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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
X Annual report under Section 13 or 15(d) of the Securities Exchange Act
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of 1934.
For the fiscal year ended December 31, 1998
Transition report under Section 13 or 15(d) of the Securities Exchange
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Act of 1934.
For the transition period from _________________________ to ________________
Commission file number 0-24886
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ACRODYNE COMMUNICATIONS, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 11-3067564
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
516 Township Line Road, Blue Bell, PA 19422
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(Address of Principal Executive Office) (Zip Code)
215-542-7000
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Securities registered under Section 12(g) of the Exchange Act:
Units
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(Title of Class)
Common Stock
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(Title of Class)
Warrants
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(Title of Class)
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Check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 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 past 90
days.
Yes X No
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Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of the 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.
State issuer's revenues for its most recent fiscal year.
$ 11,726,719
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The aggregate market value of the voting stock held by
non-affiliates of the Registrant is $24,323,050, computed by reference to the
average bid and asked prices of such stock, as of March 19, 1999. This
computation is based upon the number of issued and outstanding shares held by
persons other than directors and officers of the Registrant.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. Common stock, par value
$0.01 per share: 6,769,523 outstanding at March 19, 1998.
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ACRODYNE COMMUNICATIONS, INC.
FORM 10-KSB
FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
PART I.......................................................................5
Item 1....................................................................5
Description of Business................................................5
Item 2...................................................................16
Description of Property...............................................16
Item 3...................................................................16
Legal Proceedings.....................................................16
Item 4...................................................................16
Submission of Matters to a Vote of Security Holders...................16
Part II.....................................................................17
Item 5...................................................................17
Market for Common Equity and Related Stockholder Matters..............17
Item 6...................................................................18
Management Discussion and Analysis....................................18
Item 7...................................................................23
Financial Statements..................................................23
Item 8...................................................................23
Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.............................................23
Part III....................................................................24
Item 9...................................................................24
Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.....................24
Item 10..................................................................24
Executive Compensation................................................24
Item 11..................................................................24
Security Ownership of Certain Beneficial Owners and Management........24
Item 12..................................................................24
Certain Relationships and Related Transactions........................24
Item 13..................................................................24
Exhibits and Reports on Form 8-K......................................24
SIGNATURES...............................................................27
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Part I
Item 1. Description of Business
THE COMPANY. The business of Acrodyne Communications, Inc. (formerly Acrodyne
Holdings, Inc.), a Delaware corporation (the "Company"), is conducted through
its sole operating subsidiary Acrodyne Industries, Inc. ("Acrodyne"). Acrodyne
was acquired by the Company on October 24, 1994 (the "Acquisition"). Prior
thereto, the Company had no operations. The Company changed its name to
Acrodyne Communications, Inc. on June 9, 1995.
As used in this Form 10-KSB, the term "Company" refers to Acrodyne Holdings,
Inc. as of dates and periods prior to the acquisition of Acrodyne, and refers
to the combined operations of Acrodyne Communications, Inc. and Acrodyne
Industries, Inc. subsequent to the acquisition.
BUSINESS OF ACRODYNE. Acrodyne (together with its predecessor), has designed,
manufactured and marketed television transmitters and translators which have
been sold in the United States and internationally since 1971. The function of
a television transmitter is to broadcast on the air television signals to a
specific audience receiving such signals by regular antenna or by a local cable
company which then feeds the signal to their subscribers. Television
translators, which operate unattended, retransmit incoming signals from primary
stations on different channels within areas where direct reception of the
original signal may be limited by mountains or other geographic impediments.
ACRODYNE PRODUCTS AND SERVICES
Overview
Acrodyne designs, manufactures and markets digital and analog television
broadcast transmitters and translators for domestic and international
television stations, broadcasters, government agencies, not-for-profit
organizations and educational institutions. The useful life of a television
transmitter or translator is approximately 20 years. Acrodyne's television
transmitters, which range in transmission power levels from one watt for
localized applications to tens of thousands of watts for large television
broadcasters, have a modularized design which permits Acrodyne to respond to
specific customer requests. Acrodyne classifies its transmitters into two
categories based upon the power output of such transmitters (as discussed in
greater detail below). Lower power transmitters and higher power transmitters
transmit signals in both UHF and VHF frequency bands. The VHF band covers
channels two through thirteen and the UHF band covers channels above thirteen.
Each transmitter permits the sender to broadcast over one channel, except in
the case of adjacent channel assignments for which one transmitter is able to
transmit two television signals, one analog and one digital.
All of Acrodyne's television transmitters feature enhanced linear amplifiers.
Such units feature easy to read diagnostic displays and meters which clearly
indicate a unit's operating condition. Units automatically shut down for self-
protection if out-of-tolerance conditions are encountered. The Company believes
that Acrodyne's television transmitters are relatively easy to maintain since
they utilize common modules and parts. Other operating features include full
remote
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control, telemetry and status functions, and a modular design which allows for
cost-effective expansion to higher output power levels.
Lower Power Analog and Digital Television Transmitters
Lower power analog and digital television transmitters with power outputs of up
to 10 kilowatts and translators account for approximately 43% of Acrodyne's
sales. Such transmitters are used by LPTV Stations, a United States
classification, which are limited by the Federal Communications Commission
("FCC") to power output levels of 10 watts in the VHF band and 10 kilowatts in
the UHF band. Although virtually all of Acrodyne's lower power transmitters are
solid state, Acrodyne will produce some models using single tetrode tube final
amplifiers for certain customers. Solid-state refers to the physical make-up of
the transmitter components. Instead of vacuum tubes where electron flow takes
place in a vacuum, solid state transmitters utilize transistors, which have
crystalline structures. Tetrode and diacrode tubes are four electrode, vacuum
tube amplifying devices used in the final power stage of both lower and higher
power television transmitters. Acrodyne's solid-state television transmitters
have the advantage of long-life and compact size as compared to tube-based
units, and utilize high frequency "microstrip" designs to minimize the number
of components and provide reliability. Solid-state television transmitters also
have multiple amplifiers so that the loss of any one amplifier means only a
partial loss of power and not lost air time. Failure of a tube amplifier, on
the other hand, may cause the entire unit to go off line until a replacement
tube can be installed.
UHF solid state television transmitters are particularly well-suited for LPTV
Stations. In addition, there is a substantial market overseas for these UHF
transmitters. Acrodyne's translators in this area cover the power range up to
10 watts in VHF and up to 10 kilowatts in UHF frequency spectra for domestic
and international television formats. Substantially all of the translators sold
by Acrodyne have been solid state as compared to tetrode tube-based designs.
List prices for Acrodyne's lower power transmitters range from approximately
$10,000 to $140,000.
