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, 1998
COMMISSION FILE NO. 0-21931
AMPLIDYNE, INC.
----------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3440510
(STATE OF OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
144 BELMONT DRIVE
SOMERSET, NEW JERSEY 08873
-------------------- -----
(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.
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, PAR VALUE $.0001 PER SHARE
(TITLE OF CLASS)
CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT
(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 $1.786,936.
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, 1999, was approximately $9,024,750.
Number of shares outstanding of the issuer's common stock, as of March
31, 1999 was 5,651,333.
Documents Incorporated by Reference: None
<PAGE>
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 continues to be one
of the fastest growing areas, and the Company has devoted significant resources
in 1998 to develop single channel and multi channel amplifiers for this market.
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.
2
<PAGE>
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 under the symbols
AMPD and AMDW, respectively.
In December 1998, the Company announced that it had entered into a
letter of intent with Microwave Power Devices, a publicly traded company listed
on Nasdaq ("MPD"), providing for the proposed merger of the Company with and
into MPD pursuant to a definitive merger agreement. In January 1999 the Company
and MPD terminated the letter of intent, inasmuch as such parties could not
consummate such merger on terms satisfactory to both parties.
In March 1999 the Company sold an aggregate of 900,000 shares of Common
Stock to "accredited investors" (pursuant to Rule 506 of Regulation D
promulgated under the Securities Act of 1933, as amended) at a per share price
of $1.125 (for an aggregate of $1,012,500), resulting in net proceeds of
$941,625.
FORWARD LOOKING STATEMENTS
Certain information contained in this Annual Report 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. 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;
reliance on certain key personnel; 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
3
<PAGE>
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.
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 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.
According to a report of Strategy Analytics, by 2003 more than 725
million people worldwide will subscribe to cellular and personal communications
services. Global Systems for Mobil Communications Technology (GSM) will continue
to dominate the worldwide digital cellular market. However CDMA Systems will
capture a 20% share of the subscribers by 2003. The report also indicates that
Southeast Asia will continue to hold a leadership position through 2003 with
total subscribers reaching 250
4
<PAGE>
million. Western Europe is predicted to grow at a compound annual rate of 18%
until 2003. Worldwide cellular telephone shipments are predicted to grow by 17%
annually, to exceed 330 million units by 2003. Southeast Asia will remain the
largest market for cellular phones, representing a 34% market share.
EMERGING TECHNOLOGY AND WIRELESS INTERNET ACCESS
The Global market for mobile users is forecast to grow from today's
figures of around 200 million users to around 2.4 billion users by 2015, which
means today's market only represents 10% of future demand according to sources
at International Telecommunication Union. With consumers looking for added
features including voice and data and wireless Internet access, new technology
is needed. The evolution of the third generation (3G) of wireless communication
is a fundamental step to the new world. 3G represents the world of multi media
mobile communications where users will have access not just to voice but to
video, image, text, graphics and data communications. The capabilities offered
by 3G will be limitless, offering users services such as video conferencing,
access to the Internet and a host of other applications.
The new technology will require wide band ultra liner amplifiers
requiring predistortion and feed forward technology. Amplidyne's propriety
patented technology and feed forward correction systems are ideally suited for
this new emerging market. The Company expects to provide solutions in the PCS
and IMT2000 formats using W-CDMA and similar technologies.
CELLULAR SYSTEMS
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
5
<PAGE>
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 amplifiers.
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.
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.
6
<PAGE>
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 original equipment manufactures
("OEMs") to develop products for the PCS market. The Company's products are
being evaluated for emerging technology at various OEM sites.
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 provided several new models to its Southeast Asian, European and
US customers, which resulted in several new orders being placed with the Company
during 1998.
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 1998.
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
7
<PAGE>
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. The Company is aware of the emerging 3D technology and is continuing
to provide products for the technology either at W-CDMA or IMT2000 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. The Company has continued its research
and development on PCS and wireless local loop products during 1998, and has
procured some orders for this equipment 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 DCS-1800 and PCS-1900 markets. The Company has
continued to develop amplifier products which can be used in PCS repeater
subsystems. This aspect of the business has continued to show steady growth
during 1998.
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,
8
<PAGE>
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 has consistently analyzed in house
automated manufacturing versus the use of subcontracted manufacturers in order
to control its production schedule. The Company may install automated equipment
as needed. In 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, as financing permits.
9
<PAGE>
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.
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 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 to 32, 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.
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
10
<PAGE>
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.
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.
11
<PAGE>
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 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 among 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").
EMERGING TECHNOLOGY AND WIRELESS INTERNET ACCESS. The Global market for
mobile users is forecasted to grow from today's figures of around 200 million
users to around 2.4 billion users by 2015, which means today's market only
represents 10% of future demand according to sources at International
Telecommunication Union. With consumers looking for added features including
voice and data and wireless Internet access, new technology is needed. The new
technology will require wide band ultra linear amplifiers requiring
predistortion and feed forward technology. Amplidyne's propriety patented
technology and feed forward correction systems are ideally suited for this new
emerging market. The Company expects to provide solutions in the PCS and IMT2000
formats using W-CDMA and similar technologies.
WIRELESS RECEIVE TECHNOLOGY. The receiving section of a cellular base
station frequently uses two antennas for efficient spectrum usage. The
deployment of complex
12
<PAGE>
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, PCS and other new and
emerging applications (such as W-CDMA) 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 major OEMs as well as
emerging wireless telecommunications infrastructure equipment providers when
providing infrastructure equipment for such new cell sites.
WIRELESS LOCAL LOOP. 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. The
Company has recently obtained a sales contract for its wireless local loop
products, the value of which may range between $2 - $5 million during fiscal
years 1999 and 2000. (See Backlog/Future Orders discussion on pages 16-17)
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
13
<PAGE>
Japan and the U.S., PCS-based operators are proving formidable competitors to
cellular network operators. The Company has developed products for the PCS
market and has shipped production quantities of single channel PCS amplifiers
and received additional purchase orders for PCS single channel linear
amplifiers. The Company has recently obtained a purchase order in excess of $5
million for its PCS single channel and multi-channel amplifier products from
certain key customers in the Southeast Asian market. The Company expects to
deliver such products during fiscal year 1999 and the first half of 2000. (See
Backlog/Future Orders discussion on pages 16-17)
PRODUCTS
The Company designs and sells multicarrier transmit amplifiers and low
noise receive amplifiers for the cellular communications market, as well as the
PCS and wireless local loop 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 designs and 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 3.0 watts of output
power.
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.
14
<PAGE>
AMPLIDYNE'S MCLPA PRODUCT SUMMARY
- --------------------------------------------------------------------------------
OUTPUT IMD
PRODUCT POWER ---
MODEL NO. FREQUENCY STANDARD WATTS (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/CDM 100 -70
A
CDPD,
TDMA
- --------------------------------------------------------------------------------
AMP917/950-E-100 917-960 ETACS/CD 100 -70
MA
- --------------------------------------------------------------------------------
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.
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
- --------------------------------------------------------------------------------
15
<PAGE>
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).
The Company's wireless telecommunications amplifiers can be configured
as modules separate plug-in amplifier units or integrated subsytems. 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.
PRODUCT WARRANTY
The Company warrants new products against defects in materials and
workmanship generally for a period of one (1) year from the date of shipment.
Certain sales to Korean customers provide for a two year warranty. To date, the
Company has not experienced a material amount of warranty claims.
BACKLOG/FUTURE ORDERS
As of December 31, 1998, the Company had multi-year backlog and open
future orders of approximately $7,000,000 which the Company plans to deliver
during fiscal years 1999-2000 (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,
16
<PAGE>
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
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 94% of the Company's net sales for fiscal 1998. These sales were
principally for the supply of equipment for implementation in the digital
cellular and PCS networks in Korea, and wireless local loop systems worldwide.
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 1998.
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. Economic conditions have improved, however, weakness in
the currency and strict banking controls have created problems in the execution
of planned growth for the Korean PCS networks. In certain cases, purchase orders
have been placed and then delayed, because of these circumstances.
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. During 1998 the Company has had
success in obtaining small quantity purchase orders
17
<PAGE>
from some key North American OEM's particularly for the PCS single and
multichannel amplifiers.
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 1996.
