESIGN THROUGH INSTALLATION AND OPERATION.
The Company works with its customers throughout the design process to assist
them in refining and developing their amplifier specifications. Once the
specifications have been met and the product delivered, Amplidyne continues to
provide technical support to facilitate system integration, start-up and
continued operation. By providing customer support services from the product
design phase through installation and operation, management believes it fosters
increased levels of customer loyalty and satisfaction. In addition, through this
process, the Company believes it will develop new product definitions and
implementations to further enhance the strategic position of the Company in the
wireless market.
MAINTAIN CONTROL OF THE MANUFACTURING PROCESS. As part of the
transition to becoming a leading amplifier supplier to the wireless
telecommunications market, Amplidyne is in the process of implementing in-house
automated manufacturing in order to control its production schedule. In
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certain instances, Amplidyne has made the strategic decisions to select single
or limited source suppliers in order to obtain lower pricing, receive more
timely delivery and maintain quality control.
THE AMPLIDYNE ADVANTAGE
The Company believes that its products, particularly the ultra linear
power amplifiers and MCLPAs, have several features which differentiate them from
those of its competitors, such as:
THE PREDISTORTION SOLUTION. Utilizing its proprietary technology the
Company can obtain significant distortion reduction in its core amplifiers. This
enables the predistorted amplifier to have feed forward correction (which is
described below, see "Technology") applied to it to achieve distortion
cancellation. The Company believes that its competitors are only able to obtain
this level of distortion cancellation by use of complex and component intensive
"Dual Feed Forward Loops" resulting in the use of more components within the
amplifier unit. In general, the fewer components that an amplifier uses, the
better its reliability. The Company has been a pioneer in its use and
development of predistortion technology and intends to further enhance its
products using such technology.
SUPERIOR DISTORTION AND SPURIOUS CANCELLATION RESULTING IN ULTRA LINEAR
HIGH POWER AMPLIFIERS. The Company believes the use of MCLPAs is critical in the
implementation of new cellular systems and upgrade of older analog systems.
Cellular systems need to cover large areas with minimum hardware in order to
minimize cost per subscriber. Reduction of the distortion and spurious signals
from the amplifiers is a key enabling technology. Amplidyne has developed
proprietary interference cancellation technology using multiple methods to
achieve high suppression of spurious output and distortion typically associated
with higher power amplifiers. The Company's PCS multicarrier linear power
amplifier has been well received in the industry and, management believes, is
among the leading products available in the wireless industry. The Company's
single channel PCS amplifiers have also been well received in the industry,
however, the Company has experienced more competition in this area. The Company
is seeking to position itself to be a viable source in this area. The Company
constantly monitors such situations and will employ significant resources to
explore such opportunities.
By utilizing its proprietary and patented predistortion technology and
its proprietary feed forward technology, the MCLPAs amplification capacity of
the Company's amplifiers are, in management's belief, among the best in the
industry. Standard MCLPAs currently support 25 channels with approximately 50
watts composite power, resulting in approximate 2 watt per channel. The
Company's MCLPAs support up to 32 channels at 1.5 watts per channel, to satisfy
the increasing need for higher power and capacity required by the system
operators.
HIGH QUALITY AND RELIABILITY. Amplidyne believes that it has
consistently provided high quality, reliable products to its customers. The
Company has many thousands of its amplifiers in the field. Management believes
that its reputation for quality and reliability we enabled Amplidyne to attract
new customers and maintain existing customers for all its products.
LINEARITY, LOW DISTORTION AND HIGH AMPLIFICATION. Wireless service
providers' ability to manage scarce spectrum resources more effectively and
accommodate a larger number of subscribers is largely dependent on their ability
to broadcast signals with high linearity, which pertains to the
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ability of a component to amplify a wave form without altering its
characteristics in undesirable ways. Linear amplifiers allow signals to be
amplified without introducing spurious emissions that might interfere with
adjacent channels. Higher linearity increases the capacity of cellular systems
by enabling a more efficient use of digital transmission technologies,
microcellular architectures and adaptive channel allocation. In current cellular
systems, the power amplifier is generally the source of the greatest amount of
signal distortion. Consequently, obtaining power amplifiers with high linearity
and low distortion is critical to wireless service providers' ability to improve
spectrum efficiency.
The Company has several products covered by a patent issued by the
United States Patent and Trademark Office which it believes gives it a
significant advantage over its competitors. These features for Pre-distortion
and Pre-distortion Linearization designs significantly reduces distortion below
that which is currently available in the marketplace.
MULTICARRIER DESIGNS. Multicarrier amplification, in which all channels
are amplified together by a MCLPA, rather than each channel using a separate
amplifier, allows for instantaneous electronic channel allocation. Functionally,
it combines multiple single channel power amplifiers, typically 16, into a
single unit, thereby eliminating the single channel power amplifiers and the
corresponding tunable cavity filters. MCLPAs require significantly higher
linearity compared to single channel designs.
By virtue of the Company's high linearity products which incorporates
pre-distortion and feed forward technology achieving, in management's belief,
the lowest distortion in the industry, the MCLPA amplified signal remains within
their prescribed band and spectrum with low interference of adjacent channels
thus providing flexibility to accommodate any frequency plan.
BOOSLER AMPLIFIER. Since 1991, the Company has been manufacturing low
noise amplifiers (LNA) which are used in the receiver section of the base
station (digital and analogue). With this technology, the Company has the
ability to offer "booster amplifiers" to the wireless industry which incorporate
LNAs, MCLPAs and receive / transmit filters. Management believes that there is a
significant market for "booster amplifiers" which it intends to pursue.
HIGH QUALITY, RELIABILITY AND CUSTOMER SUPPORT. The Company believes
that the power amplifier in cell sites historically has been the single most
common point of equipment failure in wireless telecommunications networks.
Increasingly reliable power amplifiers, therefore, will improve the level of
service offered by wireless service providers, while reducing their operating
costs. In addition, MCLPAs eliminate the need for high-maintenance, tunable
cavity filters which should further reduce costs.
The Company works closely with its customers throughout the design
process in refining and developing their amplifier specifications. The Company
uses the latest equipment and computer aided design and modeling, solid state
device physics, advanced digital signal processing ("DSP") and digital control
systems, in the development of its products in their specialized engineering and
research departments. The integration of the Company's design and production is
a factor in the Company's ability to provide its customers with high
reliability, low distortion and low maintenance amplifiers.
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TECHNOLOGY
WIRELESS TRANSMIT TECHNOLOGY. A typical cellular communications system
comprises a geographic region containing a number of cells, each with a base
station, which are networked to form a cellular service provider's coverage
area. Each base station or cell site houses the equipment that transmits and
receives telephone calls to and from the cellular subscriber within the cell and
the switching office of the local wireline telephone system. Such equipment
includes a series of transceivers, power amplifiers, tunable cavity filters and
an antenna. In a single channel system, each channel requires a separate
transceiver, power amplifier and tunable cavity filter. The power amplifier
within the base station receives a relatively weak signal from the transceiver
and significantly boosts the power of the outgoing wireless signal so that it
can be broadcast throughout the cell. The radio power levels necessary to
transmit the signal over the required range must be achieved without distorting
the modulation characteristics of the signal. The signal must also be amplified
with linearity in order to remain in the assigned channel with low distortion or
interference with adjacent channels.
Because cellular operators are allocated a small RF spectrum and
certain channels, it is necessary to make efficient use of the spectrum to
enable optimum system capacity. By amplifying all channels with minimum
distortion at the same time, rather than inefficient use of single channel
amplification, one obtains better system capacity. A MCLPA combines the
performance capabilities of up to 32 single carrier amplifiers into one unit,
eliminating the need for numerous single carrier amplifiers and their
corresponding tunable cavity filters. These MCLPAs require less space than
multiple single channel amplifiers and their corresponding tunable cavity
filters which reduce the size and cost of a base station.
MCLPAs create distortion products which can cause adjacent channel
interference. The minimization of these distortion products requires
sophisticated technology. This is accomplished through interference cancellation
techniques such as "predistortion" and "feed forward" accompanied by highly
advanced control and processing technology. The Company has developed certain
proprietary technology and methods to achieve minimal distortion in its
amplifiers, technically called predistortion and feed forward correction. The
Company uses three distinct technologies (A) Linear class A and AB amplifiers,
(B) Predistorted class A and AB amplifiers and (C) Predistortion feed forward
amplifiers. The Company's proprietary leading edge products contain patented
predistortion and proprietary feed forward technology combined in a proprietary
automatic correction technique.
All amplifiers create distortion when they are run at a high power
level. In an ideal case the output of the amplifier would faithfully reproduce
the input signal without any distortion. In real life, however, distortion
characteristics are produced. These distortion products can cause interference
with another caller's channel which in turn produces poor call quality. By using
a simple, patented technology, Amplidyne recreates the distortion for the
amplifier in such a manner to cancel the interference signals.
Amplidyne believes that this cancellation technique is superior to any
other predistortion technology available at present. Feed forward cancellation
involves taking the distortion created by the amplifier and processing it in
such a way that when it is added back into the amplifier having been
pre-distorted and combined with the feed forward technology, distortion
cancellation occurs. The Company believes that its patented technology has the
most unique and potent technology for distortion cancellation. Furthermore,
Amplidyne has selected linear class AB technology for its base amplifier which
it believes also has superior distortion characteristics compared to other
competitors
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because it is easier to pre-distort. Thus the three key ingredients (a) Linear
class A and AB amplifiers, (b) Predistortion technology and (c) Feed forward
technology enables Amplidyne to produce MCLPAs with what it believes to be the
best distortion cancellation available on the market.
ANALOG V. DIGITAL TECHNOLOGY. Cellular system operators are increasing
their system capacity by transitioning from analog to digital technology.
Cellular systems based on analog technology are capable of carrying only one
call per channel. Current analog standards and formats include AMPS and TACS.
Digital systems allow a given channel of spectrum to carry multiple calls
simultaneously thereby increasing system capacity. Conversion to digital
transmission is expected to allow three to eight times as many voice
conversations to occupy the same frequency bands. Current digital standards and
formats include TDMA and CDMA in North America and GSM and DCS-1800 in Europe.
An additional cellular system operating in the specialized mobile radio ("SMR")
spectrum is in the early stages of deployment in the United States. This system
uses digital techniques that include Frequency Hopping Multiple Access ("FHMA").
WIRELESS RECEIVE TECHNOLOGY. The receiving section of a cellular base
station frequently uses two antennas for efficient spectrum usage. The
deployment of complex circuitry and techniques, including the use of GaAsFET
(Gallium Arsenide Field Effect Transistors) enhances the systems performance,
enabling the weak "noisy" signal to be amplified with a significant reduction in
the level of noise. Amplidyne has been manufacturing low noise amplifiers since
1991, with thousands currently in service.
MARKETS
The market for wireless communications services has grown substantially
during the past decade as cellular wireless local loop, SMR and other new and
emerging applications (such as PCS) have become increasingly accessible and
affordable to growing numbers of consumers. The growth of these markets has
increased the demand for the Company's products, although the Company cannot
predict trends in these markets.