Higher Power UHF Analog and Digital Television Transmitters
Higher power UHF analog television transmitters range in power from above 10
kilowatts to 240 kilowatts and higher, and account for approximately 31% of
Acrodyne's sales. For television transmitters with power output levels of 10
kilowatts and above, Acrodyne uses advanced tetrode and diacrode tubes which
use water vaporization cooling to prolong their useful lives. Acrodyne also
utilizes a 10 kilowatts air cooled diacrode. Such advanced design features
significantly reduce the operating costs of these transmitters. At identical
output power, the power consumption of an advanced tetrode or diacrode
transmitter is approximately 50% less than that of a transmitter using klystron
tubes, a high power vacuum tube amplifying device, which is the predecessor of
the current tube technology.
Acrodyne's solid-state analog transmitters can also be made at power levels of
5 to 10 kilowatts.
Acrodyne also produces analog television transmitters standard to the industry
which have power ratings in multiples of 60 kilowatts in analog and 25
kilowatts in digital. Acrodyne can produce a 60 kilowatt UHF transmitter by
combining two 30 kilowatt diacrode tube transmitters. More
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notably, the Company's mainstay high power product is the 60 kilowatt diacrode
tube transmitter. The Company won the New Technology Award at the 1996 National
Association of Broadcasters ("NAB") show for the development of this product.
This product provides Acrodyne access to a much larger portion of the United
States television transmitter market and to the international television high
power transmitter market. List prices for Acrodyne's higher power analog
television transmitters range from approximately $150,000 to $1,500,000 for a
240 kilowatt transmitter. As of the date of this report, the Company has sold
multiple diacrode transmitters that are equivalent to eighteen 60 kilowatt
sockets. Continuing development of this concept has been slowed by the more
immediate requirement to design ACT equipment.
Auxiliary Products and Services
In addition to manufacturing and selling its transmitters and translators,
Acrodyne also offers television broadcasters a value-added complete "turn-key"
broadcast system which includes the procurement, systems integration and
installation of the television transmitter and antenna and related accessory
equipment. Such products and services, which are provided to both higher power
and lower power broadcasters, account for approximately 21% of Acrodyne's
sales. Upon request, Acrodyne technicians also supervise the installation of
television transmitters on-site, in the United States and abroad. Acrodyne
technicians perform additional testing after the transmitter has been connected
to the station's programming sources and the transmission antenna to assure
that the television transmitter operates as intended. This is an ongoing
commitment to provide full service to today's broadcasters and will continue as
part of Acrodyne's offering one-stop-shopping to its customers.
NEW PRODUCTS
Adjacent Channel Technology (ACT(TM))
The FCC's assignment for a broadcaster to transmit DTV in a channel adjacent to
its existing NTSC channel appeared to initially cause apprehension among
broadcasters allotted such assignments. These broadcasters believed that in the
case, at least, of DTV assignments above an NTSC channel (such assignments, the
"N + 1 Case"), there existed no practical, co-located solution for sharing a
single transmission line to a common antenna. This dilemma remains after nearly
two years after the FCC announcement except if three transmitters are used: one
for DTV, one for NTSC pictures and one for NTSC sound along with a very large
and expensive channel combiner. It remains virtually impossible to manufacture
an adjacent channel combiner where one modern NTSC transmitter provides both
picture and sound signals and another, the DTV signal. Consequently, in the N+1
Case, broadcasters with such assignments appeared to initially believe that a
second antenna and line, and perhaps a second tower, would be required.
As a solution to the problems associated with the FCC's adjacent assignments,
Acrodyne's Engineering Department theorized and then confirmed that it is
possible to amplify both the NTSC and DTV signals through a single advanced
tetrode or diacrode high power amplifier since the cavity tuning of such
amplifiers could readily be made wide enough to carry both channels. It has
been shown by competing companies that this is not possible with any other
vacuum amplifying device such as the klystron, klystrode or IOT. Retuning and
adding a second separate DTV driver alongside the existing NTSC driver
demonstrated conclusively that a diacrode 60kW NTSC visual (picture) 6kW Aural
(sound) transmitter could readily be converted
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into a single 30kW NTSC picture, 1.5kW sound and 2.5kW DTV transmitter. It has
been shown that this technology works equally well for the N+1 case and the N-1
case having delivered a transmitter of the N+1 case to KBLR in Las Vegas and
one of the N-1 case to KCPT in Kansas City, MO. The ACT(TM) trademark has been
obtained and Acrodyne has applied for six U.S., six Mexican and six Canadian
patents pertaining to this new technology.
Because the market is so large (nearly 400 adjacent channel assignments) for
which the Company believes that Acrodyne alone has a technical solution,
management has refocused the majority of the Engineering Department's efforts
toward bringing ACT(TM) to fruition in 1998. This has been accomplished and the
product line is available.
The Acrodyne Renaissance Series (ARS) of transmitters
The FCC requires that every DTV transmitter turned on for broadcasting today
must meet the minimum effective radiated power of 50 kW. This translates to a
transmitter power of about 2.5 kW. At some future date, most DTV broadcasters
will be allowed to upgrade to 1MW, a 20 times increase in effective radiated
power and transmitter power. The approach taken by Acrodyne in the make-up of
its line of high power DTV transmitters conforms to the minimum power required
now and the escalated power in the future. The present power requirement is met
by the purchase and installation of the driver section of a high power
transmitter. The driver, permanently installed with no obsolescence is
complemented by the purchase and installation of the high power amplifier in
the future when higher power becomes authorized. This scalability option saves
the broadcaster from investing in the complete high power transmitter at the
beginning of his DTV experience. Money saved by not spending could earn a
significant amount toward the purchase of the high power amplifier at the
future date. This plan certainly goes a long way toward making the Acrodyne
road to DTV implementation more affordable. This is only possible using the
Diacrode technology pioneered by Acrodyne since Diacrode driver power conforms
to the present minimum effective radiated power of 50 kW required by the FCC.
The redundancy of the many (thirty-two) power transistors used in the Diacrode
driver ensure unbroken transmission even with occasional transistor failures
attesting to the right technical approach for the ultimate in reliability.
Reliability is further enhanced by the recent introduction of built-in
microprocessor monitoring of all essential transmitter and antenna transmission
line subsystem performance. (The first delivered microprocessor monitored
transmitter is the ACT transmitter at KCPT). Common modem interfacing through a
telephone line allows Acrodyne and station personnel to monitor the transmitter
and antenna performance on a remote personal computer with software provided by
Acrodyne. Built-in diagnostics provide for remote delayed troubleshooting by
analyzing data captured at the moment of a failure. It also allows for constant
remote monitoring of normal performance. The purpose of the microprocessor is
restricted to provide meaningful monitoring of transmitter and antenna behavior
and specifically not used to control anything.
The notions of affordability, reliability and scalability translate to the
Acrodyne Renaissance Series (ARS). This line has been totally restyled using
the most modern cabinetry available. The built-in computer based touch-screen
and modem provide for complete local and remote, but
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friendly access to monitored data. This project has been completed and the
product line is available.