NET REVENUES BY MARKET CATEGORIES
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31,
------------------------
MARKETS 1996 1997 1998
------- ------ ------ ------
Cellular Analog ............................ $ 126 $ 99 $ 15
Cellular Digital ........................... 452 78 0
Wireless Telephony ......................... 759 265 600
Satellite Communications, Custom and other
Products .................................... 231 173 188
Digital PCS Products ....................... 652 1,818 983
Total ............................... $2,220 $2,433 $1,786
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 continue to improve its 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 1997 and the
Company concentrated its efforts in developing MCLPAs. In
February 1996 the Company received prototype orders for its
wireless MCLPAs. Sales to the analog and
18
<PAGE>
digital cellular industry have decreased from 7.2% in 1997
to approximately .8% of total sales in 1998.
* WIRELESS TELEPHONY. Sales to the wireless telephone
segments of the wireless communications industry have
increased from approximately 11% of total revenues for
fiscal year end 1997 to 33% of total revenue for the fiscal
year end 1998.
* DIGITAL PCS. The Company has shipped single channel
amplifiers to its OEM customers as of January 1, 1997
accounting for 75% of sales in the period ended December 31,
1997. Sales in this sector of the market showed some
decrease during fiscal 1998 accounting for 55% of total
sales, primarily due to the decline in the South Korean
marketplace.
* INTERNATIONAL SALES. Sales of wireless products
outside the United States (primarily to Western Europe and
the Far East) represented approximately 66%, 80% and 94% of
net sales during fiscal 1996, fiscal 1997, and fiscal 1998,
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 operate
profitably 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
19
<PAGE>
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.
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.
20
<PAGE>
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 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.
The Company has consistently reviewed its in house automated
manufacturing needs in order to control its production schedule. To date, the
Company has not established a fully automated manufacturing facility. Until such
time as its establishes such facilities, the Company expects to be dependent on
contract manufacturing.
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 1996, 1997 and 1998
were approximately $1,150,000, $876,000 and $544,200, respectively, and
represented approximately 52%, 36% and 31%, respectively, of net revenues. These
efforts were primarily dedicated to the development
21
<PAGE>
of the linear feed forward, high power, low distortion amplifiers, resulting in
the Company's models for AMPS, TACS, NMT-450, PCS-1900, and PCS Repeater
Amplifier (DCS 1800).
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.
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. The Company intends to broaden its patent
protection in other countries for its existing patents and file for additional
patent protection relating to products it is currently developing.
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.
22
<PAGE>
GOVERNMENTAL REGULATIONS
The Company's customers must obtain regulatory approval to operate
their base stations. The United States Federal Communications Commission ("FCC")
has 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, 1998, the Company had a total of 37 employees,
including 26 in operations, 3 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.
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.
IN ADDITION TO OTHER INFORMATION IN THIS ANNUAL REPORT ON FORM 10-KSB,
THE FOLLOWING IMPORTANT FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE
COMPANY AND ITS BUSINESS BECAUSE SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT
IMPACT ON THE COMPANY'S BUSINESS, PROSPECTS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
RECENT HISTORY OF LOSSES. The Company incurred net losses of
$5,419,940, $2,493,611 and $1,916,359 for the years ended December 31, 1996,
1997 and 1998, respectively, although a substantial portion of the net losses
for such periods is due to nonoperating charges to earnings and research,
engineering and development costs. The
23
<PAGE>
Company expects that losses will increase and continue until such time, if ever,
as the Company can manufacture and market a new line of linear power amplifiers
including multicarrier linear power amplifiers (sometimes referred to as
"MCLPA"). In addition, the Company had an accumulated deficit of $11,569,036 at
December 31, 1998.
POSSIBLE NEED FOR ADDITIONAL FINANCING. The Company believes that the
current cash on hand including the proceeds of the recently completed private
placement of 900,000 shares of Common Stock, resulting in net proceeds of
$941,625 to the Company, together with cash flow from operations will be
adequate to fund its operations for at least twelve months. There can be no
assurance, however, that the Company will not require additional financing prior
to or after such time. 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.
RELIANCE UPON GROWTH OF WIRELESS TELECOMMUNICATIONS SERVICES. Demand
for the Company's products will depend in large part upon continued and growing
demand within the wireless telecommunications industry for power amplifiers.
Although demand for power amplifiers has grown in recent years, there can be no
assurance that the quantity and variety of wireless telecommunications services
will continue to grow, or that such services will create a demand for the
Company's products.
LACK OF AUTOMATED MANUFACTURING PROCESSES; DEPENDENCE ON CONTRACT
MANUFACTURERS; LIMITED NUMBER OF SUPPLIERS. The Company has consistently
reviewed its in house automated manufacturing needs in order to control its
production schedule. To date, the Company has not established a fully automated
manufacturing facility. Until such time as its establishes such facilities, the
Company expects to be dependent on contract manufacturing. There can be no
assurance that the Company's contract manufacturers will be able to fulfill the
Company's production commitments. There are no written agreements with such
contract manufacturers. Any inability to obtain timely deliveries of finished
assemblies of acceptable quality could delay the Company's ability to deliver
its products to its customers, which in turn would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, in the event that production costs for the Company's contract
manufacturers increase, the Company may suffer losses due to an inability to
recover such cost increases under its fixed price commitments with its original
equipment manufacturer ("OEM") customers.
Power transistors and certain other key components used in the
Company's products are currently available from only a limited number of
sources. Certain of the Company's limited source suppliers have limited
operating histories and limited financial
24
<PAGE>
and other resources and, therefore, they may prove to be unreliable sources of
supply. The Company has no written agreements with such suppliers. Further, the
Company has generally not previously purchased key components in large volume.
If the Company were unable to obtain sufficient quantities of components,
particularly power transistors, delays or reductions in product shipments could
occur which would have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, delays in filling
orders may have a material adverse effect on the Company's relationships with
its OEM customers, which may result in the termination of material orders from
its OEM customers and/or cause a permanent loss of future sales.
RELIANCE ON A SMALL NUMBER OF CUSTOMERS; POSSIBLE FLUCTUATIONS IN
OPERATING RESULTS. In 1996, approximately 70% of net revenues were derived from
sales to three customers. In 1997, approximately 48% of net revenues were
derived from one customer (in South Korea). In 1998, approximately 94% of net
revenues were derived from three customers (two European and one South Korean).
The Company anticipates that sales of its products to relatively few customers
(wireless telecommunications OEMs) will account for a majority of the Company's
revenues in 1999. The reduction, delay or cancellation of orders from one or
more significant customers would materially and adversely affect the Company's
financial condition and results of operation. Moreover, as a result of the
uncertainty of such sales, the Company may in the future experience significant
fluctuations in net sales, gross margins and operating results.
LIMITED MARKETING EXPERIENCE. The Company has developed its sales and
marketing network, which includes outside sales agents, which has demonstrated
the advantages of its products over competing products. The Company's marketing
experience with its single and multi channel amplifiers has had limited success
with major OEMs. The Company has to maintain a leading edge position regarding
emerging technologies, such as the 3G systems and wireless Internet access,
which require ultra linear base station amplifiers. The Company continues to
upgrade its sales and marketing efforts, while maintaining product cost. There
can be no assurance that the Company will be successful in its marketing efforts
or that it will be able to maintain sales and distribution capabilities.
CONTROL BY MANAGEMENT. Officers and directors and persons who may be
deemed affiliates beneficially own, in the aggregate, and have the right to vote
approximately 40% of the issued and outstanding Common Stock (not including any
options they may own) of the Company. The Chairman and Chief Executive Officer
of the Company owns approximately 38% of the issued and outstanding Common
Stock. Accordingly, such holders will be in a position to elect all of the
directors and thereby control the Company.
LIMITED PRIOR PUBLIC MARKET; POTENTIAL LIMITED TRADING MARKET; POSSIBLE
VOLATILITY OF STOCK PRICE. There has only been a public market for the
Securities since January 1997 and there can be no assurance that an active
trading market in the
25
<PAGE>
Company's Securities will be maintained. In the absence of such a market, an
investor may find it more difficult to sell the Securities offered hereby. In
addition, the stock market in recent years has experienced extreme price and
volume fluctuations that have particularly affected the market prices of many
smaller companies. The trading price of the Securities is expected to be subject
to significant fluctuations in response to variations in quarterly operating
results, changes in analysts' earnings estimates, announcements of technological
innovations by the Company or its competitors, general conditions in the
wireless communications industry and other factors. These fluctuations, as well
as general economic and market conditions, may have a material adverse effect on
the market price of the Company's Securities.