CELLULAR MARKET. The market for cellular communications is currently
the largest of the wireless services. See " Industry Background." Cellular
system operators have expanded the capacity of their existing cellular systems
by splitting macrocells into smaller microcells. The Company believes that the
relatively small size, high power and performance characteristics of its
microcell MCLPAs will be particularly attractive to companies like AT&T and DSC
Communications, as well as emerging wireless telecommunications infrastructure
equipment providers when providing infrastructure equipment for such new cell
sites.
WIRELESS LOCAL LOOP AND SMR MARKETS. Wireless local loop systems are
increasingly being adopted in developing markets to more quickly implement
telephone communication services. In certain developing countries, such as
Indonesia and Brazil, wireless local loop systems provide an attractive
alternative to copper and fiber optic cable based systems, with the potential to
be implemented more quickly and at lower cost than wireline telephone systems.
The Company designs, manufactures and markets MCLPAs and single channel
amplifiers for infrastructure equipment systems in the wireless local loop
market in the 2 and 3-5 ghz.
SMR, like cellular communications, is a two-way service for both speech
and data. SMR originally was designed as a private network for closed groups
communicating between a base station and a large number of users, mainly for
dispatching taxis, delivery and public safety vehicles.
11
<PAGE>
SMR system operators are subject to certain limitations which make the use of
SMR frequencies more appropriate for short dispatch messages. The success of SMR
as a new type of wireless service will depend in part on whether infrastructure
manufacturers and service providers can reduce costs so as to gain greater
market penetration than cellular service providers.
CUSTOM COMMUNICATIONS AND OTHER MARKETS. The custom communications
market consists of small niche segments within the larger communications market:
long-haul radio communications, land mobile communications, surveillance
communications, ground-to-air communications, microwave communications,
broadband communications and telemetry tracking. The Company sells custom
amplifiers and related products to these segments. See " Customers, Sales and
Marketing".
PCS MARKET. There are industry projections that by 2002, there will be
over 500 million cellular and PCS subscribers worldwide, more than tripling the
end-year 1996 cellular and PCS subscriber base of nearly 140 million. Key
factors in this growth are the continued deployment of digital cellular systems
and the more recent implementation of PCS including PCN, PHS and a number of
U.S.-based standards including PCS 1900 (based on the GSM protocol), CDMA, and
TDMA. As evidenced in markets such as Japan and the U.S., PCS-based operators
are proving formidable competitors to cellular network operators. The Company is
currently developing products for the PCS market and has shipped prototype
products (single and multichannel) for the PCS market and has recently received
additional prototype purchase orders for PCS multicarrier linear power
amplifiers.
PRODUCTS
The Company designs and sells multicarrier transmit amplifiers and low
noise receive amplifiers for the cellular communications market, as well as the
PCS, wireless local loop and special mobile radio (SMR) segments of the wireless
communications industry. The Company also provides a large number of catalog and
custom amplifiers to OEMs and to other customers in the communications market in
general.
o MULTICARRIER LINEAR POWER AMPLIFIERS (MCLPAS). When a cellular
or PCS user places a call, the call is processed through a
base station, amplified, and then transmitted on to the person
receiving the call. Therefore, all base stations require
amplifiers (MCLPAs) whether they are being used for cellular,
PCS or local loop applications. Amplidyne manufactures these
amplifiers. The objective is to provide a quality product at a
good price and to have exemplary reliability. Management
believes that Amplidyne's products with its patented
predistortion technology, core linear amplifier technology and
proprietary feed forward technology achieve all of the above
mentioned objectives. Amplidyne's MCLPAs are a unique line of
ultra linear devices which utilize a proprietary predistortion
and phase locked feed forward architecture. The Company's
MCLPAs typically amplify up to 32 carriers at 1.5 watts of
output power.
12
<PAGE>
The following table provides certain information regarding the
Company's MCLPAs. The key item in this table is the IMD specification, which
management believes is among the best available in the industry.
AMPLIDYNE'S MCLPA PRODUCT SUMMARY
- -------------------------------------------------------------------------------
OUTPUT
Product POWER
Model No. FREQUENCY STANDARD WATTS IMD (Dbc)*
--------- --------- -------- ----- ---------
- -------------------------------------------------------------------------------
AMP461/466-N-100 463-467.5 NMT-450 100 -70
- -------------------------------------------------------------------------------
AMP651/866-SE-100 851-866 SETACS 100 -70
- -------------------------------------------------------------------------------
AMP869-896-100 869-894 AMPS/CDMA 100 -70
CDPD, TDMA
- -------------------------------------------------------------------------------
AMP917/950-E-100 917-960 ETACS/CDMA 100 -70
- -------------------------------------------------------------------------------
AMP1819-D-100 1805-1880 DCS-1800 100 -70
- -------------------------------------------------------------------------------
AMP1990-P-100 1930-1990 PCS-1900 100 -70
- -------------------------------------------------------------------------------
AMP1855-K-100 1840-1870 PCS-CDMA 100 -70
- -------------------------------------------------------------------------------
* Carrier to Intermodulation Distortion Radio (the industry's standard
measure) and spurious emissions.
o HIGH POWER LINEAR AMPLIFIERS. Amplidyne's product line of linear
amplifiers have a high third order intercept point which translates to
better call quality. These high power amplifiers are supplied as
modules or plug in enclosures. The communication bands available are
NMT-450, AMPS, TACS, ETACS and PCS. The output power ranges from 1 to
200 Watts. These amplifiers can be used in instances where service
providers only need a single transmit channel.
13
<PAGE>
The following table lists the Company's high power linear amplifiers:
Model No. FREQUENCY STANDARD POWER WATTS
--------- --------- -------- -----------
MHZ
---
- -------------------------------------------------------------------------------
AMP0861-50 869-894 CDMA 25
AMPS/TDMA 50
AMP/CDPD 65
- -------------------------------------------------------------------------------
AMP0935-16 925-960 GSM 65
- -------------------------------------------------------------------------------
AMP0933-50 917-960 ETACS 65
- -------------------------------------------------------------------------------
AMP0450-25 463-468 NMT-450 50
- -------------------------------------------------------------------------------
AMP1855-25 1840-1870 DCS-1800 30/35
- -------------------------------------------------------------------------------
AMP1990-25 1930-1990 PCS-1900 35
TDMA 50
CDMA 17/25/35
- -------------------------------------------------------------------------------
o LOCAL LOOP AND MINI CELL AMPLIFIERS. Local loop and mini cell
amplifiers are designed with a proprietary circuit to achieve a high
IMD specification, which translates to better call quality through the
mini cell. These amplifiers can be supplied by the Company as modules
or in a rack configuration.
o LOW NOISE AMPLIFIER, CELLULAR, PCN, PCS, GSM. Amplidyne's low noise
amplifiers are manufactured with a mix of silicon and GaAsFET devices.
These amplifiers offer the user the lowest noise and the highest
intercept point, while maintaining good efficiency. Received calls at a
base station are low in level due to the fact that hand held cellular
phones typically operate at half a watt power level. This weak signal
has to be amplified clearly which is done by using Amplidyne's low
noise amplifier. All amplifiers undergo 72 hour burn-in period to
ensure reliable filed operation.
o COMMUNICATION AMPLIFIERS. These amplifiers are designed for cellular
and PCN/PCS applications and use GaAs or Silicon Bipolar FET devices.
Management believes that this product provides the industry's best
performance per dollar. The transmit amplifiers are optimized for low
distortion products. Custom configurations are available for all
communication amplifiers. This line of products is aimed at the single
channel base station users employing the digital cellular standards
(CDMA and TDMA).
14
<PAGE>
The Company's wireless telecommunications amplifiers can be configured
as modules, separate plug-in amplifier units or integrated subsystems. The
Company's products are integrated into systems by OEM customers, and therefore
must be engineered to be compatible with industry standards and with certain
customer specifications, such as frequency, power, linearity and built-in test
(BIT) for automatic fault diagnostics.
SIGNIFICANT DEVELOPMENTS
The following are some of the significant developments achieved by the
Company in 1997:
o Developed 17, 25 and 35 watt single channel amplifiers for the PCS
market (domestic and overseas).
o Provided samples to major OEMs for evaluation and attended trade shows
such as the CTIA and PCIA to promote PCS products. As a result of these
demonstrations, the Company received prototype quantity orders from
domestic OEM's.
o Began to develop advanced cellular MCLPA's in the digital cellular
market (CDMA/TDMA/GSM), at power levels of 50 watts, incorporating its
proprietary predistortion technology to provide the best available
products in this market. The Company expects to provide samples of new
products to customers in the third and fourth quarters of 1998.
PRODUCT WARRANTY
The Company warrants new products against defects in materials and
workmanship for a period of one (1) year from the date of shipment. To date, the
Company has not experienced a material line of warranty claims.
BACKLOG/FUTURE ORDERS
As of December 31, 1997, the Company had multi-year delivery backlog
and open future orders of approximately $90,000,000 which the Company plans to
deliver during fiscal years 1998-2002 (which may be extended). The Company
cannot predict whether or not all of such backlog or orders will be delivered
inasmuch as purchase orders are subject to changes and/or cancellation
particularly since the wireless communications industry is characterized by
rapid technological change, new product development, product obsolescence and
evolving industry standards. In addition, as technology changes, corporations
are frequently requested to update and provide new prototypes in accordance with
new specifications if products become obsolete or inferior.
A substantial majority of these orders is attributable to orders from
customers from the Korean market. Based upon recent discussions with its Korean
customers, the Company believes that the current prolonged period of continued
economic and market uncertainty within Korea will result in either postponed,
rescheduled or possibly canceled orders with the Company's Korean customers.
Such postponements or cancellations will significantly reduce the amount of the
15
<PAGE>
Company's backlog and orders. Product orders are subject to changes in delivery
schedules or to cancellation at the option of the customer. Accordingly, the
Company stresses that backlog or orders as of any particular date may not be a
reliable indicator of sales for any future period.
The Company's Korean and other international customers, collectively
accounted for approximately 80% of the Company's net sales for fiscal 1997, and
approximately 66% of the Company's net sales for fiscal 1996. These sales were
principally for the supply of equipment for implementation in the digital
cellular and PCS networks in Korea.
The build-out of the Korean PCS networks began the first quarter of
1997. Sales to the Company's Korean customers for the Korean PCS networks
represented substantially all of the Company's PCS sales during 1997.
During the fourth quarter of 1997, certain Asian countries, including
South Korea, began to experience weaknesses in their currencies, banking systems
and equity markets. The deteriorating economic and currency conditions
throughout Asia led South Korea, along with several other Asian countries,
including Indonesia and Thailand, to request economic support from the
International Monetary Fund in December 1997.
The Company currently believes that the completion of the buildout of
the Korean wireless networks is dependent upon a stabilization of economic,
currency and banking conditions within Korea. It is currently anticipated that
the continued deployment of both the cellular and PCS digital networks will be
delayed until such time that economic conditions become stabilized from a
long-term perspective.