THE ANALOG TELEVISION TRANSMISSION INDUSTRY
Approximately 9,600 analog and digital translators and television transmitters
with an output power level of one watt or more are in operation in the United
States, and approximately 27,000 are in operation worldwide. Of these, more than
1,687 television transmitters in the United States have an output power level of
5 kilowatts or more, and more than 10,000 in operation worldwide have a power
level of 5 kilowatts or more. As of December 31, 1998 there were construction
permits for 95 new higher power stations and 1,120 new low power stations in the
United States. As of December 31, 1998, Acrodyne had sold and delivered, since
its inception, 1,680 lower power transmitters and 91 higher power transmitters
in the United States and 1,582 lower power transmitters and 88 higher power
transmitters abroad.
DIGITAL TELEVISION (Formerly High Definition Television - "HDTV")
Digital Television ("DTV") encompasses higher fidelity video and audio
production, transmission and display technologies, and promises to provide
television viewers with greater picture resolution, improved color fidelity,
and higher fidelity surround sound audio. The Company's management believes
that DTV is the largest emerging market for the manufacturers of television
broadcasting equipment.
In December 1996, the FCC announced its decision concerning the transmitted
format to be used for the transmission of DTV signals relieving the speculation
that had taken place for several years. In the first quarter of 1997, the FCC
allocated DTV channels in the UHF band for each full service television station
in the country. Based on the most recent FCC pronouncements, those channels
will co-exist with each station's existing VHF or UHF channel for 9 years after
the selection of a transmission standard and adoption of a Table of Allotments,
after which the pre-existing channel will be abandoned. Each station will be
required to apply for a construction permit to install one DTV transmitter
during the three-year phase-in period and will have three years to construct
such a facility. During the remainder of the 9-year transition, each licensee
may transmit on the assigned DTV channel and its regular channel. At the end of
the 9-year period, each licensee must surrender the non-DTV channel. Each DTV
channel will require its own transmitter and antenna if the channel assignments
are not adjacent.
The Company's management believes that it can capitalize on the opportunities
afforded by this emerging market because its current product line, as well as
its planned digital amplitude modulator-transmitters, can be re-engineered to
be compatible with the DTV digital transmission format selected.
GROWTH STRATEGY
Management of the Company believes that the Company can increase sales of its
transmitters and translators based on a growth strategy centered on the
following principles:
(i) expanding Acrodyne's sales and marketing activities;
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(ii) expanding and strengthening its network of agents and
distributors;
(iii) increasing work-in-progress inventory for expedited product
delivery; and
(iv) commercializing the one kilowatt digital transmitter
("Adam(R)").
(v) finalizing a strategic alliance with a major broadcaster or
equipment supplier.
To implement the Company's growth strategy, the Company expanded its annual
operating budget from $2.2 million in 1995 to approximately $4.6 million in
1998. Over the Company's past two fiscal years, the Sales and Marketing
department has grown from three to ten individuals including sales management
for the domestic high power, low power and international markets; the network
of sales representatives and dealers for the international market has been
upgraded to include exclusive representation in China, the Philippines,
Malaysia and Brazil; and strategic new hires have been added to engineering,
field service, testing, quality control and materials management in support of
anticipated growth from the domestic and international markets.
RESEARCH AND DEVELOPMENT
Overview
Acrodyne's Engineering Department is responsible for new product design and
development while devoting significant resources to continually maintain its
current products truly state-of-the-art. The Engineering Department also
provides product support to sales, manufacturing and quality assurance as
required.
Digital Technology
Acrodyne's Digital Amplitude Modulator (ADAM(R))
Acrodyne's Engineering Department has developed a one kilowatt digital
amplitude modulator-television transmitter which is compatible with currently
existing television transmission formats, as well as any DTV. This digital
transmitter, demonstrated in 1993 at a NAB show, improves power efficiency over
existing television transmitters. Digital transmission involves sampling an
analog video signal to create a digital video signal which then drives the
digital video signal through a sequence of related solid state amplifiers, the
outputs of which are then combined to produce the desired signal. By using
highly efficient but non-linear solid state amplifiers, the power efficiency of
a transmitter of this design using Class C type amplifiers is expected to be
more than 50% greater than any television transmitter now in use. As Class C
amplifiers do not preserve linearity, they cannot be used to amplify television
signals. However, when Class C amplifiers are used with Acrodyne's patented
digital technology, such Class C amplifiers can be combined to produce a
modulated output television signal. Moreover, a solid state configuration is
more reliable and will have lower maintenance costs.
As noted above, as part of the Company's growth strategy, management has
concentrated its development efforts toward the market directly related to
Adjacent Channel Technology or ACT(TM), since the Company believes no other
manufacturer is in a position to do so, and to delay the introduction of the
Digital Amplitude Modulation Transmitter demonstrated at the 1993 NAB show
until it is fully developed for DTV use.
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MARKETING AND SALES
Marketing Strategy
Acrodyne's marketing strategy is based on the technology, performance, and cost
advantages of its television transmitters. The Company's solid state designs
have been extensively field proven in the low power television transmitter
market. Acrodyne's solid state, advanced tetrode, and diacrode equipped
transmitters are widely used in the U.S. medium power television transmitter
market. The Company's management believes that Acrodyne's high power diacrode
equipped television transmitters, introduced in 1995, are proving more reliable
and cost effective than transmitters using klystron and inductive output tubes,
and that significant opportunity exists for the Company to increase sales of
its solid state, advanced tetrode and diacrode technologies on the basis of the
technical advantages inherent in these designs. In addition, the Company
believes that the bandwidth and linearity of its advanced tetrode and diacrode
tubes and cavities offer a distinct advantage to Acrodyne for DTV sales,
including adjacent channel (ACT(TM)) opportunities. Longer term, Acrodyne's
patented digital amplitude modulator transmitter design is expected to enhance
the performance and cost advantages of its current product line and permit
Acrodyne's entry into other product areas.
General
Sales department representatives are strategically located to respond to client
needs in an efficient and economical manner. Regional sales managers gather
information about potential transmitter business in their territories from
industry journals, personal networking, and telemarketing. They follow through
on leads by telephone and personal contact. Proposals for standard commercial
sales are generated in the field. The home office sales team receives and
evaluates all government bids and requests for quotation ("RFQ") for
non-standard product. In responding to bids, RFQ's, and standard proposals for
lower power applications, Acrodyne is often either a sole source, or competing
with one or two firms of similar size specializing in lower power products.
When Acrodyne pursues higher power opportunities, it competes with major
international manufacturers. The sales department organizes, prepares and
presents proposal and bid packages to a potential client based on the most cost
effective design, taking into account the client's exact requirements, and
optimum engineering and manufacturing considerations. The broadcast industry is
strictly regulated, both in the United States and abroad; therefore,
transmitter purchases are not forthcoming on a regular basis. The goal of the
sales department is to broaden the Company's client base in effort to establish
a steady stream of purchasers of the Company's products.
Domestic Sales
Domestic sales accounted for approximately 70% of the Company's net sales in
1998. Transmitter and translator equipment and turnkey systems are sold
directly to television station operators. Domestic sales are handled by
regional sales managers located in field offices supported by management and
applications personnel at the Company's factory. Regular contact promotes
coordination of effort for optimum performance. Domestic sales negotiations
often require weeks or months of consultative effort. All domestic sales staff
are required to have in-depth industry knowledge to guide the prospective
client to cost-effective, responsible purchasing decisions.