NO ASSURANCE OF SUCCESSFUL EXPANSION OF OPERATIONS. The Company has
substantially increased its scale of operations over the past two years,
however, due to the down turn in business activity in the Southeast Asian
market, the Company has had to reassess its business strategy. The Company
intends to downsize some of its operations in order to maintain competitiveness
and achieve profitability. The Company has explored joint ventures and mergers
in order to achieve these results, but has not consummated any of these
transactions. If the Company does not increase its sales, decrease overhead
expenditure or does not adequately manage the growth of its operations, the
Company's results of operations will be materially adversely affected.
DECLINING AVERAGE SALES PRICES. If wireless telecommunications OEMs
come under increasing price pressure from cellular and PCS service providers,
the Company could expect to experience downward pricing pressure on its
products. In addition, competition among non-captive amplifier suppliers could
increase the downward pricing pressure on the Company's products. To date, such
pressure has not been experienced. As these manufacturers frequently negotiate
supply arrangements far in advance of delivery dates, the Company often must
commit to price reductions for its products before it is aware of how, or if,
cost reductions can be obtained. If the Company is unable to achieve cost
reductions, the Company's gross margins will decline, which will have a material
adverse effect on the Company's business, financial condition and results of
operations.
RAPID TECHNOLOGICAL CHANGE AND INTENSE COMPETITION. The wireless
telecommunications equipment industry is extremely competitive and is
characterized by rapid technological change, new product development, product
obsolescence and evolving industry standards. In addition, price competition in
this market is intense and characterized by significant price erosion over the
life of a product. 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 delivery schedules of
its customers. The Company's existing and potential OEM customers continuously
evaluate whether to manufacture their own amplification products or to purchase
such products from outside sources. These customers and other large
manufacturers of wireless telecommunications infrastructure equipment could
elect
26
<PAGE>
to enter the market and compete directly with the Company. Many of the Company's
competitors have significantly greater financial, technical, manufacturing,
sales and marketing capabilities and research and development personnel and
other resources than the Company and have achieved greater name recognition of
their existing products and technologies. In order for the Company to
successfully compete it must continue to develop new products, keep pace with
advancing technologies and competitive innovations and successfully market its
products to OEM customers that will incorporate the Company's products into
their systems. There can be no assurance that the Company will be able to
compete successfully.
In addition, there can be no assurance that new products or alternative
amplifier technology will not be developed that render the Company's current or
planned products obsolete or inferior. Rapid technological development by others
may result in the Company's products becoming obsolete before the Company
recovers a significant portion of the research, development and
commercialization expenses incurred with respect to those products.
RISKS ASSOCIATED WITH SALES OUTSIDE OF THE UNITED STATES. International
sales represented approximately 72%, 70%, and 94% of the Company's net revenues
for the years ended December 31, 1996, 1997 and 1998, respectively. The Company
expects that international sales will continue to account for a significant
portion of its net revenues in the future. To the extent that the Company does
not achieve and maintain substantial international sales, the Company's
business, results of operations and financial condition could be materially and
adversely affected. There can be no assurance that the Company will be able to
maintain or increase its current level of international sales.
Sales of the Company's products outside of the United States are
denominated in US dollars. An increase in the value of the U.S. dollar relative
to foreign currencies would make the Company's products more expensive and,
therefore, potentially less competitive outside the United Sates. Additional
risks inherent in the Company's sales abroad include the impact of recessionary
environments in economies outside the United States, generally longer
receivables collection periods, unexpected changes in regulatory requirements,
tariffs and other trade barriers, potentially adverse tax consequences,
restrictions on the repatriation of earnings, reduced protection for
intellectual property rights in some countries, and the burdens of complying
with a wide variety of foreign laws. There can be no assurance that such factors
will not have an adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition and results of
operations.
DEPENDENCE UPON MANAGEMENT AND TECHNICAL PERSONNEL. The success of the
Company is highly dependent upon the continued services of Devendar Bains, the
Company's President and Chief Executive Officer. The Company has entered into a
five year employment agreement with Mr. Bains which terminates April 30, 2001
and contains a covenant not to compete against the Company for a two year period
following
27
<PAGE>
termination of employment. The Company has obtained key man insurance on the
life of Mr. Bains in the amount of $1,000,000. There can be no assurances that
the Company will be able to replace Mr. Bains in the event his services become
unavailable or that the proceeds of such insurance would be adequate to
compensate the Company for the loss of his services.
Due to the specialized nature of the Company's business, the Company is
highly dependent on the continued service of, and on its ability to attract and
retain, qualified technical and marketing personnel, particularly highly skilled
radio-frequency ("RF") and microwave design engineers involved in the
development of new products and processes and test technicians involved in the
manufacture and enhancement of existing products. In addition, as part of the
Company's team-based sales approach, the Company dedicates specific design
engineers to service the requirements of individual customers. The loss of any
such engineer could adversely affect the Company's ability to obtain future
purchase orders from the customers to which such engineer is dedicated. The
Company has employment or non-competition agreements with most of its current
design engineers or test technicians. The competition for such personnel is
intense, and the loss of any such persons, as well as the failure to recruit
additional key technical personnel in a timely manner, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
PROPRIETARY TECHNOLOGY; RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT. 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 upon the rights of others. Although there are no
pending lawsuits against the Company regarding its technology or notices that
the Company is infringing upon intellectual property rights of others, there can
be no assurance that litigation or infringement claims will not occur in the
future. Such litigation or claims could result in substantial costs, and
diversion of resources and could have a material adverse effect on the Company's
business, financial condition, and results of operations. The Company generally
enters into confidentiality and non-disclosure agreements with its employees and
limits access to and distribution of its proprietary information. However, there
can be no assurance that such measures will provide adequate protection for the
Company's trade secrets or other proprietary information, or that the Company's
trade secrets or proprietary technology will not otherwise become known or be
independently developed by competitors. The failure of the Company to protect
its proprietary technology could have a material adverse effect on its business,
financial condition and results of operations.
NO DIVIDENDS. The Company has not paid any dividends on its Common
Stock since its inception and does not intend to pay dividends on its Common
Stock in the foreseeable future. Any earnings which the Company may realize in
the foreseeable future will be retained to finance the growth of the Company.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL REGULATIONS. The Company's
customers must obtain regulatory approval to operate their base stations. The
United
28
<PAGE>
States Federal Communications Commission ("FCC") has regulations that impose
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.
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.
NASDAQ CONTINUED LISTING REQUIREMENTS. Although the Company's Common
Stock and Warrants are currently listed on Nasdaq, for continued listing on The
Nasdaq Small Cap Market, a company, among other things, must have $2,000,000 in
net tangible assets, $1,000,000 in market value of public float and a minimum
bid price of $1.00 per share. If the Company is unable to satisfy the
requirements for continued quotation on The Nasdaq Small Cap Market, trading, if
any, in the Common Stock and Warrants offered hereby would be conducted in the
over-the-counter market in what are commonly referred to as the "pink sheets" or
on the NASD OTC Electronic Bulletin Board. As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the securities offered hereby. The above-described rules may materially
adversely affect the liquidity of the market for the Company's securities. This
Annual Report on Form 10-KSB for the year ended December 31, 1998 indicates net
tangible assets of $1,167,251. Although the Company believes that the proceeds
of the private placement in March 1999 as well as certain other first quarter
adjustments and revenue will assist the Company in its compliance with continued
listing, no assurances are made as to the Company's continued listing on Nasdaq.
PENNY STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON
MARKETABILITY OF SECURITIES. The Securities and Exchange Commission (the
"Commission") has adopted regulations which generally define a "penny stock" to
be any equity security that has a market price (as defined) of less than $5.00
per share or an exercise price of less than $5.00 per share, subject to certain
exceptions. Since the Common Stock is listed on The Nasdaq Small Cap Market,
such securities are exempt from the definition of "penny stock." If the Common
Stock and Warrants are removed from listing by The Nasdaq
29
<PAGE>
Small Cap Market at any time, the Company's Common Stock and Warrants may become
subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the Commission relating to the penny stock
market. The broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Company's securities and may
affect the ability of purchasers in this Offering to sell the Company's
securities in the secondary market and the price at which such purchasers can
sell any such securities.