The Company's South Korean customers account for a substantial majority
of the Company's net sales. Although the Company is attempting to expand its
customer base, the Company expects that a limited number of customers will
continue to represent a substantial portion of the Company's net sales for the
foreseeable future. The Company believes that its future success depends upon
its ability to broaden its customer base.
CUSTOMERS, SALES & MARKETING
CUSTOMERS. The Company markets its products worldwide generally to
wireless communications manufacturers (OEMs) and communications system
operators. The table below indicates net revenues derived from customers in the
Company's markets since 1995.
16
<PAGE>
<TABLE>
<CAPTION>
NET REVENUES BY MARKET CATEGORIES
(IN THOUSANDS)
Year Ended
December 31,
------------
Markets 1995 1996 1997
------- ------ ------ -----------
<S> <C> <C> <C>
Cellular Analog . . . . . . . . . . . . . . . . . . . . . . . . . $ 308 $ 126 $ 99
Cellular Digital. . . . . . . . . . . . . . . . . . . . . . . . . 591 452 78
Wireless Telephony. . . . . . . . . . . . . . . . . . . . . . . . 435 759 265
Satellite Communications, Custom and other
Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . 476 231 173
Digital PCS Products. . . . . . . . . . . . . . . . . . . . . . . -- 652 1,818
Total. . . . . . . . . . . . . . . . . . . . . . . . . .. $1,810 $2,220 $ 2,433
</TABLE>
Historically, the Company has derived a substantial percentage of its
net revenues from various customers during certain fiscal periods and until
fiscal 1994 the Company derived substantially all of its net revenues from
cellular analog products. However, since 1995 the Company has focused primarily
on digital cellular and wireless telephony and therefore the sales in those
areas have substantially increased. The Company expects that for future sales
the Company will have substantial market share in the cellular digital, wireless
telephony and digital PCS products.
* CELLULAR ANALOG AND DIGITAL. In 1989 the Company began working
closely with AT&T Bell Labs to develop products for analog
base stations primarily in the AMPS Band. These products
consist primarily of high linearity pre-amp amplifiers and low
noise amplifiers for the receive section of the base station.
In subsequent years the Company shipped thousands of the
amplifiers to its OEM customers. However, with the transition
of digital technology the sales of the products decreased
substantially in 1995 and the Company concentrated its efforts
in developing MCLPAs. In February 1995 the Company received
prototype orders for its wireless MCLPAs. Sales to the analog
and digital cellular industry have decreased from 26% in 1996
to approximately 7.2% of total sales in 1997.
17
<PAGE>
* WIRELESS TELEPHONY. Sales to the wireless telephone segments
of the wireless communications industry have decreased from
approximately 34% of total revenues for fiscal year end 1996
to 11% of total revenue for the fiscal year end 1997.
* DIGITAL PCS. The Company has shipped prototype amplifiers to
its OEM customers as of December 31, 1996 accounting for 29%
of sales in the period ended December 31, 1996 and recently
received purchase orders for its PCS products. Sales in this
sector of the market showed substantial growth during fiscal
1997 accounting for 75% of total sales.
* INTERNATIONAL SALES. Sales of wireless products outside the
United States (primarily to Western Europe and the Far East)
represented approximately 30%, 66% and 80% of net sales during
fiscal 1995, fiscal 1996, and fiscal 1997, respectively. The
Company believes that cellular, PCS and wireless telephony
growth worldwide is going to far exceed growth rate
experienced in the U.S. The Company is positioned to be a
prime source of base station, single channel and multi carrier
power amplifiers.
* SALES AND MARKETING. The Company's executive officers are
involved in all aspects of the Company's relationships with
its major OEM and system operator customers. The Company
employs a direct sales approach focused on providing its
wireless industry customers with unique solutions to satisfy
their transmit and receive amplification needs. Sales of the
Company's products to OEM and system operators requires close
technical liaison with customer engineers and purchasing
managers.
COMPETITION
The ability of the Company to compete successfully and sustain
profitability depends in part upon the rate of which OEM customers incorporate
the Company's products into their systems. The Company believes that a
substantial majority of the present worldwide production of power amplifiers is
captive within the manufacturing operations of a small number of wireless
telecommunications OEMs and offered for sale as part of their wireless
telecommunications systems. The Company's future success is dependent upon the
extent to which these OEMs elect to purchase from outside sources rather than
manufacture their own amplification products. There can be no assurance that OEM
customers will incorporate the Company's products into their systems or that in
general OEM customers will continue to rely, or expand their reliance, on
external sources of supply for their power amplification products. Since each
OEM product involves a separate proposal by the amplifier supplier, there can be
no assurance that the Company's current OEM customers will not rely upon
internal production capabilities or a non-captive competitor for future
amplifier product needs. The Company's OEM customers continuously evaluate
whether to manufacture their own amplification products or purchase them from
outside sources. These OEM customers are large manufacturers of wireless
telecommunications equipment who could elect to enter the non-captive market and
compete directly with the Company. Such increased competition could materially
adversely affect the Company's business, financial condition and results of
operations.
18
<PAGE>
Certain of the Company's competitors have substantially greater
technical, financial, sales and marketing, distribution and other resources than
the Company and have greater name recognition and market acceptance of their
products and technologies. In addition, certain of these competitors are already
established in the wireless amplification market, but the Company believes it
can compete with them effectively. No assurance can be given that the Company's
competitors will not develop new technologies or enhancements to existing
products or introduce new products that will offer superior price or performance
features. To the extent that OEMs increase their reliance on external sources
for their power amplification needs more competitors could be attracted to the
market.
The Company expects its competitors to offer new and existing products
at prices necessary to gain or retain market share. The Company expects to
experience significant price competition, which could have a materially adverse
effect on gross margins. Certain of the Company's competitors have substantial
financial resources which may enable them to withstand sustained price
competition or downturns in the power amplification market. Currently, the
Company competes primarily with non-captive suppliers of power amplification
products. The Company believes that its competition, and ultimately the success
of the Company, will be based primarily upon service, pricing, reputation and
the ability to meet the delivery schedules of its customers.
MANUFACTURING
The Company assembles, tests, packages, and ships its products at its
manufacturing facilities located in Somerset, New Jersey. This facility includes
a separate assembly and test facility for various custom products.
MANUFACTURING PROCESS. The Company's manufacturing process consists of
purchasing components, assembling and testing components and subassemblies,
integrating the subassemblies into a final product and testing the product. The
Company's amplifiers consist of a variety of subassemblies and components
designed or specified by the Company including housings, harnesses, cables,
packaged RF power transistors, integrated circuits and printed circuit boards.
Most of these components are manufactured by others and are shipped to the
Company for final assembly. Each of the Company's products receives extensive in
process and final quality inspections and tests.
The Company's devices, components and other electrical and mechanical
subcomponents are generally purchased from multiple suppliers. The Company does
not have any written agreement with any of its suppliers. The Company has
followed a general policy of multiple sourcing for most of its suppliers in
order to assure a continuous flow of such supplies. However, the Company does
purchase certain transistors produced by a single manufacturer because of the
high quality of its components. The Company believes it is unlikely that such
transistors would become unavailable, however, if that were to occur, there are
multiple manufacturers of generally comparable transistors. The Company would
require a period of time to "return" its products to function properly with the
replacement transistors. The Company believes that the distributors of such
transistors maintain adequate inventory levels, which would mitigate any adverse
effect on the Company's production
19
<PAGE>
in the event unavailability or shortage of such transistors. If for any reason
the Company could not obtain comparable replacement transistors or could not
return its products to operate with the replacement transistors, the Company's
business, financial condition and results of operations could be adversely
affected.
The Company currently utilizes discrete circuit technology on printed
circuit boards which are designed by the Company and provided by suppliers to
the Company's specifications. All transistors and other semiconductor devices
are purchased in sealed packages ready for assembly and testing. Other
components such as resistors, capacitors, connectors or mechanical supported
subassemblies are also manufactured by others. Components are ordered from
suppliers under master purchase orders with deliveries timed to meet the
Company's production schedules. As a result, the Company maintains a low
inventory of components, which could result in delay in production in the event
of delays in such deliveries.
RESEARCH, ENGINEERING AND DEVELOPMENT
The Company's research, engineering and development efforts are focused
on the design of amplifiers for new protocols, the improvement of existing
product performance, cost reductions and improvements in the manufacturability
of existing products.
The Company has historically devoted a significant portion of its
resources to research, engineering and development programs and expects to
continue to allocate significant resources to these efforts. The Company's
research, engineering and development expenses in fiscal 1995, 1996 and 1997
were approximately $370,000, $1,150,000 and $876,000, respectively, and
represented approximately 21%, 52% and 36%, respectively, of net revenues. These
efforts were primarily dedicated to the development of the linear feed forward,
high power, low distortion amplifiers, resulting in the Company's models for
AMPS, TACS, NMT-450 and PCS-1900.
The Company uses the latest equipment and computer aided design and
modeling, solid state device physics, advanced digital signal processing ("DSP")
and digital control systems, in the development of its products in the
specialized engineering and research departments.
The Company uses a CAD environment employing networked work stations to
model and test new circuits. This design environment, together with the
Company's experience in interference cancellation technology and modular product
architecture, allows the Company to rapidly define, develop and deliver new and
enhanced products and subsystems sought by its customers.
The markets in which the Company and OEM customers compete are
characterized by rapidly changing technology, evolving industry standards and
continuous improvements in products and services.
20
<PAGE>
PATENTS, PROPRIETARY TECHNOLOGY AND OTHER INTELLECTUAL PROPERTY
The Company's ability to compete successfully and achieve future
revenue growth will depend, in part, on its ability to protect its proprietary
technology and operate without infringing the rights of others. The Company has
a policy of seeking patents, when appropriate, on inventions resulting from its
ongoing research and development and manufacturing activities.
Presently, the Company has been granted a patent (No. 5,606,286) by the
United States Patent and Trademark Office with respect to its Pre-Distortion and
Pre-Distortion Linearization technology which, the Company believes, is more
effective in reducing distortion then other currently available technology.
There can be no assurance that the Company's patent will not be challenged or
circumvented by competitors.
Notwithstanding the Company's active pursuit of patent protection, the
Company believes that the success of its amplifier business depends more on its
specifications, CAE/CAD design and modeling tools, technical processes and
employee expertise than on patent protection. The Company generally enters into
confidentiality and non-disclosure agreements with its employees and limits
access to and distribution of its proprietary technology. The Company may in the
future be notified that it is infringing certain patent and/or other
intellectual property rights of others. Although there are no such pending
lawsuits against the Company or unresolved notices that the Company is
infringing intellectual property rights of others, there can be no assurance
that litigation or infringement claims will not occur in the future.