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Domestic payment terms are normally 30% of the purchase price payable upon
order, 60% due when the equipment is ready for shipment, and the final 10% due
thirty days after shipment.
International Sales
International sales accounted for approximately 30% of net sales in 1998.
Independent manufacturers' representatives and distributors, who normally have
specific account affiliations within a particular country, operate on an
exclusive and non-exclusive basis and receive a negotiated commission rate. In
general, Company management believes that sales to international customers have
been steadily growing in the past few years for United States-based television
transmitter manufacturers, and that market growth in these areas will
accelerate as a result of the recent ascendancy of democratic governments in
the former eastern bloc nations, the trend toward greater privatization of
broadcasting in general and the expansion of new communication services in
developing countries.
International payment terms are similar to domestic payment terms and rely on
an irrevocable letter of credit payable upon presentation for any balance
outstanding at the time of shipment. A portion of the Company's present
business is subject to performance bonds, "holdbacks" (a renegotiation of
profits) or contract termination credits against the purchase price.
Customer Base
Acrodyne's customer base is large and diversified. Acrodyne's business has
historically been dependent upon a relatively small number of significant
transmitter sales with one-time customers. No single commercial customer
accounted for more than 10% of total sales in 1998.
Although Acrodyne is not dependent upon military contracts or upon customers
who are dependent on military contracts, its largest recurring customer is the
United States General Services Administration which is primarily responsible
for United States Government procurement including, to some degree, military
procurement. Such customer accounted for approximately 6% of net sales in 1998,
GOVERNMENT REGULATION
Industry Regulation
Transmission characteristics are regulated in the United States by the FCC and
abroad by local governments and international treaties. United States
television transmission is in either the VHF band, covering the frequency
ranges from 54 MHz (Channel 2) to 88 MHz (Channel 6) and 174 MHz (Channel 7) to
216 MHz (Channel 13), or the UHF band, covering the frequency range from 470
MHz (Channel 14) to 806 MHz (Channel 69). Users include governments,
not-for-profit and privately owned and operated commercial, educational,
foreign language and religious broadcasters. United States broadcasters are
regulated by the FCC as to operating characteristics and suitability of
ownership. Acrodyne has registered all of its television translators and
transmitters including ACT(TM) transmitters with the FCC and believes that its
products and procedures satisfy all the criteria necessary to comply with the
regulations of the FCC.
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In addition to the FCC, foreign governments regulate radio-frequency broadcast
equipment operating within their borders. However, the United States and almost
all foreign governments are parties to international treaties which adhere to
frequency allocation and interference criteria.
Environmental Regulation
The registrant believes it is in material compliance with applicable United
States, state and local laws and regulations relating to the protection of the
environment.
COMPETITION
Acrodyne competes, with respect to lower power applications, on the basis of
product features, quality, technology advantages, dependability, life cycle,
costs associated with acquiring and operating the equipment, and reputation.
The domestic lower power UHF market is dominated by a small number of American
companies. Acrodyne competes with specialty firms of similar size and
resources, such as EMCEE Broadcast Partners, LARCAN-Television Technology Corp.
("TTC") or Information Transmission Systems Corporation ("ITS") in this market.
The VHF market represents an insignificant percentage of Acrodyne's sales.
Unlike the lower power domestic market, the higher power domestic market is
characterized by intense competition from companies that are much larger than
Acrodyne and which possess significantly greater resources. The high power
television transmitter market is currently dominated by larger companies with
older klystron technology or newer inductive output tubes ("IOT"). IOTs are
amplifying devices used in higher power television transmitters, which utilize
features from tetrode and klystron technology. The higher power transmitter
market is dominated by suppliers such as Comark, a subsidiary of Thomson-CSF
and Harris Corporation ("Harris"). Both Comark and Harris have access to
significant resources, both financial and otherwise.
The international markets are characterized by intense competition in both the
higher power and lower power segments. For lower power applications,
particularly in the third world and newly developing countries, price
considerations typically are the determining factor. Acrodyne has been very
competitive in this market and a significant portion of Acrodyne's business has
been derived from lower power solid state transmitters sold in these countries.
For higher power applications overseas, Acrodyne's primary competition comes
from companies that are much larger, have significantly greater resources, and
are willing to offer attractive financing terms in order to secure new
business. Acrodyne's major competition in this market comes from Thomson-CSF
(France), Nippon Electric Corporation (Japan), and Rohde & Schwarz (Germany).
The foregoing foreign competitors have a dominant market position within their
home countries. The Company's management does not expect that the Company will
be able to compete with such companies in their respective home countries in
the near future. Harris Corporation, a U.S. company, is also a very strong
competitor in most international markets.
The primary competing technology to Acrodyne's higher power advanced tetrode
and diacrode tube products are transmitters offering the IOT design. IOTs were
developed as an attempt to improve the linearity and efficiency of klystron
tubes. However, the IOT configuration is significantly more expensive to build.
In addition, another major drawback to IOT-based
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transmitters is that they are much more complicated and difficult to service,
with the time required to change a tube averaging about one full day (during
which time the transmitter must remain off the air) whereas an advanced tetrode
or diacrode tube can be changed on-site in about 20 minutes. The Company's
management believes that, for both analog and digital requirements, Acrodyne's
advanced tetrode or diacrode tube transmitter designs are more cost effective
than competing technologies based upon initial capital expenditures, tube
replacement, maintenance and operating efficiency.
MANUFACTURING
Acrodyne's manufacturing department includes a machine shop, circuit board
assembly, assembly fabrication, wire and cable harness fabrication and final
systems assembly. Acrodyne does not utilize, and is not dependent upon, any
unusual raw materials or processes in the design of its products. Other than
the advanced tetrode and diacrode tubes supplied by Thomson Components and
specialized transistors supplied by Thomson SGS and Ericsson, the Company
purchases from multiple sources to the maximum extent practical. Acrodyne
maintains limited inventory quantities of materials in excess of its immediate
requirements. Major purchased parts include fabricated printed circuit boards,
water cooling pumps and specialized output filters, output power tubes and
cavities and power transformers. As part of an ongoing profit improvement
program, manufactured subassemblies, where appropriate, are reviewed for
suitability for outsourcing to contract vendors. Outsourcing provides decreased
costs, improved quality and better inventory control.
Acrodyne's machine shop fabricates heat sinks, metal cabinet parts and
specialized interior mounting panels. Chemical etching of circuit boards and
painting of cabinets is performed by outside suppliers to minimize the
potential for adverse environmental consequences at Acrodyne's facility.
Assembly occurs in a build-to-order job shop environment utilizing standard
assembly modules depending on the frequency and output power level of the
transmitter. All phases of assembly are carried out in a single open area
comprising approximately 15,000 square feet.