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. The Company will be able to issue shares of its Common Stock upon
exercise of the Warrants only if there is then a current prospectus relating to
such Common Stock and only if such Common Stock is qualified for sale or exempt
from qualification under applicable state securities laws of the jurisdictions
in which the various holders of the Warrants reside. Currently there is no
current prospectus which will permit the purchase and sale of the Common Stock
underlying the Warrants (which are currently exercisable at $6.00 per share).
The Warrants may be deprived of any value and the market for the Warrants may be
limited if a current prospectus covering the Common Stock issuable upon the
exercise of the Warrants is not effective or if such Common Stock is not
qualified or exempt from qualification in the jurisdictions in which the holders
of the Warrants then reside.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants may be
redeemed by the Company at any time at a redemption price of $.01 per Warrant
upon not less than 30 days prior written notice if the average closing price or
bid price of the Common Stock as reported by the principal exchange on which the
Common Stock is traded, the Nasdaq SmallCap Market or the National Quotation
Bureau, Incorporated, as the case may be, equals or exceeds $9.00 per Share for
any twenty (20) consecutive trading days ending within five (5) days prior to
the date on which notice of redemption is given. Notice of redemption of the
Warrants could force the holders to exercise the Warrants and pay the exercise
price at a time when it may be disadvantageous for them to do so, to sell the
Warrants at the current market price when they might otherwise wish to hold the
Warrants, or to accept the redemption price which would be substantially less
than the market value of the Warrants at the time of redemption.
30
<PAGE>
ANTI-TAKEOVER PROVISIONS. Pursuant to the Company's Certificate of
Incorporation, the Board of Directors may issue up to 1,000,000 shares of
Preferred Stock in the future with such preferences, limitations and relative
rights as the Board may determine without stockholder approval. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of delaying or preventing a change in control of the Company without
further action by the stockholders. The Company has no present plans to issue
any shares of Preferred Stock. In addition, following this Offering the Company
will become subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which will prohibit the Company from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the persons became an
interested stockholder, unless the business combination is approved in a
prescribed manner. The application of Section 203 also could have the effect of
delaying or preventing a change of control of the Company.
ADDITIONAL AUTHORIZED SHARES OF COMMON STOCK AND PREFERRED STOCK
AVAILABLE FOR ISSUANCE MAY ADVERSELY AFFECT THE MARKET. The Company is
authorized to issue 25,000,000 shares of its Common Stock, $.0001 par value. As
of March 31, 1999, there were 5,651,333 shares of Common Stock issued and
outstanding. However, the total number of shares of Common Stock issued and
outstanding does not include the exercise of up to 1,610,000 Warrants to
purchase up to 1,610,000 shares of Common Stock, the option granted to the
underwriter of the Company's initial public offering to purchase up to 140,000
Shares and 140,000 Warrants to purchase 140,000 shares of Common Stock, 212,500
shares of Common Stock issuable upon exercise of the $2.50 Warrants, 350,000
shares of Common Stock issuable upon exercise (at $1.25) of the Rule 701
Warrants, 214,000 shares of Common Stock issuable upon exercise of the $4.00
Warrants, 90,000 shares of Common Stock issuable upon exercise of Agent Warrants
issued in the March 1999 private placement, and 1,500,000 shares of Common Stock
issuable upon exercise of options granted pursuant to the Incentive Option Plan
(1,293,000 of which have been granted). After reserving a total of 4,284,000
shares of Common Stock for issuance upon the exercise of all options and
warrants, the Company will have at least 14,212,667 shares of authorized but
unissued Common Stock available for issuance without further shareholder
approval. As a result, any issuance of additional shares of Common Stock may
cause current shareholders of the Company to suffer significant dilution which
may adversely affect the market.
In addition to the above-referenced shares of Common Stock which may be
issued without shareholder approval, the Company has 1,000,000 shares of
authorized preferred stock, the terms of which may be fixed by the Board of
Directors. The Company presently has no issued and outstanding shares of
preferred stock and while it has no present plans to issue any shares of
preferred stock, the Board of Directors has the authority, without shareholder
approval, to create and issue one or more series of such
31
<PAGE>
preferred stock and to determine the voting, dividend and other rights of
holders of such preferred stock. The issuance of any of such series of preferred
stock could have an adverse effect on the holders of Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET. As of
March 31, 1999, the Company had 5,651,333 shares of its Common Stock issued and
outstanding, 3,161,333 of which are "restricted securities". Of such "restricted
securities" 2,000,000 of such Shares may be sold pursuant to Rule 144 as
described below, 40,000 Shares may be sold pursuant to Rule 144 commencing July
1999, 173, 333 Shares may be sold pursuant to Rule 144 commencing January 2000,
48,000 Shares may be sold pursuant to Rule 144 commencing January 2000 and the
remaining 900,000 Shares may be sold pursuant to Rule 144 commencing April 2000.
Rule 144 provides, in essence, that a person holding "restricted
securities" for a period of one year may sell only an amount every three months
equal to the greater of (a) one percent of the Company's issued and outstanding
shares, or (b) the average weekly volume of sales during the four calendar weeks
preceding the sale. The amount of "restricted securities" which a person who is
not an affiliate of the Company may sell is not so limited, since non-affiliates
may sell without volume limitation their shares held for two years if there is
adequate current public information available concerning the Company. In such an
event, "restricted securities" would be eligible for sale to the public at an
earlier date. The sale in the public market of such shares of Common Stock may
adversely affect prevailing market prices of the Common Stock.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. As of the date of this
Annual Report, there are outstanding stock options and warrants (not including
the underwriter's warrants and publicly traded Warrants) to purchase an
aggregate of 440,000 shares of Common Stock at an exercise price of $1.25 per
Share (which includes 90,000 Agent Warrants), and additional 212,500 shares of
Common Stock at an exercise price of $2.50 per share, an additional 214,000
shares of Common Stock at an exercise price of $4.00 per share, and the Company
has reserved 1,293,000 shares of Common Stock for issuance pursuant to
outstanding Employee Options. None of the $2.50 Warrants, $4.00 Warrants, Agent
Warrants or Employee Options are available for public resale and such shares
would be subject to Rule 144 of the Act upon issuance thereof. The 350,000
Shares underlying the Rule 701 Warrants (which were issued pursuant to Rule 701
of the Act) are available for sale in the public market pursuant to Rule 701.
The exercise of such outstanding options and warrants will dilute the percentage
ownership of the Company's stockholders, and any sales in the public market of
shares of Common Stock underlying such securities may adversely affect
prevailing market prices for the Common Stock. Moreover, the terms upon which
the Company will be able to obtain additional equity capital may be adversely
affected since the holders of such outstanding securities can be expected to
exercise their respective rights therein at a time when the Company would, in
all likelihood, be able to obtain any needed capital on terms more favorable to
the Company than those provided in such securities.
32
<PAGE>
LIMITATION ON DIRECTOR LIABILITY. As permitted by Delaware law, the
Company's Certificate of Incorporation limits the liability of directors to the
Company or its stockholders for monetary damages for breach of a director's
fiduciary duty except for liability in certain instances. As a result of the
Company's charter provision and Delaware law, stockholders may have limited
rights to recover against directors for breach of fiduciary duty.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE. This Memorandum
contains forward-looking statements and information that are based on
management's beliefs as well as assumptions made by, and information currently
available to, management. When used in this Memorandum (including Exhibits),
words such as "anticipate," "believe," "estimate," "except," and, depending on
the context, "will" and similar expressions, are intended to identify
forward-looking statements. Such statements reflect the Company's current views
with respect to future events and are subject to certain risks, uncertainties
and assumptions, including the specific risk factors described above. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, believed, estimated or expected. The Company does not intend to
update these forward-looking statements and information.
ITEM 2. PROPERTIES.