GOVERNMENTAL REGULATIONS
The Company's customers must obtain regulatory approval to operate
their base stations. The United States Federal Communications Commission ("FCC")
recently adopted new regulations that impose more stringent RF and microwave
emissions standards on the telecommunications industry. There can be no
assurance that the Company's customers will comply with such regulations which
could materially adversely affect the Company's business, financial condition
and results of operations. The Company manufactures its products according to
specifications provided by its customers, which specifications are given to
comply with applicable regulations. The Company does not believe that costs
involved with manufacturing to meet specifications will have a material impact
on its operations. There can be no assurances that the adoption of future
regulations would not have a material adverse affect on the Company's business.
EMPLOYEES
As of December 31, 1997, the Company had a total of 37 employees,
including 24 in operations, 5 in engineering, 2 in sales and marketing, 2 in
quality assurance and 4 in administration. The Company believes its future
performance will depend in large part on its ability to attract and retain
highly skilled employees. None of the Company's employees is represented by a
labor union and the Company has not experienced any work stoppages. The Company
considers its employee relations to be good.
21
<PAGE>
ENVIRONMENTAL REGULATIONS
The Company is subject to Federal, state and local governmental
regulations relating to the storage, discharge, handling, emissions, generation,
manufacture and disposal of toxic or other hazardous substances used to
manufacture the Company's products. The Company believes that it is currently in
compliance in all material respects with such regulations. Failure to comply
with current or future regulations could result in the imposition of substantial
fines on the Company, suspension of production, alteration of its manufacturing
process, cessation of operations or other actions which could materially and
adversely affect the Company's business, financial condition and results of
operations.
ITEM 2. PROPERTIES.
The Company leases (from an unaffiliated party) approximately 21,000
square feet at 144 Belmont Drive, Somerset, New Jersey 08873 which serves as the
Company's executive offices and manufacturing facility. The lease term commenced
on May l, 1996 and expires on April 30, 1999. The annual rental is $168,000. The
Company has the option to extend the term of the lease for a three (3) year
period so long as it exercises the option for the entire building (36,405 square
feet) less space leased to third parties.
22
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Other than as set forth below, the Company is not a party to any
litigation or governmental proceedings that, management believes, would result
in judgments or fines that would have a material adverse effect on the Company.
The Company is involved in the following matter:
AIRNET COMMUNICATIONS CORPORATION V. AMPLIDYNE, INC.
Plaintiff filed a complaint in the Circuit Court of the
Eighteenth Judicial District of the State of Florida on January 23,
1997 alleging breach of contract. Plaintiff also alleges damages in the
amount of $4,322,579.05, plus interest, costs and attorneys fees. The
Company filed an answer to the complaint denying the allegations
therein and a counterclaim on March 10, 1997. The counterclaim alleges
breach of contract, common law fraud, conversion and unjust enrichment.
The Company further asserts damages in the amount of $463,411.36, plus
interest, costs and attorney fees. Management believes that the
allegations in the complaint are without merit.
LARKEN ASSOCIATES V. AMPLIDYNE, INC.
In October 1997, this action was dismissed with prejudice as
to the complaint and counterclaim. The Company paid Larken $41,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no matters which have been submitted to a vote
of the Company's security holders.
23
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock and Warrants commenced trading on the Nasdaq
Small Cap Market on January 22, 1997.The Common Stock and Warrants are regularly
quoted and traded on the Nasdaq SmallCap Market under the symbols AMPD and
AMPDW, respectively.
The following table sets forth the range of high and low bid quotation
prices for the Company's Common Stock and Warrants for the period January 22,
1997 up to March 31,1997, the last three quarters in 1997 and for the period of
January 1, 1998 up to March 31, 1998 as reported by the Nasdaq SmallCap Market.
The quotes represent inter-dealer prices without adjustment or mark-ups,
mark-downs or commissions and may not necessarily represent actual transactions.
The trading volume of the Company's Common Stock and Warrants fluctuates and may
be limited during certain periods. As a result, the liquidity of an investment
in the Common Stock and Warrants may be adversely affected.
Common
Stock
- -----
1997 Calendar Year Quoted Bid Price
------------------ ----------------
High Low
---- ---
January 22 - March 31 5-5/8 4-1/4
April 1 - June 30 5-3/8 4-1/2
July 1 - September 30 7-5/8 4-1/4
October 1 - December 31 7-3/8 1-5/8
1998 Calendar Year
------------------
January 1 - March 31 $2-3/8 $7/8
Warrants
- --------
1997 Calendar Year Quoted Bid Price
------------------ ----------------
High Low
---- ---
January 22 - March 31 13/16 1/4
April 1 - June 30 1-1/16 1/2
July 1 - September 30 1-3/4 1/4
October 1 - December 31 1-1/16 1/4
1998 Calendar Year
------------------
January 1 - March 31 $3/4 $3/16
On March 31, 1998 the closing prices of the Common Stock and Warrants
as reported on Nasdaq SmallCap Market was $1.00 and $5/16, respectively. On
March 31, 1998 there were 4,460,000 shares of Common Stock and 1,610,000
Warrants outstanding, held of record by approximately 56 record holders (with
over 1,000 beneficial owners).
24
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as percentage of
total revenue:
PERCENTAGE OF TOTAL NET SALES
YEARS ENDED
DECEMBER 31,
1996 1997
------ ------
Net sales 100% 100%
Cost of goods sold 99.0 78.9%
Gross profit 1.0 21.1%
Selling, general and
administrative 51.6 66.4%
Research, engineering and
development 51.8 36%
Total operating expenses 103.4 102.4%
Interest Income 5.8%
Interest expense 4.9 2.0%
Stock compensation and
financing costs 136.7 25%
Loss before income taxes (244.1) (102.5)%
Provision (credit) for
income taxes
Net loss (244.1) (102.5)%
RESULTS OF OPERATIONS - FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL
YEAR ENDED DECEMBER 31, 1996.
Revenues for the fiscal year ended December 31, 1997 increased 9.6%
compared to the fiscal year ended December 31, 1996. The Company's principal
business strategy since 1995 has been devoted to the engineering production of
the linear power amplifiers and Multicarrier Linear Power Amplifiers (MCLPA)
prototypes for major international OEM manufactures. During 1997 the Company
continued to refine its PCS single and multichannel amplifier products, and
several products were shipped to major OEM's in the U.S. for prototype
evaluations. Furthermore certain production orders did not get released until
the 4th quarter. In the 4th quarter the Company shipped more than $1,000,000. In
fiscal year 1997, approximately 17% of all product shipments were prototypes
compared to about 29% for the same period in 1996.
The Company's sales to international markets representing 80% of the
Company's sales in 1997, were primarily to Korea, which has recently suffered
significant currency fluctuations. The Company believes that it's ability to
generate sales during the first part of 1998 will be adversely impacted by,
among other things, economic conditions in Korea.
25
<PAGE>
Cost of sales as a percentage of sales was 79% during the year ended
December 31, 1997, compared to 99% during the same period for 1996. This
decrease can be attributed to the reduction in engineering and direct labor
costs associated with the production of MCLPA prototypes and other products in
1997.
Selling, general and administrative expenses increased in 1997 by
$469,646 to $1,615,556 from $1,145,910, in 1996. Expressed as a percentage of
sales, the selling, general and administrative expenses were 66.4% in 1997 and
51.6% in 1996. The principal factors contributing to the increase in selling,
general and administrative expenses were related to the appointment of a new
Sales Director in 1997, attendance at trade shows with live demonstrations of
amplifier PCS products as well as costs incurred in connection with sales in
South Korea.
Research, engineering and development expenses decreased to 36% of net
sales in 1997 compared to 51.8% in 1996. In 1997, the principal activity of the
business related to the design and production of product prototypes for OEM
manufacturers, particularly for the PCS single and multichannel products. The
research, engineering and development expenses consist principally of salary
cost for engineers and the expenses of equipment purchases specifically for the
design and testing of the prototype products, which decreased during 1997.
The Company had interest income in 1997 of $140,931 or 5.8% of net
sales due to earnings on initial public offering proceeds.
Interest expense was lower in 1997 because of the repayment of
outstanding bank debt and promissory notes.
Stock compensation and financing expenses in 1996 of $3,034,990 and in
1997 of $607,179 relate to the 1996 and 1997 issuances of stock, options and
warrants at prices substantially lower than the initial public offering price.
As a result of the foregoing, the Company incurred net losses of
$2,493,611 or ($.57) per share for the year ended December 31, 1997 compared
with net losses of ($5,419,940) or ($2.03) per share for the same period in
1996.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995.
Revenues for the fiscal year ended December 31, 1996 increased 23%
compared to the fiscal year ended December 31, 1995. The Company's principal
business strategy since 1995 has been devoted to the engineering production of
the linear power amplifiers and Multicarrier Linear Power Amplifiers (MCLPA)
prototypes for major international OEM manufactures. As a result, the production
of commercial cellular amplifiers decreased significantly in 1995 replaced with
minimal revenues relating to the MCLPA. During fiscal year 1996, the Company's
revenues relating to the MCLPA as compared to the same period in 1995 increased
significantly as the MCLPA is further developed and nearing acceptance by OEM
manufacturers. In fiscal year 1996, approximately 29% of all product shipments
were prototypes compared to about 7% for the same period in 1995.
Cost of sales as a percentage of sales was 99% during the year ended
December 31, 1996, compared to 97% during the same period for 1995. This
increase can be attributed to the extensive engineering and direct labor costs
associated with the production of MCLPA prototypes.
26
<PAGE>
Selling, general and administrative expenses increased in 1996 by
$629,496 to $1,145,910 from $516,414 in 1995. Expressed as a percentage of
sales, the selling, general and administrative expenses were 51.6% in 1996 and
28.5 % in 1995. The principal factors contributing to the increase in selling,
general and administrative expenses relate to consulting and professional fees
in 1996 that did not exist in 1995 and increased rent expense due to the Company
leasing a new larger facility.
Research, engineering and development expenses increased to 51.8% of
net sales in 1996 compared to 20.6% in 1995. In 1996, the principal activity of
the business related to the design and production of product prototypes for OEM
manufacturers. The research, engineering and development expenses consist
principally of salary costs for engineers and the expenses of equipment
purchased specifically for the design and testing of the prototype products.
Interest expense was higher in 1996 because of the outstanding bank
debt, lease obligations and promissory notes.
Stock compensation expense in 1996 of $3,034,990 relates to the 1996
issuance of stock and options at prices substantially lower than the initial
public offering price.
As a result of the foregoing, the Company incurred net losses of
($5,419,940) or ($2.03) per share for the year ended December 31, 1996 compared
with net losses of ($2,025,677) or ($.96) per share for the same period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash and cash equivalents of
$2,039,012. The Company's bank line of credit outstanding of $210,000 and
stockholders loans of $339,694 were paid from the proceeds of the public
offering. The funds from the credit line and stockholder's loan were used for
working capital purposes. Additional loans totaling $1,214,000 incurred during
1996 as a result of bridge financings were paid at the closing of the initial
public offering.
The Company has several lease obligations for certain research,
engineering and development equipment used in the production processes requiring
minimum monthly payments of $10,000 through 1999.