The first phase of the assembly process includes placing electronic and
electrical components on two-sided, single layer circuit boards. These circuit
boards are mated with a mechanical structure and are then built into modules.
The modules are assembled into cabinets along with other purchased components,
the electrical harness and, in the case of higher powered units, plumbing for
the water cooled tetrode tubes. Completed television transmitters, which may be
comprised of as many as seven six-foot high cabinets depending on the output
power level, then move from final assembly into system test. Eight weeks are
normally required for a television transmitter to complete the manufacturing
cycle and be ready for shipment. In some cases, customer education and training
sessions are conducted at Acrodyne's facility prior to shipment of a television
transmitter. A service manual is written for each product type sold, a copy of
which is maintained in Acrodyne's reference library.
In a continuing effort to support product quality, a quality assurance manager
was hired in 1997. This position reports directly to the General Manager.
Quality assurance procedures are in place
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during incoming parts inspection and throughout the production process.
Assemblies are thoroughly tested and inspected in the manufacturing area for
accuracy and workmanship prior to final assembly and systems testing. Connected
utility power is adequate to meet all current test requirements for high power
systems up to 30 kilowatts. After systems testing, results are verified to be
in accordance with specifications. A final mechanical inspection is performed
just prior to shipment. A permanent record of all test results is maintained
for future reference.
Acrodyne provides a limited one year warranty on its products with the
exception of vendor parts which are warranted by their manufacturer.
TESTING, PRODUCT SUPPORT AND FIELD SERVICE
Acrodyne's Test Lab and Field Installation and Service Department have been
outfitted with the equipment necessary for extensive testing and proofing of
high power DTV transmitters by previous capital expenditures in 1997. In
addition, module and full system testing is supported by a full array of NTSC
television transmitter test equipment. A technical manual for each product by
serial number accompanies each television transmitter. A duplicate manual is
maintained at the factory to minimize field troubleshooting time.
Acrodyne's Engineering Department provides technical information necessary to
complete requests for sales quotations, accompanies sales representatives in
visits to customer sites in order to promote the appropriate technology to the
customer engineers, prepares customer manuals and regularly publishes
promotional oriented articles in trade journals, and presents technical papers
at important conventions and exhibitions.
PATENTS AND TRADEMARKS
Acrodyne is the owner of United States Patent 4,804,931, entitled Digital
Amplitude Modulator-Transmitter, issued on February 14, 1989, expiring in 2006.
Digital Amplitude Modulation is the process of converting an arbitrary video or
audio signal into successive binary words of sampled equivalent information
which control the presence or absence of power signal sources to synthesize
such information in a high power combiner, such as a television transmitter for
broadcasting the signal. The process offers less distortion and greater power
efficiency than any other method. Six additional patents based on the general
technology of the original patent have also been granted. For one key patent
with respect to DTV, Acrodyne has filed for international patent protection.
Certain additional steps have been taken under the PCT (Patent Cooperation
Treaty) to apply for foreign protection on the other patents.
Acrodyne has also applied for six U.S., six Mexican and six Canadian patents
covering Adjacent Channel Technology. The ACT(TM) trademark has been acquired
in 1998.
With the exception of the above-referenced patents, Acrodyne relies on
proprietary know-how and trade secrets and employs various methods to protect
its processes, concepts, ideas and documentation associated with its
proprietary products. However, such methods may not afford complete protection
and there can be no assurance that others will not independently develop such
processes, concepts, ideas and documentation. Although Acrodyne has
confidentiality
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agreements with its key employees, there can be no assurance that such
arrangements will adequately protect its trade secrets.
EMPLOYEES
Acrodyne currently employs approximately 96 individuals on a full-time basis,
none of whom are union members. Acrodyne believes it has a good relationship
with its employees.
Item 2. Description of Property
Acrodyne's headquarters and manufacturing facility is located at 516 Township
Line Road in Blue Bell, Pennsylvania, 19422. Its site includes a 30,000 square
foot single story building on approximately ten acres. The facility is rented
under a lease expiring July 31, 2000 and includes a five-year extension option
and the ability to terminate the current lease if a larger facility is needed.
The current rental rate is approximately $6.65 per square foot or $199,500
annually excluding taxes, insurance and maintenance which the Company is
responsible for paying. Total lease expense was $206,400 for the year ended
December 31, 1998. This represents a $4,000 increase over the total 1997 lease
expense, resulting from an annual price adjustment which is based on a consumer
price index calculation.
The Company also operates a machine shop located at 704 Forman Rd, Souderton,
PA 18964. This facility consists of 5,000 square feet of warehouse and
manufacturing space. The facility is rented under a lease that commenced in
November 1996 and expires in October 2001. The current rental rate is
approximately $3.50 per square foot or $17,500 annually. Lease expense over the
five year term totals $87,499.80 excluding taxes, insurance and maintenance.
The Company's management believes the facilities are sufficient to meet current
and future needs. Included at the Blue Bell facility are all office,
engineering, manufacturing and test operations.
Item 3. Legal Proceedings
There were no legal proceedings pending to which the Company is party as of
year end December 31, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
On January 27, 1999 the Board of Directors of Acrodyne held a special
shareholder meeting. See significant and recent events.
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Part II
Item 5. Market for Common Equity and Related Stockholder Matters
MARKET INFORMATION
Since October 1994 the principal market on which the Company's common stock,
units and warrants have been quoted is the NASDAQ Small Cap over-the-counter
market under the symbols ACRO, ACROU and ACROW, respectively. ACROU (units) and
ACROW (warrants) ceased trading on July 29, 1996.
HOLDERS
As of January 27, 1999, there were 1,900 beneficial holders of record of the
Company's Common Stock, along with 119 holders of record. As an update there
were 118 holders of record on March 19, 1999.
DIVIDENDS
No dividends on the Company's Common Stock were declared during fiscal 1998.
The Company anticipates that all of its earnings in the foreseeable future will
be retained to finance the growth of its business and does not intend to pay
cash dividends on its Common Stock in the foreseeable future. The Company paid
cash dividends of $56,112 during fiscal 1998 to the holders of the Company's 8%
convertible redeemable preferred stock as required by the terms of such stock.
In addition, the Company accrued dividends in the amount of $25,863 for its
newly created, class of Series "A" Preferred Stock which the Company sold on
September 4, 1998. See Recent Events.
PRICE RANGE OF SECURITIES
The following table sets forth the high and low bid prices for shares of the
Company's Common Stock for the periods indicated, as supplied by NASDAQ. These
quotations reflect interdealer prices, without retail mark-up, mark-down or
commissions, and may not necessarily represent actual transactions. There has
been only limited and sporadic trading in the Company's securities.
QUARTER ENDING
High Low
March 31, 1997.......................... $5-1/4 $4-3/8
June 30, 1997........................... 6-1/4 4
September 30, 1997...................... 5-5/8 3
December 31,1997........................ 5-1/2 2-5/8
March 31, 1998.......................... 4-1/4 4-3/8
June 30, 1998........................... 4-3/16 4
September 30, 1998...................... 3-1/16 2-7/8
December 31, 1998....................... 4 3-13/16
As of the close of business on March 15, 1999 the high and low bid price for
the Company's Common Stock was $3-3/4 and $3-1/2 respectively.