The Company leases (from an unaffiliated party) approximately 21,000
square feet, on a month-to-month basis, at 144 Belmont Drive, Somerset, New
Jersey 08873, which serves as the Company's executive offices and manufacturing
facility. The lease term expired on March 31, 1999. The annual rental is
$168,000. The Company intends to move to new premises, with a target to reduce
its lease obligations to $80,000 per year, compared to $168,000 that it
currently pays.
With common area and other charges, the Company is currently paying $240,000
annually.
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 matters:
1. 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
33
<PAGE>
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. The case is
currently in discovery. A motion for summary judgment was denied in February
1999.
2. The Company is also a defendant in a complaint filed in the United
States District Court for the District of New Jersey on May 13, 1998. The
complaint alleges breach of contract of a representative agreement between the
Company and ENS Engineering of South Korea. According to the plaintiff's
attorney, the claim against the Company is for $135,000, plus unspecified
compensatory and punitive damages. The Company filed an answer to the complaint
denying the allegations and a counterclaim against the plaintiff on September
12, 1998. The counterclaim alleges breach of contract for unspecified damages,
which in the opinion of management exceeds $1,000,000. The Company intends to
aggressively defend this action and to prosecute its counterclaim. Management
believes that the breach of contract was caused by the plaintiff. The case is
currently in discovery.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 28, 1998, the Company held an annual meeting of
stockholders to vote on the election of directors and the ratification of the
Company's independent auditors. Of the 4,530,000 shares of the Company's Common
Stock entitled to vote at the meeting, holders of 3,944,599 shares were present
in person or were represented by proxy at the meeting.
The directors elected at the meeting and the results of the voting were
as follows:
For Withheld
--- --------
Devendar S. Bains 3,944,599 18,995
Tarlochan Bains 3,944,599 18,995
Charles J. Ritchie 3,944,599 18,995
Manish V. Detroja 3,944,599 18,995
The above represented all of the directors of the Company on December
28, 1998.
The shares voted regarding the Board of Directors' proposal to select
the accounting firm of Grant Thornton LLP, to serve as independent auditors of
the Company, were as follows:
For: 3,936,594
Against: 8,600
Abstain: 18,400
34
<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 closing 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, fiscal 1998 and for the
period of January 1, 1999 up to March 31, 1999 as reported by the Nasdaq
SmallCap Market. 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 Closing Price
------------------ -------------
High Low
---- ---
January 22 - March 31 5.625 4.250
April 1 - June 30 5.375 4.500
July 1 - September 30 7.625 4.250
October 1 - December 31 7.375 1.625
1998 Calendar Year
------------------
January 1 - March 31 2.375 .875
April 1 - June 30 1.813 .906
July 1 - September 30 1.750 .750
October 1 - December 31 1.844 .469
1999 Calendar Year
------------------
January 1 - March 31 2.625 1.094
Warrants
- --------
1997 Calendar Year Closing Price
------------------ -------------
High Low
---- ---
January 22 - March 31 .8125 .250
April 1 - June 30 1.0625 .500
July 1 - September 30 1.750 .250
35
<PAGE>
October 1 - December 31 1.0625 .250
1998 Calendar Year
------------------
January 1 - March 31 .625 .125
April 1 - June 30 .625 .125
July 1 - September 30 .531 .125
October 1 - December 31 .250 .063
1999 Calendar Year
------------------
January 1 - March 31 .406 .031
On March 31, 1999 the closing prices of the Common Stock and Warrants
as reported on Nasdaq SmallCap Market was $2.625 and $.406, respectively. On
March 31, 1999 there were 5,651,333 shares of Common Stock and 1,610,000
Warrants outstanding, held of record by approximately 56 record holders (with
over 1,000 beneficial owners).
36
<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,
1998 1997
---- ----
Net sales 100% 100%
Cost of goods sold 98.5% 78.9%
Gross profit 1.5% 21.1%
Selling, general and
administrative 71.5% 66.4%
Research, engineering and
development 30.4% 36%
Total operating expenses 101.9% 102.4%
Interest Income 4.4% 5.8%
Interest expense .8% 2.0%
Stock compensation and
financing costs 10.4% 25%
Loss before income taxes (107.2%) (102.5%)
Provision (credit) for
income taxes
Net loss (107.2%) (102.5%)
RESULTS OF OPERATIONS - FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL
YEAR ENDED DECEMBER 31, 1997.
Revenues for the fiscal year ended December 31, 1998 decreased 26%
compared to the fiscal year ended December 31, 1997. The primary reason for the
decrease was due to the economic crisis experienced by South Korea during 1998
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 1998 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.
and overseas for prototype evaluations.
37
<PAGE>
Sales for the first 3 quarters of 1998 were weak due to the economic
crises in the South East Asian markets, as planned shipments under purchase
orders were never completed due to delay and cancellations by certain customers.
The Company refocused its strategy to obtain more US and European business. As a
result of its efforts, the Company was able to obtain a substantial order from a
major OEM in Europe. The sales in the fourth quarter of 1998 accounted for 35%
of the overall sales for 1998. Management intends to reduce overhead during 1999
and continue to focus its sales and marketing efforts in the US and European
markets.
The Company's sales to international markets representing 94% of the
Company's sales in 1998, were primarily to Korea and Europe. Korea has suffered
significant currency fluctuations during 1998. The Company believes that its
ability to generate sales during the first half of 1999 will be adversely
impacted by, among other things, economic conditions in Korea.
Cost of sales as a percentage of sales was 98% during the year ended
December 31, 1998, compared to 79% during the same period for 1997. This
increase can be attributed to the economic conditions in South Korea resulting
in slow build-out of the PCS networks in that country, which caused the
Company's ramp-up in manufacturing personnel and shop overhead to be severely
underutilized during 1998. The cost of new product development is a prolonged
and an expensive process, causing the cost of certain prototypes to be greater
than targeted profit margins. Further, certain sales to a distributor in Korea
yield a lower sales price (as compared to a commission expense separately paid
and included in selling general and administrative expenses) and extended
warranty terms. The Company is continuing to assess cost reduction of its
products to improve gross margins in 1999.
Selling, general and administrative expenses decreased in 1998 by
$337,300 to $1,278,256 from $1,615,556, in 1997. Expressed as a percentage of
sales, the selling, general and administrative expenses were 71.5% in 1998 and
66.4% in 1997. The principal factors contributing to the decrease in selling,
general and administrative expenses were related to the reduction in staffing
levels, and cost containment efforts.
Research, engineering and development expenses decreased to 30.4% of
net sales in 1998 compared to 36% in 1997. In 1998, the principal activity of
the business related to the design and production of product 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 1998. The
Company's research and development efforts are influenced by available funds and
the level of effort required by the engineering staff on customer specific
projects.
The Company had interest income in 1998 of $79,159 or 4.4% of net sales
due to earnings on initial public offering proceeds, and reflect lower
interest-earning balances.
38
<PAGE>
Interest expense was lower in 1998 because of the closing out of some
capitalized leases on test equipment.
Stock compensation and financing expenses in 1997 of $607,179 and in
1998 of $186,249 relate to the 1996 and 1997 issuances of stock, options and
warrants at prices substantially lower than the fair market values. The decrease
in 1998 expense reflects that some of these discounts have been fully amortized
over the respective vesting periods.
As a result of the foregoing, the Company incurred net losses of
$1,916,359 or ($.43) per share for the year ended December 31, 1998 compared
with net losses of ($2,493,611) or ($.57) per share for the same period in 1997.
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 its ability to
generate sales during the first part of 1998 will be adversely impacted by,
among other things, economic conditions in Korea.
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
39
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash and cash equivalents of
$427,510.
The Company believes that the net proceeds of the Company's initial
public offering, private placement in March 1999 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. Further,
the officers of the Company have deferred a portion of their salaries or
provided loans to the Company to meet short-term liquidity requirements. In
light of the current situation in Korea, and its impact on sales, the Company
expects to fund operations in 1999 with the remaining cash that was received
from the initial public offering and the March private placement. 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
40
<PAGE>
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Stockholders loans of $98,000 were repaid in 1998. The funds from the
stockholder's loan were used for working capital purposes. The Company has
several lease obligations for certain research, engineering and development
equipment used in the production processes requiring minimum monthly payments of
$6,000 through the second quarter of 1999. The Company has converted certain of
its obligations to officers through the issuance of Common Stock (at an
equivalent fair value) and may continue to do so in 1999.