The Company believes that the net proceeds of the Company's initial
public offering and cash generated from revenues will permit it to continue to
meet its working capital obligations and fund the further development of its
business for the next 12 months. In light of the current economic situation in
Korea, and it's impact on sales, the Company expects to fund operations in 1998
with the remaining cash that was received from the initial public offering.
There can be no assurance that any additional financing will be available to the
Company on acceptable terms, or at all. If adequate funds are not available, the
Company may be required to delay, scale back or eliminate its research,
engineering and development or manufacturing programs or obtain funds through
arrangements with partners or others that may require the Company to relinquish
rights to certain of its technologies or potential products or other assets.
Accordingly, the inability to obtain such financing could have a material
adverse effect on the Company's business, financial condition and results of
operations.
27
<PAGE>
YEAR 2000
The Company has considered the impact of the year 2000 as it relates to
the accounting and manufacturing operations and does not believe there is
significant risk or cost to the Company, nor is there any impact on the
Company's transactions with customers and suppliers.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The requirements of this statement will be effective for both interim and annual
periods beginning after December 15, 1997. Management does not believe the
implementation of SFAS 130 will have a material effect on the financial
statements.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 changes how
operating segments are reported in annual financial statements and requires the
reporting of selected information about operating segments in interim financial
reports issued to shareholders. SFAS No. 131 is effective for periods beginning
after December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. The Company is in the process of evaluating
the disclosure requirements. The adoption of SFAS No. 131 will have no impact on
the Company's results of operations, financial position or cash flows.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See financial statements following Item 13 of this Annual Report on
Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
28
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF THE REGISTRANT
The names and ages of the directors and executive officers of the
Company are set forth below:
Name Age Position(s) With The Company
- ---- --- ----------------------------
Devendar S. Bains* 46 Chairman of the Board, President, Chief
Executive Officer, Treasurer and Director
Tarlochan Bains 48 Vice President-Sales & Marketing and
Director
Nirmal Bains 40 Secretary
Charles J. Ritchie* 56 Director
Manish V. Detroja* 32 Director
Harris Freedman 61 Vice President - Strategic Alliances
Sharon Will 36 Vice President - Corporate Communications
and Investor Relations
* Member of the Compensation Committee and Audit Committee.
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
DEVENDAR S. BAINS has been Chairman of the Board, President, Chief Executive
Officer, Treasurer and a director of the Company since its inception in 1988.
From 1983 to 1988 Mr. Bains was Group Project Leader of Amplifier division of
Microwave Semiconductor Corporation. Previously, Mr. Bains was employed at
G.E.C. in Coventry, England. Mr. Bains received a Bachelor's Degree in
Electronic Engineering from Sheffield University, England, and a Masters Degree
from the University of Leeds and Sheffield, England. Mr. Bains is the brother of
Tarlochan Bains and the husband of Nirmal Bains.
TARLOCHAN BAINS has been Vice President of Sales and Marketing since 1991.
Previously, Mr. Bains was Technical Manager at Land Rover in Solihull, England.
He has a Masters Degree in Mechanical Engineering from Hatfield Polytechnic,
England. Mr. Bains is the brother of Devendar S. Bains and the brother-in-law of
Nirmal Bains.
NIRMAL BAINS has been Secretary of the Company since 1989. She has a degree in
Computer Programming from Cittone Institute in New Jersey. Mrs. Bains is the
wife of Devendar S. Bains and the sister-in-law of Tarlochan Bains.
29
<PAGE>
CHARLES J. RITCHIE was elected to the Board of Directors of the Company in
February 1998. Mr. Ritchie has had a 32 year career with Lucent Technologies,
formerly AT&T, with assignments that included Product Management, Account
Management, AT&T Divestiture Planning, National Cellular Sales Manager for
non-Wireline Companies, International Wireless Product Support, and many others.
Since 1992, Mr. Ritchie has been an International Wireless Product Support, and
many others. Since 1992, Mr. Ritchie has been an International Business
Development director for Europe, Middle Ease and Africa for the Network Wireless
Division at Lucent Technologies. Marketing, Sales and Business Development
education and experience were accrued over his business career. Mr. Ritchie
received a Bachelors Degree in Electrical Engineering at Youngstown University
and continued with graduate work in Electrical Engineering at Ohio State
University.
MANISH V. DETROJA was elected to the Board of Directors of the Company in
February 1998. Mr. Detroja has been with Current Circuits Inc. ("CCI"), a
private company engaged in the manufacturing of printed circuit boards for the
electric industry, since its inception in May of 1989. From 1989-1993 Mr.
Detroja was the production manager for CCI and from 1993-1996 he was its sales
manager for the entire United States. His is currently is President and Chief
Executive Officer. Mr. Detroja is a graduate of Temple University and has a B.S.
in Electrical Engineering Technology.
HARRIS FREEDMAN has served as Vice President - Strategic Alliances of the
Company since July 1996. Since August 1994 he has been Vice President of
Hemispherx Biopharma, Inc., a publicly traded company listed on Nasdaq. He is
the Secretary of SMACS Holdings Corp. a private company which provides
strategic-alliance services to emerging technology companies in the private and
public markets. His business experience has encompassed developing significant
business contacts and acting as an officer of several companies in the
pharmaceutical, health care and entertainment fields. Mr. Freedman was Vice
President of U.S. Alcohol Testing of America, Inc., from August 1990 to February
1991. Additionally, he was Vice President - East Coast Marketing for MusicSource
U.S.A., Inc. from October 1992 to January 1994. Mr. Freedman attended New York
University from 1951 to 1954.
SHARON WILL has been Vice President - Corporate Communications and Investor
Relations of the Company since July 1996. Since November 1994 she has been Vice
President of Hemispherx Biopharma, Inc., a publicly traded company listed on
Nasdaq. She was a registered sales representative and Senior Vice President for
Institutional Sales at Westfield Financial Corporation from September 1994 to
October 1994. She was a registered sales representative with Marsh Block
Corporation from July 1994 to September 1994. From October 1993 to July 1994 she
served as a registered sale representative at Seaboard Securities Corp. From
October 1991 to present, Ms. Will has been President of Worldwide Marketing Inc.
a manufacturers' representative of various companies selling to the retail trade
markets. Ms. Will was the National Sales Manager of Innovo, Inc., a domestic
manufacturer of textiles, from October 1989 to November 1991. She attended
Baylor College as an undergraduate for two years with a primary focus on
chemistry.
The Company has established a compensation committee and an audit
committee. The compensation committee reviews executive salaries, administers
any bonus, incentive compensation and stock option plans of the Company,
including the Amplidyne, Inc. 1996 Incentive Stock Option and Stock Appreciation
Rights Plan, and approves the salaries and other benefits of the executive
30
<PAGE>
officers of the Company. In addition, the compensation committee consults with
the Company's management regarding pension and other benefit plans, and
compensation policies and practices of the Company. The compensation committee
consists of Devendar S. Bains, Charles J. Ritchie and Manish J. Detroja.
The audit committee reviews the professional services provided by the
Company's independent auditors, the independence of such auditors from
management of the Company, the annual financial statements of the Company and
the Company's system of internal accounting controls. The audit committee also
reviews such other matters with respect to the accounting, auditing and
financial reporting practices and procedures of the Company as it may find
appropriate or as may be brought to its attention. The audit committee consists
of Devendar S. Bains, Charles J. Ritchie and Manish J. Detroja.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely upon its review of the copies
of such reports furnished to the Company during the year ended December 31,
1997, all Section 16(a) filing requirements applicable to its officers and
directors and greater than ten percent beneficial owners were satisfied.
31
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate compensation paid by the
Company for the years ended December 31, 1995, 1996 and 1997 for its Chief
Executive Officer. No other employee received compensation in excess of
$100,000. Each director of the Company is entitled to receive reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors
of the Company but are not compensated for services provided in their capacities
as directors.
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------------------------
Annual Compensation Awards Securities Payouts
------------------------------ ----------- -------------- ------------------
Name Of Individual Other Annual Restricted Underlying Ltip All Other
And Principal Position Year Salary Bonus Compensation Stock Awards Options/sars(#) Payouts Comp.
- ---------------------- ---- ------ ----- ------------ ------------ -------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Devendar S. Bains, Chairman, 1997 $85,000 --- $20,000(1) --- --- --- ---
Chief Executive Office, 1996 $80,000 --- $20,000(1) --- 1,000,000 --- ---
President and Treasurer 1995 $85,000 --- $20,000(1) --- --- --- ---
</TABLE>
(1) Represents payment for health insurance and automobile insurance lease
payments on behalf of such individual but does not include deferred compensation
(See note H to the financial statements).
EMPLOYMENT AGREEMENTS
The Company has entered into five-year employment agreements commencing
May 1, 1996 with each of Devendar Bains (Chairman, Chief Executive Officer,
President and Treasurer), Tarlochan Bains (Vice President - Sales & Marketing),
and Nirmal Bains (Secretary). The employment agreements provide for annual base
salaries of $162,000, $100,000 and $50,000 with respect to Devendar Bains,
Tarlochan Bains and Nirmal Bains, respectively. The employment agreements
provide for discretionary bonuses to be determined in the sole discretion of the
Board of Directors and contain covenants not to compete with the Company for a
two year period following termination of employment.
In December 1995 the Company entered into three-year employment
agreements with each of Harris Freedman and Sharon Will, Vice President for
Strategic Alliances and Vice President for Corporate Communications and Investor
Relations, respectively. Under the terms of each agreement they are to be paid
$60,000 per annum through December 1998.
STOCK OPTION PLANS AND AGREEMENTS
INCENTIVE OPTION PLAN - In May 1996, the Directors of the Company
adopted and the stockholders of the Company approved the adoption of the
Company's 1996 Incentive Stock Option Plan (" Incentive Option Plan"). The
purpose of the Incentive Option Plan is to enable the Company to encourage key
employees and Directors to contribute to the success of the Company by granting
such employees and Directors incentive stock options ("ISOs").
The Incentive Option Plan will be administered by the Board of
Directors or a committee appointed by the Board of Directors (the "Committee")
which will determine, in its discretion, among other things, the recipients of
grants, whether a grant will consist of ISOs or a combination thereof, and the
number of shares to be subject to such options.
32
<PAGE>
The Incentive Option Plan provides for the granting of ISOs to purchase
Common Stock at an exercise price to be determined by the Board of Directors or
the Committee not less than the fair market value of the Common Stock on the
date the option is granted.
The total number of shares with respect to which options may be granted
under the Incentive Option Plan is 1,500,000. ISOs may not be granted to an
individual to the extent that in the calendar year in which such ISOs first
become exercisable the shares subject to such ISOs have a fair market value on
the date of grant in excess of $100,000. No option may be granted under the
Incentive Option Plan after May 2006 and no option may be outstanding for more
than ten years after its grant. Additionally, no option can be granted for more
than five (5) years to a stockholder owning 10% or more of the Company's
outstanding Common Stock and such options must have an exercise price of not
less than 110% of the fair market value on the date of grant.