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Item 6. Management Discussion and Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The business of Acrodyne Communications, Inc. (the "Company") is conducted
through its sole operating subsidiary Acrodyne Industries, Inc. ("Acrodyne").
The following discussion compares the Company's actual results for the years
ended December 31, 1998 and 1997.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Sales........................................... $ 11,726,719 $ 8,171,612
Cost of Sales....................................... 9,602,301 6,869,003
---------- ----------
Gross Profit............................... 2,124,418 1,302,609
---------- ----------
Operating expenses:
Engineering, research and development 3,171,359 823,406
Selling 1,998,915 1,609,600
Administration 2,082,741 1,543,824
Amortization:
Goodwill and intangibles........................ 156,496 156,496
Noncompete agreement............................ 75,000 75,000
------- -------
Total operating expenses............................ 7,484,511 4,208,326
Operating loss...................................... ($5,360,093) (2,905,658)
Other income (expense):
Interest expense, net........................... ( 72,790) ( 15,218)
Other income.................................... 609 7,902
---- ------
Net loss............................................ ($5,432,274) ($2,912,974)
------------- -------------
Dividend on 8% Convertible Redeemable Preferred Stock
(81,975) (64,087)
------------- -------------
Net loss applicable to common shares................ ($5,514,249) ($2,977,061)
============= =============
Net loss per common share $ (1.04) $ (0.65)
Weighted average number of
common shares outstanding 5,321,188 4,584,347
------------ -----------
</TABLE>
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Net Sales for the year ended December 31, 1998 were $11,726,719 which reflects a
43% increase from net sales for the year ended December 31, 1997. This increase
is directly related to the sale of the first two ACT transmitters (one
incorporating the new ARS design) and two updated design VHF transmitters. Each
of these sales occurred in the last 4 months of the year. For the past few years
the industry has postponed any significant transmission equipment expenditures
pending a clear plan for the emergence of Digital Television. In early 1998 the
final channel allocations were defined. Without these allocations, the Company
believes that broadcasters were unable to specifically define their transmitter
requirements and thus the entire transmitter manufacturing industry was set
back. Accordingly, in order to generate sales volume and to obtain a portion of
the available business in 1998 in an increasingly competitive market, the
Company's margin on sales, on an operating basis, before non-recurring charges
(detailed below), remained low at 25.4% in 1998 as compared to 15.94% in 1997
(see "Liquidity and Capital Resources" below). After non-recurring charges,
margin on sales in 1998 was 18.11%. Further delaying the purchase of Digital
transmitters is the limited availability of Digital ready televisions, limiting
the customer base of the broadcaster. In addition, there is very little
programming available for the broadcaster at this time. To date, the broadcaster
is being asked to purchase transmission equipment to service a small, limited
digital market, and to replace his existing, aging analog transmission
equipment. Management believes these factors represent a significant demand for
its products in the future. Further hampering the Company's growth in 1998 was a
serious reduction in industry wide capital expenditures resulting from the
global economic and currency crisis experienced during the year.
The company experienced non-recurring charges to profit amounting to
$3,219,124. These charges are detailed below:
o $856,092 inventory write-off resulting from technical changes relating to
new product designs, cost overruns in the manufacture of new design VHF
transmitters and the elimination of the MMDS product line. This amount was
recorded as additional cost of sales.
o $2,298.032 of research and development expenses relating to the shipment
and successful installation of the first two ACT (ARS) transmitters. Both
shipments occurred in the last four months of the year.
o $65,000 charge to administration expense. In 1998, the Company issued
options to purchase 25,000 shares of common stock at an exercise price of
$3.50 to a consultant for services. The options expire on June 5, 2008 and
were valued at $65,000 at the time of issuance. This amount was recorded
as additional paid in capital and as an administration expense.
Before non-recurring charges, the Company experienced an overall increase in
operating expenses from 1997 to 1998. The Company believes these expense levels
were needed to maintain its position in the marketplace. Engineering expense,
net of non-recurring charges, remained fairly constant at $873,327 during 1998
versus $823,406 in 1997. Selling expense increased by 24.1% to $1,998,915 mainly
due to increased commissions and advertising due to increased sales volume.
During the period, administration expenses increase by 30.7%, exclusive of
non-recurring charges, primarily due to a financial consulting agreement.
Amortization expense remained constant at $231,496.
Interest expense increased from $15,218 to $72,790 due to the increased
utilization of the line of credit during 1998.
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LIQUIDITY AND CAPITAL RESOURCES
Historically, Acrodyne has financed its activities primarily from customer
deposits, internally generated funds, and use of its credit facility. On
December 31, 1998 the Company's working capital decreased $4,282,085 compared
to December 31, 1997. This reduction was due primarily to the use of working
capital for operations and the write-off of inventory as well as an increase in
trade accounts payable of $968,232 and credit line increase of $1,275,000.
Accounts receivable at December 31, 1998 were $1,497,197 and reflect a $554,014
increase from 1997. This increase is due mainly to the higher sales volume
experienced during 1998. The allowance for bad debt increased from $24,327 in
1997 to $62,565 in 1998 again due to the overall increase in sales volume. The
majority of the Company's sales of domestic transmitters are made with credit
terms of a non-refundable 30% deposit at the time of placing the order, 40% to
60% prior to shipment and 10% to 30% net thirty days. The Company continues to
require an irrevocable letter of credit on international orders.
Inventories, net of reserves, decreased to $4,325,445 at December 31, 1998 from
$5,271,449 at December 31, 1997. This decrease is mainly due to the elimination
of the Multichannel Multipoint Distribution System ("MMDS") product line for the
wireless cable industry.
The Company purchased a full complement of Digital Technology test equipment
from Hewlett Packard in 1997. This test equipment has enabled the Engineering
Department to properly monitor and test the Company's Digital products in
compliance with the new 8-VSB technology (Digital Modulation scheme). The
Company believes that the use of these assets demonstrates its DTV and ACT(TM)
capabilities which are expected to enhance its sales opportunities for 1999 and
beyond. There were no significant capital equipment purchases in 1998.
In the third quarter of 1998 the Company and Acrodyne, as co-borrowers,
established a new $2,000,000 credit facility arrangement with a bank for working
capital purposes to replace its then existing bank credit facilities. The new
facility is now available on a standard formula basis involving qualified
Accounts Receivable and Inventory and contain certain convenants having to do
with financial ratios such as working capital and their debt to equity ratio. As
of December 31, 1998 the Company was not in compliance with the terms of the
line of credit with respect to their working capital ratio. The Company has
obtained a waiver for the 1998 event of default and has restructured its loan
agreement for 1999. The new credit facility is collateralized by the assignment
of a certificate of deposit in the amount of $750,000 maintained at the bank.