YEAR 2000
Many existing computer systems, including certain of the Company's
internal systems, use only the last two digits to identify years in the date
field. As a result, these computer systems do not properly recognize a year that
begins with "20" instead of the familiar "19", or may not function properly with
years later than 1999. If not corrected, many computer applications could fall
or create erroneous results. This is generally referred to as the "Year 2000" or
"Y2K" issue. Computer systems that are able to deal correctly with dates after
1999 are referred to as "Year 2000 compliant".
The Company has 37 employees of which 28 are involved in production
processes. The Company's internal computers systems consist of individualized
PCs. The Company intends to replace all of these PCs with the latest hardware,
at an estimated cost of about $20,000. The Company's technical software has been
upgraded for the Y2K compliance. Presently the Company is exploring the purchase
of a new MRP system, which will be Y2K compliant, and will be installed by the
second or third quarter of 1999. All other software for day to day office work
is Y2K compliant. The Company's accounting software will also be upgraded as
part of the MRP system. Estimated cost is about $25,000. Therefore, the Company
expect to be fully Y2K compliant by the third quarter of 1999. Other than as set
forth, the Company has no other contingency plan for Y2K non-compliance.
The Company is in the process of contacting all its major vendors and
suppliers to ensure that they are Y2K compliant. Overall the Company does not
see any material effect upon its business and operations due to the Y2K problem.
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.
41
<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* 48 Chairman of the Board, President, Chief
Executive Officer, Treasurer and Director
Tarlochan Bains 49 Vice President-Sales & Marketing and Director
Nirmal Bains 42 Secretary
Charles J. Ritchie* 57 Director
Manish V. Detroja* 33 Director
* 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.
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
42
<PAGE>
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.
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
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.
43
<PAGE>
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,
1998, all Section 16(a) filing requirements applicable to its officers and
directors and greater than ten percent beneficial owners were satisfied.
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, 1996, 1997 and 1998 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
------------------- ------------------------------------
Other Restricted Underlying All
Name of Individual Annual Stock LTIP Other
and Principal Position Year Salary Bonus Compensation Awards Options/SARS(#) Payouts Comp.
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Davendar S. Bains, 1998 $85,000 -- $ 20,000(1) -- -- -- --
Chairman $167,000(2)
Chief Executive Officer, 1997 $85,000 -- $ 20,000(1) -- -- -- --
President and Treasurer 1996 $85,000 -- $ 20,000(1) -- 1,000,000 -- --
</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-3 to the financial statements).
(2) Represents the fair value of shares of Common Stock in lieu of cash payment
of the amount owed for deferred compensation - 144,000 shares in the aggregate.
- -------------------
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.
44
<PAGE>
In June 1998, the Company issued 40,000 shares of Common Stock to
Devendar S. Bains, the Company's President and Chief Executive Officer, in
consideration of the forgiveness by Mr. Bains of $50,000 of accrued salary owed
to him.
On September 30, 1998, accrued and unpaid salary in the aggregate
amount of $195,000 owed to Devendar S. Bains ($117,000), Tarlochan Bains
($54,600) and Nirmal Bains ($23,400), were forgiven. In consideration of such
forgiveness of accrued salary, the Company issued 104,000, 48,533 and 20,800
shares, respectively to such persons in December 1998 (based upon the closing
sales price of the Common Stock ($1.125) on such date).
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 is administered by the compensation committee
which determines, 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.
The Incentive Option Plan provides for the granting of ISOs to purchase
Common Stock at an exercise price to be determined by the compensation 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.
45
<PAGE>
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 to purchase Common Stock under the
Incentive Option Plan were granted to certain employees, including Devendar
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. The options are exercisable at $4.00,
66.66% of which have vested (with the remainder to vest in May 1999). In January
1999, 30,000 options to purchase Common Stock were granted to each of Messrs.
Detroja and Ritchie, Directors of the Company, under the Incentive Option Plan.
These options are exercisable at $1.25 and are fully vested. The 1,293,000
options granted under the Incentive Option Plan are referred to collectively as
the "Employee Options". 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.
RULE 701 WARRANTS
In December 1995, the Company issued Rule 701 Warrants to purchase
350,000 Shares at $2.50 per share pursuant to Rule 701 under the Act to the
Company's former Vice President for Strategic Alliances and Vice President for
Corporate Communications and Investor Relations, respectively. The 701 Warrants
were initially exercisable until June 30, 1999. In January 1999, the Company
agreed to reduce the exercise price of such Warrants to $1.25 and to extend the
expiration date to June 30, 2001.
PLACEMENT AGENT WARRANTS
In connection with the Company's private offering in March 1999, the
Company has committed to issued to certain NASD Members 90,000 warrants, each
exercisable at $1.25 per share (the "Agent Warrants"). The Agent Warrants are
exercisable for a two (2) year period through March 31, 2001 and are subject to
certain anti-dilution adjustments.
46
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 1999 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) 3,239,800 48.35
Tarlochan Bains(3) 148,533 2.58
Nirmal Bains(2) 3,239,800 48.35
Charles J. Ritchie(4) 30,000 .53
Manish V. Detroja(5) 30,000 .53
All Officers and
Directors as a group
(5 persons)(6) 3,448,333 51.99
- ------------------
* Unless otherwise indicated, the address of all persons listed in this
section is c/o Amplidyne, Inc., 144 Belmont Drive, Somerset, NJ 08873.
(1) Beneficially ownership as reported in the table above has been determined
in accordance with Instruction (4) to Item 403 of Regulation S-B of the
Securities Exchange Act.
(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 2,169,000
of such shares and Mrs. Nirmal Bains is the record holder of 20,800 of such
shares. Includes 1,000,000 Employee Options which were granted to Mr.
Devendar Bains. Includes 50,000 Employee Options which were granted to Ms.
Nirmal Bains. See "Executive Compensation-Stock Option Plans and
Agreements."
(3) Mr. Tarlochan Bains is the brother of Mr. Devendar Bains. Mr. Tarlochan
Bains is the record holder of 48,533 of such shares. Includes 100,000
Employee Options. See "Executive Compensation - Stock Option Plans and
Agreements."
(4) The address for such person is 92 Parker Road, Long Valley, NJ 07853.
Includes 30,000 Employee Options. See "Executive Compensation - Stock
Option Plans and Agreements."
(5) The address for such person is 925 Schwal Road, Hatfield, PA 19440.
Includes 30,000 Employee Options. See "Executive Compensation - Stock
Option Plans and Agreements."
(6) Include 1,000,000 options held by Devendar Bains, 50,000 options held by
Nirmal Bains, 100,000 options held by Tarlochan Bains, 30,000 options held
by Mr. Detroja and 30,000 options held by Mr. Ritchie. See Notes 2, 3, 4
and 5.
47
<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
and an additional $98,000 was repaid during 1998.
In connection with the Company's settlement of a litigation, Devendar
S. Bains, the Company's President and Chief Executive Officer, loaned the
Company $41,000 (in October 1997) without interest, payable on demand.
See "Management - Employment Agreement" for recent issuances to
officers and directors.
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.
48
<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
(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
49
<PAGE>
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 1998.
50
<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-20
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, 1998 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, 1998 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
Parsippany New Jersey
March 31, 1999
F-2
<PAGE>
Amplidyne, Inc.
BALANCE SHEETS
December 31,
ASSETS 1998 1997
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 427,510 $2,039,012
Accounts receivable, net of allowance
for doubtful accounts of $86,000 and
$41,000 in 1998 and 1997, respectively 440,516 706,893
Inventories 558,685 324,622
Prepaid expenses and other 14,206 9,296
---------- ----------
Total current assets 1,440,917 3,079,823
PROPERTY AND EQUIPMENT - AT COST
Machinery and equipment 540,116 538,214
Furniture and fixtures 43,750 43,750
Autos and trucks 61,183 19,923
Leasehold improvements 4,162 4,162
---------- ----------
649,211 606,049
Less accumulated depreciation and amortization 342,052 237,494
---------- ----------
307,159 368,555
OTHER ASSETS 35,000 35,000
---------- ----------
$1,783,076 $3,483,378
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-3
<PAGE>
Amplidyne, Inc.