Upon the exercise of an option, the holder must make payment of the
full exercise price. Such payment may be made in cash or in shares of Common
Stock, or in a combination of both. The Company may lend to the holder of an
option funds sufficient to pay the exercise price, subject to certain
limitations.
The Incentive Option Plan may be terminated or amended at any time by
the Board of Directors, except that, without stockholder approval, the Incentive
Option Plan may not be amended to increase the number of shares subject to the
Incentive Option Plan, change the class of persons eligible to receive options
under the Incentive Option Plan or materially increase the benefits of
participants.
In May 1996, 1,233,000 options (net of 34,000 forfeited) to purchase
Common Stock under the Incentive Option Plan were granted to employees
("Employee Options"), including Dave Bains (1,000,000 options), Tarlochan Bains
(100,000 options) and Nirmal Bains (50,000 options), the Company's Chief
Executive Officer, Vice President-Sales and Marketing and Secretary,
respectively. See "Principal Stockholders." No determinations have been made
regarding the persons to whom options will be granted in the future, the number
of shares which will be subject to such options or the exercise prices to be
fixed with respect to any option. The Employee Options are exercisable at $4.00,
33.33% of which vested in May 1997 and, as to the remainder, ratably over the
following two-year period (33.33% in May 1998 and 33.33% in May 1999).
701 WARRANTS
In December 1995, the Company issued 701 Warrants to purchase 350,000
Shares at $2.50 per share pursuant to Rule 701 under the Act to Harris Freedman
and Sharon Will, the Company's Vice President for Strategic Alliances and Vice
President for Corporate Communications and Investor Relations, respectively, of
the Company. The 701 Warrants vest in one-third increments, 66.66% of which
vested and 33.33% of which will vest in June 1998. The 701 Warrants are
exercisable until June 30, 1999.
33
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 1998 with
respect to the beneficial ownership of the outstanding shares of the Company's
Common Stock by (i) any holder of more than five percent (5%) of the outstanding
shares; (ii) the Company's officers and directors; and (iii) the directors and
officers of the Company as a group:
Name of Beneficial Number of Shares Percentage %
Owner* Of Common Stock(1) Ownership
------ ------------------ ---------
Devendar S. Bains(2) 2,700,000 52.33
Tarlochan Bains(3) 66,667 1.47
Nirmal Bains(2)(4) 2,700,000 52.33
Charles J. Ritchie(5) --- ---
Manish V. Detroja(6) --- ---
Harris Freedman(7) 193,333 4.22
Sharon Will(8) 160,000 3.50
All Officers and
Directors as a group
(7 persons) 2,750,000 57.73
- ------------------
* Unless otherwise indicated, the address of all persons listed in this
section is c/o Amplidyne, Inc., 144 Belmont Drive, Somerset, NJ 08873.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus
upon the exercise of options. Each beneficial owner's percentage
ownership is determined by assuming those options that are held by such
person and that are exercisable within 60 days from the date of the
Prospectus have been exercised.
(2) Mr. Devendar Bains is the husband of Mrs. Nirmal Bains and the brother
of Mr. Tarlochan Bains. Mr. Devendar Bains is the record holder of
2,000,000 of such shares. Includes 666,667 Employee Options (but does
not include 333,333 Employee Options) which was granted to Mr. Devendar
Bains. Includes 33,333 Employee Options ( but not include 16,667
Employee Options) which was granted to Ms. Nirmal Bains. See "Executive
Compensation-Stock Option Plans and Agreements."
(3) Does not include 33,333 Employee Options. See "Executive Compensation -
Stock Option Plans and Agreements."
(4) Does not include 33,333 Employee Options. See "Executive Compensation -
Stock Option Plans and Agreements."
(5) The address for such person is 92 Parker Road, Long Valley, NJ 07853.
(6) The address for such person is 925 Schwal Road, Hatfield, PA 19440.
(7) The address for such person is 1241 Gulf of Mexico Drive, Longboat Key,
Florida 34228. Mr. Freedman is the Vice President - Strategic Alliances
of the Company. Includes 70,000 shares of Common Stock and 123,333
warrants to purchase Common Stock at $2.50 per share. Does not include
an additional 61,667 of such warrants. See Item 9.
(8) The address for such person is RRI Box 132, Millerton, New York 12546.
Ms. Will is the Vice President Corporate Communications and Investor
Relations of the Company. Includes 50,000 shares of Common Stock and
110,000 warrants to purchase Common Stock at $2.50 per share. Does not
include an additional 55,000 of such warrants. See Item 9.
34
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Between January 1994 and December 1996, Devendar S. Bains, the
Company's President and Chief Executive Officer, loaned the Company an aggregate
of $442,745 without interest, payable on demand. $339,694 was repaid during
1997.
In connection with the Company's settlement with Larken Associates (See
"Legal Proceedings"), Devendar S. Bains, the Company's President and Chief
Executive Officer, loaned the Company $41,000 (in October 1997) without
interest, payable on demand.
The Company intends to indemnify its officers and directors to the full
extent permitted by Delaware law. Under Delaware law, a corporation may
indemnify its agents for expenses and amounts paid in third party actions and,
upon court approval in derivative actions, if the agents acted in good faith and
with reasonable care. A majority vote of the Board of Directors, approval of the
stockholder or court approval is required to effectuate indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to officers, directors or persons
controlling the Company, the Company has been advised that, in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in such Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by an officer, director or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such officer, director or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in such Act and will
be governed by the final adjudication of such issue.
Transactions between the Company and its officers, directors, employees
and affiliates will be on terms no less favorable to the Company than can be
obtained from unaffiliated parties. Any such transactions will be subject to the
approval of a majority of the disinterested members of the Board of Directors.
35
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS.
The following financial statements are included in Part II, Item 7:
Index to Financial Statements F-1
Report of Independent Certified Public Accountants F-2
Balance Sheet F-3
Statement of Operations F-5
Statement of Stockholders' Equity F-6
Statement of Cash Flows F-7
Notes to Financial Statements F-8 - F-21
36
<PAGE>
(A) (2) EXHIBITS
1.1* Form of Underwriting Agreement
1.2* Form of Selected Dealer Agreement
1.3* Form of Agreement Among Underwriters
3.1* Certificate of Incorporation of the Company
3.2* Certificate of Merger (Delaware)
3.3* Certificate of Merger (New Jersey)
3.4* Agreement and Plan of Merger
3.5* By-Laws of the Company
4.1* Specimen Certificate for shares of Common Stock
4.2* Specimen Certificate for Warrants
4.3* Form of Underwriter's Purchase Option
4.4* Form of Warrant Agreement
5.1* Opinion of Bernstein & Wasserman, LLP, counsel to the Company
10.1* 1996 Incentive Stock Option Plan
10.2* Employment Agreement between the Company and Devendar S. Bains
10.3* Employment Agreement between the Company and Tarlochan Bains
10.4* Employment Agreement between the Company and Nirmal Bains
10.5* Agreement of Lease for Premises located at 144 Belmont Drive,
Somerset, New Jersey 08873
10.6* Agreement of Lease for Premises located at Unit 9, Building 7,
Ilene Court, Belle Mead, New Jersey 08502
10.7* Agreement between the Company and Electronic Marketing Associates,
Inc.
10.8* Agreement between the Company and Link Microtek Limited.
10.9* Agreement between the Company and ENS Engineering.
10.10* Employment Agreement between the Company and Harris Freedman.
10.11* Employment Agreement between the Company and Sharon Will.
10.12* Form of Lockup Agreement with Officers, Directors and 5% or
Greater Shareholders.
10.13* Form of Lockup Agreement with Selling Securityholders.
23.1* Consent of Bernstein & Wasserman, LLP (included in Exhibit 5.1)
23.2* Consent of Grant Thornton, LLP, Independent Certified Public
Accountants.
27 Financial Data Schedule
* Incorporated by Reference to the Company's Registration Statement on Form
SB-2, No. 333- 11015.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of fiscal 1996.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMPLIDYNE, INC.
By: /s/ DEVENDAR S. BAINS
------------------------------
Name: Devendar S. Bains
Title: Chief Executive Officer,
President, Treasurer, Principal
Accounting Officer and Director
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.
Signature Title Date
--------- ----- ----
/s/ DEVENDAR S. BAINS
---------------------------- Chief Executive Officer, April 15, 1998
Devendar S. Bains President, Treasurer,
Principal Accounting Officer
and Director
/s/ TARLOCHAN BAINS
---------------------------- Vice President and Director April 15, 1998
Tarlochan Bains
/s/ NIRMAL BAINS
---------------------------- Secretary April 15, 1998
Nirmal Bains
/s/ CHARLES J. RITCHIE
---------------------------- Director April 15, 1998
Charles J. Ritchie
/s/ MANISH V. DETROJA
---------------------------- Director April 15, 1998
Manish V. Detroja
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMPLIDYNE, INC.
By:/s/ DEVENDAR S. BAINS
----------------------------
Name: Devendar S. Bains
Title: Chief Executive Officer,
President, Treasurer, Principal
Accounting Officer and Director
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.
Signature Title Date
- --------- ----- ----
/s/ DEVENDAR S. BAINS Chief Executive Officer, April 15, 1998
-------------------------- President, Treasurer,
Devendar S. Bains Principal Accounting Officer
and Director
/s/ TARLOCHAN BAINS Vice President and Director April 15, 1998
--------------------------
Tarlochan Bains
/s/ NIRMAL BAINS Secretary April 15, 1998
--------------------------
Nirmal Bains
/s/ CHARLES J. RITCHIE Director April 15, 1998
--------------------------
Charles J. Ritchie
/s/ MANISH V. DETROJA Director April 15, 1998
--------------------------
Manish V. Detroja
39
<PAGE>
Amplidyne, Inc.
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheets F-3
Statements of Operations F-5
Statement of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8 - F-21
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
AMPLIDYNE, INC.
We have audited the accompanying balance sheets of Amplidyne, Inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Amplidyne, Inc., as of December
31, 1996 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
March 25, 1998
F-2
<PAGE>
Amplidyne, Inc.
BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1996 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 104,310 $2,039,012
Accounts receivable, net of allowance
for doubtful accounts of $119,000 and
$40,510 in 1996 and 1997, respectively 207,339 706,893
Inventories 402,696 324,622
Deferred financing costs 324,540
Private placement receivables 55,000
Prepaid expenses and other current assets 5,665 9,296
---------- ----------
Total current assets 1,099,550 3,079,823
PROPERTY AND EQUIPMENT - AT COST
Machinery and equipment 389,433 538,214
Furniture and fixtures 42,806 43,750
Autos and trucks 19,923 19,923
Leasehold improvements 4,162 4,162
---------- ----------
456,324 606,049
Less accumulated depreciation and amortization 145,593 237,494
---------- ----------
310,731 368,555
PREPAID REGISTRATION COSTS 167,053
OTHER ASSETS 45,230 35,000
---------- ----------
$1,622,564 $3,483,378
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-3
<PAGE>
Amplidyne, Inc.
BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY 1996 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Bank line of credit $ 210,000
Notes payable 1,214,000
Current maturities of lease obligations 381,392 $ 136,396
Accounts payable 690,760 194,572
Accrued expenses 401,518 189,123
Stockholders' loan 442,745 103,051
------------ ------------
Total current liabilities 3,340,415 623,142
LONG-TERM LIABILITIES
Lease obligations 200,969 67,875
Deferred compensation 140,000
STOCKHOLDERS' EQUITY
Preferred stock - authorized, 1,000,000 shares
of no stated value; no shares
issued and outstanding
Common stock - authorized, 25,000,000 shares
of $.0001 par value; 2,850,000
shares and 4,460,000 shares issued and outstanding
at December 31, 1996 and 1997, respectively 285 446
Additional paid-in capital 5,239,961 12,304,592
Accumulated deficit (7,159,066) (9,652,677)
------------ ------------
(1,918,820) 2,652,361
------------ ------------
$ 1,622,564 $ 3,483,378
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
<PAGE>
Amplidyne, Inc.
STATEMENTS OF OPERATIONS
Year ended December 31,
1996 1997
----------- -----------
Net sales $ 2,219,945 $ 2,433,310
Cost of goods sold 2,198,503 1,920,178
----------- -----------
Gross profit 21,442 513,132
Operating expenses
Selling, general and administrative 1,145,910 1,615,556
Research, engineering and development 1,150,710 876,214
----------- -----------
Operating loss (2,275,178) (1,978,638)
Other nonoperating income (expenses)
Interest income 140,931
Interest expense (109,772) (47,975)
Stock compensation and financing cost (3,034,990) (607,179)
----------- -----------
Loss before income taxes (5,419,940) (2,492,861)
Provision for income taxes 750
----------- -----------
NET LOSS $(5,419,940) $(2,493,611)
=========== ===========
Net loss per share - basic and diluted $ (2.03) $ (0.57)
=========== ===========
Weighted average number of shares
outstanding 2,668,767 4,367,320
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-6
<PAGE>
<TABLE>
<CAPTION>
Amplidyne, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1997
Common Stock Additional
----------------------------- paid-in Accumulated
Shares Par Value capital Deficit Total
--------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,100,000 $210 $1,184,790 $(1,739,126) $ (554,126)
Net loss (5,419,940) (5,419,940)
Private placements 550,000 55 549,945 550,000
Financing and compensation costs related to
options and warrants issued 3,359,530 3,359,530
Contributed capital 125,716 125,716
Exercise of options 200,000 20 19,980 20,000
--------- ---- ----------- ----------- ----------
Balance at December 31, 1996 2,850,000 285 5,239,961 (7,159,066) (1,918,820)
Net loss (2,493,611) (2,493,611)
Financing and compensation costs related to
options and warrants issued 282,639 282,639
Registration costs (1,428,847) (1,428,847)
Issuance of common stock 1,610,000 161 8,210,839 8,211,000
--------- ---- ----------- ----------- ----------
BALANCE AT DECEMBER 31, 1997 4,460,000 $446 $12,304,592 $(9,652,677) $ 2,652,361
========= ==== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-6
<PAGE>
Amplidyne, Inc.
STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(5,419,940) $(2,493,611)
----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 102,710 102,131
Loss on disposal of fixed assets 11,023
Bad debt expense 109,000 23,640
Write-off of obsolete inventory 149,696
Write-off of equipment 304,005
Stock compensation and finance cost 3,034,990 607,179
Changes in assets and liabilities
Accounts receivable (150,637) (523,194)
Inventories (121,618) (71,623)
Prepaid expenses and other current assets 22,570 (3,631)
Accounts payable and accrued expenses 620,351 (568,581)
Other assets (85,000)
Customer advances (155,932)
----------- -----------
Total adjustments 3,691,462 (284,383)
----------- -----------
Net cash used in operating activities (1,728,478) (2,777,994)
----------- -----------
Cash flows from investing activities
Purchase of fixed assets (93,767) (149,725)
----------- -----------
Cash flows from financing activities
Repayments of bank line of credit (20,000) (210,000)
Proceeds from (repayments of) notes payable 1,159,000 (1,159,000)
Payment of lease obligations (66,884) (378,090)
Proceeds from (repayments of) stockholder loans 297,745 (339,694)
Registration costs (167,053) (1,261,795)
Stock issuance 570,000 8,211,000
----------- -----------
Net cash provided by financing activities 1,772,808 4,862,421
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (49,437) 1,934,702
Cash and cash equivalents at beginning of year 153,747 104,310
----------- -----------
Cash and cash equivalents at end of year $ 104,310 $ 2,039,012
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 39,009 $ 47,975
</TABLE>
See Note K for noncash investing and financing activity.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-7
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
NOTE A - NATURE OF OPERATIONS AND LIQUIDITY
Amplidyne, Inc. (the "Company") designs, manufactures and sells ultra
linear power amplifiers and related subsystems to the worldwide wireless,
local loop and satellite uplink telecommunications market.
The Company has incurred losses of $5,419,940 and $2,493,611 in 1996 and
1997, respectively. The Company funded operations during this period from
bridge financing and proceeds from its initial public offering. In
addition, the Company's sales to international markets, representing 80% of
the Company's sales in 1997, were primarily to Korea, which has recently
suffered significant currency fluctuations which might affect the Company's
future sales.
Management believes that its ability to generate sales during the first
part of 1998 will be adversely impacted by, among other things, economic
conditions in Korea. Management plans include steps to reduce cost incurred
and cash requirements, including cash flow management of production. The
Company expects to fund operations in 1998 with the remaining cash that was
received from the initial public offering.
NOTE B - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
1. REVENUE RECOGNITION
Revenue is recognized upon shipment of products to customers.
2. INVENTORIES
Inventories are stated at the lower of cost or market; cost is
determined using the first-in, first-out method.
F-8
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1997
NOTE B (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their
estimated service lives which range from three to seven years.
Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.
The straight-line method of depreciation is followed for substantially
all assets for financial reporting purposes, but accelerated methods
are used for tax purposes.
4. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." This statement requires, among other things, an asset and
liability approach for financial accounting and reporting for deferred
income taxes. In addition, the deferred tax liabilities and assets are
required to be adjusted for the effect of any future changes in the tax
law or rates. Deferred income taxes arise from temporary differences
resulting in the basis of assets and liabilities for financial
reporting and income tax purposes.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONCENTRATIONS OF CREDIT
RISK AND ECONOMIC DEPENDENCY
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and accounts
receivable. Net sales were primarily to Korea. The Korean marketplace
has suffered significant currency fluctuations which might affect the
Company's future sales.
A relatively few customers account for a substantial portion of the
Company's revenues and accounts receivable.
F-9
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1997
NOTE B (CONTINUED)
During 1996, three customers accounted for 65% of net sales (34%, 19%
and 12%). In 1996, export sales accounted for approximately 66% of net
sales and were primarily to the United Kingdom and Korea.
During 1997, two customers accounted for 72% of net sales (56% and
16%). Export sales in 1997, including sales through a sales agent for
international markets, accounted for approximately 80% of net sales and
were primarily to Korea.
In addition, the Company is dependent on a limited number of suppliers
for key components used in the Company's products (primarily power
transistors). Management believes that other suppliers could provide
similar components on comparable terms. A change in suppliers, however,
could disrupt manufacturing.
The carrying values of financial instruments potentially subject to
valuation risk, consisting of cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses and notes and
stockholder's loan payable, approximate fair value, principally because
of the short maturity of these items.
6. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
7. STOCK-BASED EMPLOYEE COMPENSATION
Stock-based employee compensation is accounted for under the intrinsic
value based method as prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Included in
these notes to the financial statements are the pro forma disclosures
required by Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting for Stock-Based Compensation."
F-10
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1997
NOTE B (CONTINUED)
8. PREPAID REGISTRATION COSTS
Prepaid registration costs represent certain direct fees incurred in
connection with the public offering in January 1997 (Note C). Such
amounts were accounted for as a reduction of proceeds.
9. CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
The Company maintains cash and cash equivalents in bank deposit and
money market accounts which, at times, may exceed federally insured
limits or not be insured. The Company has not experienced any losses in
such accounts and does not believe it is exposed to any significant
credit risk on cash and cash equivalents.
10. ADVERTISING EXPENSES
The Company expenses advertising costs as incurred. Advertising
expenses were $105,444, and $26,067 for the years ended December 31,
1997 and 1996, respectively.
NOTE C - PUBLIC OFFERING
A registration statement covering an underwritten public offering of
1,610,000 units at a price of $5.10 per unit, prior to underwriters'
commissions, was declared effective by the Securities and Exchange
Commission on January 22, 1997. Each unit consisted of one share of common
stock, par value $.0001 per share and one redeemable common stock purchase
warrant. Each warrant entitles the holder to purchase one share for $6.00
during the four-year period ending January 21, 2001. The Company may redeem
the warrants at a price of $.01 per warrant at any time with not less than
thirty days' prior written notice if the average closing price equals or
exceeds $9.00 per share for any twenty consecutive trading days.
F-11
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1997
NOTE C (CONTINUED)
In January 1997 and March 1997, the Company received net proceeds of
approximately $6,782,000, which included the overallotment of 210,000
units. The proceeds are net of legal fees, underwriters' fees and other
expenses of the offering totalling approximately $1,429,000.
NOTE D - PRIVATE PLACEMENTS
In March 1996, the Company issued, in a private placement, ten units at
$50,000 per unit, resulting in proceeds of $480,000, which is net of
expenses of $20,000. Each unit consists of 25,000 shares of common stock at
$1.00 per share, par value $.0001 per share, 25,000 options each to
purchase one share of common stock at $2.50 per share, exercisable until
December 31, 1998, and an 8% promissory note in the principal amount of
$25,000, which was repaid at the closing of the Company's initial public
offering.
In April 1996, the Company issued an additional twelve units at $50,000 per
unit, resulting in proceeds of $600,000. Each unit consists of 25,000
shares of common stock at $1.00 per share, par value of $.0001 per share,
25,000 options each to purchase one share of common stock at $2.50 per
share, exercisable until December 31, 1998, and an 8% promissory note in
the principal amount of $25,000, which was paid at the closing of the
Company's initial public offering.
In September 1996, the Company issued, in a private placement, promissory
notes in the aggregate of $375,000, including 187,500 warrants to purchase
common stock at $2.50 per share. In December 1996, the Company issued, in
two private placements, promissory notes in the aggregate of $289,000,
including 189,000 and 100,000 warrants to purchase common stock at $4.00
and $2.50 per share, respectively. The warrants are exercisable for a
three-year period. The promissory notes accrued interest at 8% per annum.
All principal and interest were paid at the closing of the Company's
initial public offering.