The interest rate on this facility is the bank's prime rate plus 1.5% on
borrowings up to $750,000 and at the bank's prime rate in excess of $750,000.
Borrowings under the line of credit totaled $1,275,000 and $0 at December 31,
1998 and 1997, respectively.
The Company was obligated to pay the former majority shareholder of Acrodyne
quarterly installments of principal and interest over a five-year period under
the terms of a $1,450,000 Senior Subordinated Note. Interest on such note was
payable at the rate of 9% per annum. Such
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note was partially collateralized by the irrevocable standby letter of credit in
the principal amount of $500,000 . The first fifteen (15) quarterly payments
totaling $1,415,183 (including interest) under such note were made through July
23, 1998 pursuant to the agreement. On October 23, 1998, the Company paid all
remaining installments. Installment number 16 which was due on October 23, 1998,
was paid with all interest due amounting to $75,094 in addition installments 17
through 20 contained 4 principal payments of $67,500 each, amounting to
$270,000. A note owing to the Company which included principal of $66,850 and
accrued interest of $23,600 was offset against this final payment.
SIGNIFICANT AND RECENT EVENTS
During 1996, the Company privately placed, pursuant to Rule 505 under the
Securities Act of 1933, as amended (the "Act"), 10,500 shares of of its then
newly created class of 8% convertible redeemable preferred stock, par value
$1.00 per share (the "Preferred Stock"), for which the Company received
aggregate proceeds of $1,050,000. In 1997 an aggregate of 4,000 of such shares
of the Preferred Stock were converted into 100,000 shares of the Company's
common stock in accordance with the conversion provisions of the Preferred
Stock at a conversion price of $4.00 per share of common stock. In addition,
subsequent to such conversion, pursuant to the terms of the Preferred Stock and
as a result of certain common stock issuances by the Company during 1997, the
conversion price for the remaining shares Preferred Stock was reduced to $3.71
per share of common stock. No other conversions were made in 1998.
In consideration for advisory services related to the Acrodyne acquisition, the
Company sold warrants to Alchemy Capital to purchase 170,000 shares of common
stock at an exercise price of $3.00 per share on October 24, 1994. As of
December 31, 1997, 20,000 of these warrants had been exercised, raising net
proceeds of $60,000. As a result of common stock issuances by the Company
during 1997, the conversion price for the remaining warrants were reduced to
$2.73. During 1998 13,000 warrants were exercised at $2.73. A cashless exercise
was also executed which converted 5,600 warrants into 4,400 shares of common
stock. There are 131,400 warrants remaining as of December 31, 1998.
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On April 15, 1997, the Company's Board of Directors approved the Company's 1997
stock option plan with authorization to grant options with respect to an
aggregate of up to 450,000 shares of the Company's common stock. On January 20,
1998 the stock option plan had been amended to add another 200,000 shares of
the company's common stock. On June 8, 1998 the Board of Directors approved the
granting of options for 450,000 shares at an option price of $4.50 per share.
On October 16, 1998, in response to the decline in the public market price of
Acrodyne's securities and the public stock markets generally, the Board of
Directors resolved to reprice such options to $3.00 per share.
On November 7, 1997, the Company privately placed with a group of investors
800,000 shares of its common stock at a purchase price of $2.50 per share, for
an aggregate purchase price of $2,000,000. Concurrently, the Company also
issued warrants for the purchase of up to 500,000 shares of its common stock,
with such warrants being exercisable until November 7, 2002 at an exercise
price of $3.00 per share of common stock. These securities were all issued
pursuant to the exemption from registration under the Act set forth in Section
4(2) of the Act (such issuance of the shares and warrants, collectively, the
"Private Placement"). Scorpion Holdings Inc. ("Scorpion") arranged for the
financing by the investors in the Private Placement. The warrants issued to the
Investor Group were issued in consideration of the Investor Group's investment
in the Company; the warrants issued to S-A Partners were issued in
consideration of Scorpion's introduction of the Investor Group to the Company.
On September 4, 1998, the Company sold 326,530 shares of Series A 8%
Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") in a
private placement to Scorpion-Acrodyne Investors L.L.C. and the Newlight
Associates funds for net proceeds of $972,668. The Series A Preferred is
redeemable by the Company at any time and carries an 8% dividend rate . The
Series A Preferred is convertible at the option of the holder into Common Stock
of the Company at a conversion price of $3.0625 per share. In connection with
the investment the Investors received 500,000 warrants of Common Stock with an
exercise price of $3.00 per warrant and are exercisable through November 7,
2002. In addition, S-A Partners received 25,000 similar warrants for arranging
the equity financing. On January 27, 1999 this Series A Preferred Stock was
redeemed by the Company for $1,031,780 as further described in the Subsequent
Event section.
On November 23, 1998, Acrodyne entered into a subscription agreement with
Sinclair Broadcast Group for the acquisition of a significant equity interest in
Acrodyne. The closing of the transaction occurred on January 27, 1999 upon
approval by the Acrodyne shareholders at a special meeting.
Pursuant to the subscription agreement, Sinclair has made a cash infusion of
$4.3 million in Acrodyne in receipt of 1,431,333 shares of Acrodyne's common
stock and warrants to purchase up to an aggregate of 8,719,225 shares over a
term of seven years at prices ranging from $3.00 to $6.00 per share. Of such
warrants, 6,000,000 are exercisable only upon Acrodyne's achievement of
increased product sales or sales of products with new technology. Sinclair has
also acquired an additional 800,000 shares of common stock previously held by
the Scorpion/New Light investment group. Sinclair now holds an aggregate of
2,231,333 shares of Acrodyne, representing approximately 32.1% of issued common
stock, assuming no warrants are exercised. If Sinclair were to exercise all
warrants received pursuant to the Subscription Agreement, Sinclair would own
10,950,558 shares of Common Stock, representing 59.06% of all outstanding
voting stock on a fully diluted basis.
From the net proceeds of the transaction, $1,031,780 was used to retire all
Series A 8% Redeemable Convertible Preferred Stock issued in September 1998 to
the Scorpion/New Light investment group; $1,000,000 has been set aside to fund a
new research and development program; and the balance has been allocated for
working capital and general corporate purposes.
This transaction also included an investment agreement, dated as of January 27,
1999 among Sinclair, Acrodyne and Mr. Mancuso (the "Investment Agreement"), with
respect to Acrodyne's governance and providing for, among other things, the
composition of the board of directors, restrictions on certain corporate,
securities and affiliated party transactions, a standstill agreement by Sinclair
and an enhanced role for Acrodyne's independent directors.
As a condition to the Investment Agreement, Acrodyne's shareholders approved the
reconstitution of Acrodyne's board of directors to comprise 3 directors
nominated by Sinclair, including Nathaniel Ostroff as Chairman, 2 directors
nominated by Acrodyne's president and CEO, Robert Mancuso, and 2 independent
directors not affiliated with Sinclair or the Company. Mr. Ostroff will also
chair Acrodyne's management committee, which will include Mr. Mancuso and an
operating officer to be appointed.