BALANCE SHEETS
December 31,
LIABILITIES AND
STOCKHOLDERS' EQUITY 1998 1997
------------ ------------
CURRENT LIABILITIES
Current maturities of lease obligations $ 70,311 $ 136,396
Accounts payable 220,991 194,572
Deferred compensation 27,100 140,000
Accrued expenses 255,439 189,123
Stockholders' loan 5,051 103,051
------------ ------------
Total current liabilities 578,892 763,142
LONG-TERM LIABILITIES
Lease obligations 36,933 67,875
STOCKHOLDERS' EQUITY
Preferred stock - authorized, 1,000,000 shares
of no stated value; no shares issued and out-
standing -- --
Common stock - authorized, 25,000,000 shares
of $.0001 par value; shares 4,703,333 and
4,460,000 shares issued and outstanding at
December 31, 1998 and 1997, respectively 470 446
Additional paid-in capital 12,735,817 12,304,592
Accumulated deficit (11,569,036) (9,652,677)
------------ ------------
1,167,251 2,652,361
------------ ------------
$ 1,783,076 $ 3,483,378
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
<PAGE>
Amplidyne, Inc.
STATEMENTS OF OPERATIONS
Year ended December 31,
1998 1997
----------- -----------
Net sales $ 1,786,936 $ 2,433,310
Cost of goods sold 1,758,915 1,920,178
----------- -----------
Gross profit 28,021 513,132
Operating expenses
Selling, general and administrative 1,278,256 1,615,556
Research, engineering and development 544,220 876,214
----------- -----------
Operating loss (1,794,455) (1,978,638)
Nonoperating income (expenses)
Stock compensation and financing cost (186,249) (607,179)
Interest income 79,159 140,931
Interest expense (14,064) (47,975)
----------- -----------
Loss before income taxes (1,915,609) (2,492,861)
Provision for income taxes 750 750
----------- -----------
NET LOSS $(1,916,359) $(2,493,611)
=========== ===========
Net loss per share - basic and diluted $ (.43) $ (0.57)
=========== ===========
Weighted average number of shares
outstanding 4,485,132 4,367,320
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-5
<PAGE>
Amplidyne, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Common Stock Additional
---------------------------- Paid-in Accumulated
Shares Par Value Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
Net loss (1,916,359) (1,916,359)
Financing and compensation costs related to
options and warrants issued 156,249 156,249
Exercise of warrants 30,000 3 29,997 30,000
Conversion of deferred compensation to
shares of common stock by officers 213,333 21 244,979 245,000
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1998 4,703,333 $ 470 $ 12,735,817 $(11,569,036) $ 1,167,251
============ ============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-6
<PAGE>
Amplidyne, Inc.
STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997
----------- -----------
Cash flows from operating activities
Net loss $(1,916,359) $(2,493,611)
----------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 104,558 102,131
Bad debt expense 45,510 23,640
Write-off of obsolete inventory 20,000 149,696
Deferred compensation 132,100 --
Stock compensation and finance cost 186,249 607,179
Changes in assets and liabilities
Accounts receivable 220,867 (523,194)
Inventories (254,063) (71,623)
Prepaid expenses and other (4,908) (3,631)
Accounts payable and accrued expenses 92,733 (568,581)
----------- -----------
Total adjustments 543,046 (284,383)
----------- -----------
Net cash used in operating activities (1,373,313) (2,777,994)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (1,900) (149,725)
----------- -----------
Cash flows from financing activities
Payment of lease obligations (138,289) (378,090)
Repayments of stockholder loans, net (98,000) (339,694)
Repayments of bank line of credit -- (210,000)
Repayments of notes payable -- (1,159,000)
Registration costs -- (1,261,795)
Stock issuance -- 8,211,000
----------- -----------
Net cash (used in) provided by
financing activities (236,289) 4,862,421
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,611,502) 1,934,702
Cash and cash equivalents at beginning of year 2,039,012 104,310
----------- -----------
Cash and cash equivalents at end of year $ 427,510 $ 2,039,012
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 49,000 $ 48,000
See Notes D-3, G and H-3 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, 1998 and 1997
NOTE A - NATURE OF OPERATIONS AND LIQUIDITY
Amplidyne, Inc. (the "Company") operates in one segment, which is the
design, manufacture and selling of ultra linear power amplifiers and
related subsystems to the worldwide wireless, local loop and satellite
uplink telecommunications market.
The Company has incurred losses of $1,916,359 and $2,493,611 in 1998 and
1997, respectively. The Company funded operations during this period
primarily from bridge financing and proceeds from its initial public
offering. The Company has also funded certain operating expenses through
the issuance of warrants, and borrowings (in the form of deferring salaries
and cash advances) from officers and principal shareholders.
A significant portion (approximately 94% and 80% of the Company's sales in
1998 and 1997, respectively) of the Company's sales has been to
international markets. The primary international market to date has been
Korea, which has recently suffered significant currency fluctuations and
economic turmoil which might affect the Company's future sales. Several of
these Korean customers have reduced, delayed or cancelled purchase orders,
thereby affecting the timing of when (or if) sales will be made. Management
believes that its ability to generate sales during 1999 may be adversely
impacted by, among other things, economic conditions in Korea.
Management's plans for dealing with the foregoing matters include:
o Reducing costs incurred and cash requirements, including cash flow
management of production through increased use of contract
manufacturers and relocating to a less expensive facility;
o Decreasing the dependency on these Korean customers by aggressively
seeking other customers;
o Partnering with significant companies to jointly develop innovative
products;
o Completing, in March 1999, a private placement of 900,000 shares of
common stock at $1.125 per share. The net proceeds to the Company,
after commissions of approximately $71,000, were $942,000. The Company
has committed to issue to certain NASD members 90,000 warrants, each
exercisable at $1.25 per share through March 31, 2001. The warrants
will contain certain antidilution provisions.
o Funding operations in 1999 with the remaining cash that was received
from the initial public offering, the deferral of payments of
officers' salaries and the proceeds of the private placement.
F-8
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1997
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. At December 31, 1998
and 1997, inventories consisted of the following:
1998 1997
--------- ---------
Component parts $ 99,473 $ 87,378
Work-in-progress 459,212 237,244
--------- ---------
$ 558,685 $ 324,622
========= =========
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 of 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
F-9
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1997
NOTE B (CONTINUED)
temporary differences resulting in the basis of assets and liabilities
for financial reporting and income tax purposes. A valuation allowance
is provided if the Company is uncertain as to the realization of
deferred tax assets.
5. RISKS, UNCERTAINTIES AND CERTAIN CONCENTRATIONS OF CREDIT RISK AND
ECONOMIC DEPENDENCY
The Company's future results of operations involve a number of
significant risks and uncertainties. Factors that could affect the
Company's future operating results and cause actual results to vary
materially from expectations include, but are not limited to,
dependence on key personnel, dependence on a limited number of
customers, ability to design new products and product obsolescence,
ability to generate consistent sales, ability to finance research and
development, government regulation, technological innovations and
acceptance, competition, reliance on certain vendors, credit and other
risks associated with the Year 2000.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and accounts
receivable. Net sales during 1998 and 1997 were primarily to Korean
customers. The Korean marketplace has suffered significant currency
fluctuations and economic turmoil which might affect the Company's
future sales.
During 1998, two customers accounted for 85% of net sales (52% and 33%)
and 77 % of accounts receivable at December 31, 1998. Export sales in
1998, including sales through a sales agent for international markets,
accounted for approximately 94 % of net sales and were primarily to
Korea. Sales through the sales agent carry an extended (two years)
warranty, for which management has provided an estimated cost to
fulfill.
During 1997, two customers accounted for 64% of net sales (48% and 16%)
and 70% of accounts receivable at December 31, 1997. Export sales in
1997 accounted for approximately 80% of net sales and were primarily to
the United Kingdom and 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) and subcontracted manufacturing processes. Management
believes that other suppliers could provide similar components and
processes 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, and stockholder's loan payable, approximate fair value,
principally because of the short maturity of these items.
F-10
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1997
NOTE B (CONTINUED)
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."