The difference between the exercise prices and fair market values of the
above private placement transactions in aggregate is $3,208,280 and was
charged to operations over the term of the debt (to January 29, 1997). The
total financing costs reflected in nonoperating expenses for the years
ended December 31, 1996 and 1997, is $2,883,740 and $324,540, respectively.
F-12
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1997
NOTE D (CONTINUED)
During 1997, the Company revised 200,000 of the options and warrants issued
in March 1996, September 1996 and December 1996. The exercise prices of
these options and warrants were changed from $2.50, $2.50 and $4.00
respectively to the lower of $2.50 or 20% below market price on exercise
date. The expiration date of 25,000 of such options and warrants was
extended until January 20, 2001. The exercise terms of these warrants were
revised to a cashless exercise commencing October 1, 1998.
NOTE E - STOCK PLANS
An incentive option plan and stock appreciation rights ("SARs") were
authorized prior to the public offering whereby options could be granted to
purchase no more than 1,500,000 shares of common stock at exercise prices
no less than fair market value as of date of grant. Under the plan,
employees and directors may be granted options to purchase shares of common
stock at the fair market value at the time of grant. Options generally vest
in three years and expire in four years from the date of grant. In May
1996, 267,000 options were granted to approximately forty employees of the
Company. The options are exercisable at $4.00 per share (estimated fair
market value). In June 1996, 1,000,000 options were granted to the
principal shareholder. The options are exercisable at $4.00 per share
(estimated fair market value).
In May 1996, 30,000 options were granted to a key employee of the Company.
This employee left the Company during 1997, forfeiting his right to these
options. The options were exercisable at $1.00 per share and vested ratably
over a three-year period. Approximately $20,000 of compensation expense was
charged to operations in 1996.
In December 1995, the Company granted warrants to the officers whereby they
have the option to purchase up to 350,000 shares of stock at $2.50 per
share. The warrants are exercisable one-third after June 30, 1996,
two-thirds after June 30, 1997 and 100% on June 30, 1998. For financial
reporting purposes, the difference between the $2.50 per share and $4.00
(the estimated fair market value per share) aggregates to $525,000 and is
being charged to operations ratably over the period from July 1, 1996 to
June 30, 1998.
F-13
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1997
NOTE E (CONTINUED)
In February and June 1997, the Company granted warrants to consultants
whereby they have the option to purchase up to 75,000 shares of stock at
$4.00 per share. The warrants are exercisable ratably over three years
ending June 2000. For financial reporting purposes, the fair value of such
warrants aggregates to $209,500 and is being charged to operations ratably
over the period from issuance to June 30, 2000.
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its stock options. Under APB No. 25, if
the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. Total compensation expense during 1996 and 1997 for
options granted to a key employee and officers of the Company reflected in
nonoperating expenses was $151,250 and $262,500, respectively. SFAS No.
123, "Accounting for Stock-Based Compensation," requires presentation of
pro forma net loss and loss per share as if the Company had accounted for
its employee stock options granted subsequent to December 31, 1994, under
the fair value method of that statement. For purposes of pro forma
disclosure, the estimated fair value of the options is amortized to expense
over the vesting period. Under the fair value method, the Company's net
loss and loss per share would have been increased by the following:
1996 1997
---------- ----------
Net loss $1,226,695 $1,638,552
Loss per share $ .46 $ .38
The weighted-average fair value of the individual options granted during
1996 is estimated at $1.07 on the date of grant. There were no options
granted in 1997. The fair values were determined using a Black-Scholes
option-pricing model with the following assumptions:
1996
--------
Volatility 36.00%
Risk-free interest rate 6.42%
Expected life 2 years
F-14
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1997
NOTE E (CONTINUED)
Stock option activity during 1996-1997 is summarized below:
Shares of Weighted-
common stock average
attributable exercise price
to options of options
------------ --------------
Unexercised at January 1, 1996 550,000 1.63
Granted 1,297,000 3.93
Exercised 200,000 .10
Forfeited - -
--------- ----
Unexercised at December 31, 1996 1,647,000 3.63
Granted - -
Exercised - -
Forfeited 64,000 2.59
--------- ----
UNEXERCISED AT DECEMBER 31, 1997 1,583,000 3.67
========= ====
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
-------------------------------------------- ---------------------------
Weighted-
Number average Weighted- Number Weighted-
outstanding remaining average exercisable average
Range of at period- contractual exercise at period - exercise
exercise prices end life price end price
--------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$2.50 to 4.00 1,583,000 2.67 $3.67 1,583,000 $3.67
</TABLE>
F-15
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1997
NOTE F - INCOME TAXES
The Company accounts for income taxes on the liability method, as provided
by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). Temporary differences and carryforwards
give rise to deferred tax assets and liabilities. The principal components
of the deferred tax assets relate to net operating loss carryforwards. At
December 31, 1997, the net operating loss carryforward is approximately
$4,561,000. The net operating loss carryforwards expire at various dates
through 2012, and because of the uncertainty in the Company's ability to
utilize the net operating loss carryforwards, a full valuation allowance
has been provided.
Internal Revenue Code Section 382 places a limitation on the utilization of
Federal net operating loss and other credit carryforwards when an ownership
change, as defined by the tax law, occurs. Generally, this occurs when a
greater than 50 percentage point change in ownership occurs. Accordingly,
the actual utilization of the net operating loss carryforwards and other
deferred tax assets for tax purposes may be limited annually under Code
Section 382 to a percentage (about 6%) of the fair market value of the
Company at the time of any such ownership change.
The Company's tax provision (benefit) differs from the expected statutory
rate principally due to the impact of state income and minimum taxes,
increases in valuation allowance and impact of surtax exemptions.
NOTE G - CAPITAL LEASE OBLIGATIONS
The Company has capital leases for certain equipment for use in its
manufacturing and research and development activities.
F-16
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1997
NOTE G (CONTINUED)
Future minimum lease payments on these leases are as follows:
Year ending December 31,
1998 $ 152,665
1999 64,012
2000 6,781
2001 525
----------
223,983
Less amount representing interest (19,712)
----------
Present value of minimum lease payments $ 204,271
==========
The net carrying value of assets under capital leases was $177,682 and
$138,197 at December 31, 1996 and 1997, respectively, and is included in
property and equipment. Amortization of these assets is included in
depreciation and research and development expenses.
NOTE H - COMMITMENTS
1. OPERATING LEASES
The Company leases office and manufacturing space and various equipment
under operating leases expiring through 2000.
During March 1996, the Company entered into a lease agreement for
approximately 21,000 square feet of additional office and manufacturing
space. The lease term commenced May 1, 1996 and is for a three-year
period ending April 30, 1999. The annual rental is $168,000 plus the
Company's share of real estate taxes, utilities and other occupancy
costs. The Company has the option to renew the lease for another
three-year term so long as it exercises its option to lease the entire
building (36,405 square feet).
F-17
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1997
NOTE H (CONTINUED)
The Company was obligated, until October 31, 1997, under its lease for
its previous 6,000 square-foot office location.
Future minimum lease payments on noncancellable operating leases are as
follows:
Year ending December 31,
1998 $ 182,512
1999 44,750
2000 579
----------
$ 227,841
==========
Rent expense was $245,839 and $209,500 for the years ended December 31,
1996 and 1997, respectively.
2. BANK LINE OF CREDIT
During May 1995, the Company obtained a bank line of credit of $250,000
to meet short-term liquidity requirements. Borrowings under the line
were due December 3, 1996 and paid in January 1997 from the proceeds of
the public offering.
3. EMPLOYMENT AGREEMENTS
Commencing May 1, 1996, the Company entered into three five-year
employment agreements with its Chairman, its Vice President of Sales
and Marketing and its Secretary. The agreements call for aggregate
annual base salaries of $312,000, plus certain employee benefits.
The Chairman, Vice President of Sales and Marketing and the Secretary
have agreed to defer approximately $140,000 of compensation at December
31, 1997. They have no intention to require payment from the Company
before January 1, 1999.
The Company entered into a two-year consulting agreement commencing
December 1995 and ending December 1997 with a Director of the Company.
Under such agreement, the Director received compensation of $30,000 per
year for two years.
F-18
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1997
NOTE H (CONTINUED)
In December 1995, the Company entered into employment agreements with
its Vice-President of Corporate Communications and Investor Relations
and its Vice-President of Strategic Alliances. Under the terms of each
agreement, the officers will be paid $60,000 per year (paid monthly)
each for thirty-six months beginning in January 1996.
NOTE I - LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). SFAS No. 128 specifies the compilation, presentation and disclosure
requirements for earnings per share for entities with publicly held common
stock or potential common stock. The requirements of this statement are
effective for interim and annual periods ending after December 15, 1997.
All prior years were restated in accordance with SFAS No. 128.
Net loss per common share - basic and diluted is determined by dividing the
net loss by the weighted average number of shares of common stock
outstanding. Net loss per common share diluted does not include potential
common shares derived from stock options and warrants because they are
antidilutive. (See Notes C, D and E for the number of potential common
shares.)
NOTE J - STOCKHOLDER LOAN
During 1994, 1995 and 1996, the Company's president and principal
shareholder advanced funds to the Company for operating needs. Amounts so
advanced were without interest and $339,694 was repaid from proceeds of the
initial public offering.
Effective March 31, 1996, $125,716 of stockholder loans was forgiven and
contributed to capital.
F-19
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1997
NOTE K - SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company acquired equipment under capital lease obligations totalling
$501,429 during the year ended December 31, 1996. During 1996, the officer
of the Company forgave $125,716 in debt, and contributed to capital. In
1996, the Company recorded $324,500 in noncash deferred financing costs. In
December 1996, the Company recorded a noncash amount of $55,000 relating to
a December private placement.
NOTE L - LITIGATION
The Company is a defendant to a complaint filed in the Circuit Court of the
Eighteenth Judicial District of the State of Florida on January 23, 1997,
alleging breach of contract and alleged damages in the amount of
approximately $4,323,000, plus interest, costs and attorneys' fees. The
Company filed an answer to the complaint denying the allegations therein
and a counterclaim on March 10, 1997. The counterclaim alleges breach of
contract, common law fraud, conversion and unjust enrichment. The Company
further asserts damages in the amount of approximately $463,000, plus
interest, costs and attorneys' fees. Management believes that the
allegations in the complaint are without merit.
From time to time, the Company is party to what it believes is routine
litigation and proceedings that may be considered as part of the ordinary
course of its business. Except for the proceedings noted above, the Company
is not aware of any current or pending litigation or proceedings that would
have a material effect on the Company's results of operations or financial
condition.
NOTE M - 401(k) PLAN
During 1996, the Company established a defined contribution plan, the
"Amplidyne, Inc. 401(k) Plan," effective June 1, 1996. No contributions are
made by the Company. All employees with greater than six months' service
with the Company are eligible to join the plan. The plan is administered by
American Funds Service Company.
F-20
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996 and 1997
NOTE N - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 1997, the Company recorded the following:
Stock compensation cost $ 283,000
Deferred compensation expense $ 140,000
Write-off of obsolete inventory $ 150,000
F-21
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