8. CASH AND 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.
9. ADVERTISING EXPENSES
The Company expenses advertising costs as incurred. Advertising
expenses were approximately $33,000 and $105,000 for the years ended
December 31, 1998 and 1997, respectively.
10. RECLASSIFICATIONS
Certain reclassifications were made to the 1997 amounts to conform to
the current presentation.
F-11
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1997
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.
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.
The underwriter received an option to purchase up to 140,000 shares of
common stock and 140,000 warrants under the same terms.
NOTE D - PRIVATE PLACEMENTS AND ISSUANCE OF NON-EMPLOYEE WARRANTS
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, 8%
promissory notes in the aggregate of $375,000, including 187,500 warrants
to purchase common stock at $2.50 per share. The warrants are exercisable
for a three-year period. All principal and interest were paid at the
closing of the Company's initial public offering.
F-12
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1997
NOTE D (CONTINUED)
In December 1996, the Company issued, in two private placements, 8%
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. 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 year ended
December 31, 1997 is $324,540.
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 over the three-year period
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.
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 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 include a
cashless exercise option commencing October 1, 1998. During 1998, two
holders of warrants invoked the cashless exercise option redeeming (1)
100,000 of the warrants originally issued in December 1996 and (2) 50,000
of the warrants originally issued in February 1997, in exchange for an
aggregate of 30,000 shares of the Company's common stock. A charge to
operations of $30,000 was recorded to reflect the market discount.
On December 31, 1998, 525,000 of the warrants issued in March 1996 and
April 1996 expired. At December 31, 1998, the following warrants remain
outstanding: (1) 212,500 exercisable at the lower of $2.50 or 20% below
market price on exercise date through until January 20, 2001 and (2)
214,000 exercisable at $4.00 through until January 20, 2001.
F-13
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1997
NOTE E - STOCK PLANS
An incentive option and stock appreciation rights ("SARs") plan was
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 exercisable at $4.00 per share (estimated fair market value). In
June 1996, 1,000,000 options were granted to the principal shareholder
exercisable at $4.00 per share (estimated fair market value).
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. In January 1999, the expiration date of these warrants was
extended to 2001 and the exercise price was reduced to $1.25 per share. A
charge to operations will be reflected in the first quarter of 1999
representing the difference in the value of the warrants.
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. 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 as follows:
1998 1997
---------- ----------
Net loss $2,352,555 $3,208,670
Loss per share $ .52 $ .73
F-14
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1997
NOTE E (CONTINUED)
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, exercised or forfeited in 1998. The fair values were determined
using a Black-Scholes option-pricing model.
Stock options, including warrants issued to officers, activity during 1997
and 1998 is summarized below:
Shares of weighted-
common stock average
attributable exercise price
to options of options
---------- ----------
Unexercised at January 1, 1997 1,647,000 $ 3.63
Forfeited (64,000) 2.59
---------- ----------
Unexercised at December 31, 1997 and 1998 1,583,000 $ 3.67
========== ==========
The following table summarizes information concerning outstanding and
exercisable options, including warrants issued to officers, at December 31,
1998:
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
--------------- --------- ---- ----- --------- ------
$2.50 to $4.00 1,583,000 1.67 $3.67 1,583,000 $ 3.67
F-15
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1997
NOTE F - INCOME TAXES
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, 1998, the net
operating loss carryforwards are approximately $6,300,000. The net
operating loss carryforwards expire at various dates through 2013, 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 5%) of the fair market value of the
Company at the time of any such ownership change.
The Company's tax provision is principally due to the impact of state
income and minimum taxes.
NOTE G - CAPITAL LEASE OBLIGATIONS
The Company has capital leases (at interest rates ranging from 8.5% to
14.2%) for certain equipment for use in its manufacturing and research,
engineering and development activities.
Future minimum lease payments on these leases are as follows:
Year ending December 31,
1999 $ 76,200
2000 19,000
2001 12,700
2002 10,200
---------
118,100
Less amount representing interest (10,856)
---------
Present value of minimum lease payments $ 107,244
=========
Short-term portion $ 70,311
Long-term portion 36,933
---------
$ 107,244
=========
F-16
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1997
NOTE G (CONTINUED)
The cost of assets under capital leases was approximately $159,000 and
$197,000 at December 31, 1998 and 1997, respectively, and is included in
property and equipment. Accumulated amortization at December 31, 1998 and
1997 was approximately $61,000 and $20,000, respectively.
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 office and manufacturing space. The
lease term commenced April 1, 1996 and is for a three-year period
ending March 31, 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.
The Company is currently operating under a month-to-month lease.
However, the Company is currently exploring other locations.
Future minimum lease payments on noncancellable operating leases are as
follows:
Year ending December 31,
1999 $44,600
2000 600
-------
$45,200
=======
Rent expense, including the Company's share of real estate taxes,
utilities and other occupancy costs, was $217,500 and $209,500 for the
years ended December 31, 1998 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 paid in January 1997 from the proceeds of the public offering.
F-17
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1997
NOTE H (CONTINUED)
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. During 1998, these individuals deferred an additional
$126,000. In June 1998, the Chairman converted $50,000 of such deferral
into 40,000 shares of common stock of the Company, representing the
estimated fair value of the common stock of the Company at that time.
Effective September 30, 1998, the Chairman, Vice President of Sales and
Marketing and the Secretary converted an aggregate of $195,000 of such
deferrals into 173,333 shares of common stock of the Company,
representing the estimated fair value of the common stock of the
Company at that time. At December 31, 1998, these officers were owed
approximately $27,100. Although they have not expressed an intention to
require payment from the Company before January 1, 2000, no formal
agreements have been reached.
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. At the end of
1998, these officers resigned. At December 31, 1998 the Company had
accrued expenses aggregating $120,000 for these individuals. In January
1999, these individuals converted an aggregate of $60,000 of such
amounts due into 48,000 shares of common stock of the Company,
representing the estimated fair value of the common stock of the
Company at that time.
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 computation, 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.
F-18
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1997
NOTE I (CONTINUED)
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
anti-dilutive.
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 in 1997 $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. During 1998 and 1997, the Company repaid
approximately $98,000 and $339,000, respectively.
NOTE K - 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. The case is currently in
discovery. A motion for summary judgment was denied in February 1999.
From time to time, the Company is party to what it believes are 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 could
have a material effect on the Company's results of operations or financial
condition.
F-19
<PAGE>
Amplidyne, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1997
NOTE L - 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.
NOTE M - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 1998, the Company recorded the following:
Stock compensation cost $156,000
Compensation expense 25,000
Write-off of obsolete inventory/warranty provision 45,000
Reduction to sales 117,800
Increase to bad debt expense 45,000
F-20
<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:
---------------------------------------
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, 1999
Devendar S. Bains President, Treasurer,
Principal Accounting Officer
and Director
/s/ TARLOCHAN BAINS
- ---------------------- Vice President and Director April 15, 1999
Tarlochan Bains
/s/ NIRMAL BAINS
- ---------------------- Secretary April 15, 1999
Nirmal Bains
/s/ CHARLES J. RITCHIE
- ---------------------- Director April 15, 1999
Charles J. Ritchie
/s/ MANISH V. DETROJA
- ---------------------- Director April 15, 1999
Manish V. Detroja
51
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001016151
<NAME> Amplidyne, Inc.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 427,510
<SECURITIES> 0
<RECEIVABLES> 526,516
<ALLOWANCES> 86,000
<INVENTORY> 558,685
<CURRENT-ASSETS> 1,440,917
<PP&E> 649,211
<DEPRECIATION> 342,052
<TOTAL-ASSETS> 1,783,076
<CURRENT-LIABILITIES> 578,892
<BONDS> 36,933
0
0
<COMMON> 470
<OTHER-SE> 1,166,781
<TOTAL-LIABILITY-AND-EQUITY> 1,783,076
<SALES> 1,786,936
<TOTAL-REVENUES> 1,786,936
<CGS> 1,758,915
<TOTAL-COSTS> 1,758,915
<OTHER-EXPENSES> 1,884,566
<LOSS-PROVISION> 45,000
<INTEREST-EXPENSE> 14,064
<INCOME-PRETAX> (1,915,609)
<INCOME-TAX> 750
<INCOME-CONTINUING> (1,915,609)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,916,359)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.43)
</TABLE>