As an additional conditon to the Investment Agreement, on Jaunary 27, 1999,
Acrodyne and Mr. Mancuso entered into an employment agreement to retain the
services of Mr. Mancuso as President and Chief Executive Officer of Acrodyne.
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Forward Looking Statements
Certain statements contained in this report that do not relate to historical
information are "forward looking statements" within the meaning of the United
States Private Securities Litigation Reform Act of 1995 and thus are
prospective. Such forward-looking statements are subject to risks, uncertainties
and other factors which could cause actual results to differ materially from
future results expressed, projected or implied by such forward-looking
statements. Such factors include, but are not limited to, economic, competitive,
and broadcast industry conditions. These factors are discussed in greater detail
in the Company's filings with the Canadian and United States Securities
regulators, The Company disclaims any responsibility to update any such
forward-looking statements.
Year 2000
The year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations. During
1998, Management of the Company and their staff completed their assessment of
the various computer software and hardware used in connection with the ongoing
operations of the Registrant. This review indicated that significantly all of
the computer programs used by the Company are off-the-shelf "packaged" computer
programs which are easily upgraded to be Year 2000 compliant. Management began
to upgrade those systems and at present are Year 2000 compliant. The Registrant
does not expect to bear any other significant costs.
To date Management is not aware of any external agent that would materially
impact the results of operation, liquidity or capital. However, Management has
no means of ensuring that external agents will be Year 2000 compliant.
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Acrodyne
Communications, Inc. filed a Form 8-K on November 23, 1998 together with The
Sinclair Subscription Agreement and its exhibits.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting on Comprehensive Income." SFAS 130 requires that an enterprise
(a) classify items of other comprehensive income by their nature in the
financial statements and (b) display the accummulated balance of other
comprehensive income seperately from retained earnings and additional
paid-in-capital on the balance sheet. During the years ended December 31, 1998
and 1997, the Company did not experience any comprehensive gains or losses which
would require disclosure.
The Company has also adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information" in the current fiscal year. The Company
operates in one segment under the description provided in this pronouncement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity." Management is currently assessing the effect
of this statement on the financial disclosures of the Company, however
management does not expect such effect to be significant.
Item 7. Financial Statements
See pages 28 to 44 of this report for the financial statements required by this
item.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There is no information relevant to the Registrant which must be disclosed
under this item.
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Part III
Items 9, 10, 11 and 12 are hereby incorporated by reference from Acrodyne's
annual proxy statement to be filed in accordance with rule 14a-101 schedule
14a.
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Item 10 Executive Compensation.
Item 11 Security Ownership of Certain Beneficial Owners and Management.
Item 12 Certain Relationships and Related Transaction.
Item 13 Exhibits and Reports on Form 8-K.
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Item 13. Exhibits and Reports on Form 8-K
(a) The following constitutes an Exhibit Index of the applicable
Exhibits to this report:
DESCRIPTION OF EXHIBIT
- -----------------------------------------------------------------------------
3.1* Certificate of Incorporation of Acrodyne Holdings, Inc.
3.2* By-Laws of Acrodyne Holdings, Inc., as amended to date
3.3* Certificate of Incorporation of Acrodyne Industries, Inc.
3.4* By-Laws of Acrodyne Industries, Inc., as amended to date
3.5*** Certificate of Amendment to Certificate of Incorporation of
Registrant Changing its Name from Acrodyne Holdings, Inc. to
Acrodyne Communications, Inc.
3.6*** Form of Certificate of Designation Preferences and Relative,
Participating, Optional or Other Special Rights, and
Qualifications, Limitations, Restrictions, of the 8% Convertible
Redeemable Preferred Stock of Acrodyne Communications, Inc.
4.1* Specimen Share Certificate
4.2* Form of Redeemable Common Stock Purchase Warrant
4.3* Form of Unit Certificate
10.1* Stock Acquisition Agreement, dated May 16, 1994, by and among
Acrodyne Holdings, Inc., Marshall Smith and Acrodyne Industries,
Inc. (without exhibits), as amended
10.1A* Amendment No. 3, dated September 21, 1994, to the Stock
Acquisition Agreement, dated May 16, 1994, by and among Acrodyne
Holdings, Inc., Marshall Smith and Acrodyne Industries, Inc.
10.2* Form of Senior Subordinated Installment Promissory Note
10.3* Hulick and Traynor Stock Contribution Agreement, dated May 16,
1994, by and among Acrodyne Holdings, Inc., Dr. Timothy Hulick,
Daniel Traynor and Acrodyne Industries, Inc. (without exhibits),
as amended
10.3A* Amendment No. 2, dated September 21, 1994, to the Hulick and
Traynor Stock Contribution Agreement, dated May 16, 1994, by and
among Acrodyne Holdings, Inc., Dr. Timothy Hulick, Daniel Traynor
and Acrodyne Industries, Inc.
10.4* Minority Shareholders' Stock Contribution Agreement, dated May 16,
1994, by and among Acrodyne Holdings, Inc. and certain minority
shareholders of Acrodyne Industries, Inc. (without exhibits), as
amended
-25-
<PAGE>
10.4A* Amendment No. 2, dated September 21, 1994, to the Minority
Shareholders' Stock Contribution Agreement, dated May 16, 1994, by
and among Acrodyne Holdings, Inc. and certain minority shareholders
of Acrodyne Industries, Inc.
10.5* Form of Non-Compete Agreement by and among the Company and Marshall
Smith
10.6* Form of Consulting Agreement by and among the Company and Marshall
Smith
10.7* Form of Promissory Note
10.8* Form of Mancuso Employment Agreement
10.9* Form of Hulick Employment Agreement
10.10* Form of Traynor Employment Agreement
10.11* 1993 Stock Option Plan of the Company
10.12* Form of Warrant Agreement
10.13* Confirmation Letter, dated September 13, 1994, from CoreStates
Bank, N.A. regarding a line of credit of up to $1,200,000
10.14* Financial Advisory Agreement, dated as of September 14, 1993, by
and between Alchemy Capital Corp. and Acrodyne Holdings, Inc., as
amended to date.
10.15** Financial consulting agreement dated July 1, 1995 between the
Company and Colin Winthrop & Co., Inc. and form of warrant given
to Colin Winthrop & Co., Inc.
10.16** Financial consulting agreement dated January 1, 1996 between the
Company and Colin Winthrop & Co., Inc. and form of warrant given
to Colin Winthrop & Co., Inc.
10.17*** Form of Subscription Agreement, dated March 29, 1996 between
Acrodyne Communications, Inc. and (i) Furst Associates and (ii)
Eagle Partners.
10.18*** Form of Subscription Agreement, dated May 7, 1996 between Acrodyne
Communications, Inc. and (i) FM Partners and (ii) Dynamic Value
Partners.
10.19 Form of Subscription Agreement, dated Nov. 7, 1997 between Acrodyne
Communications, Inc. and Newlight Associates L.P., Newlight
Associates (B.V.I.), Scorpion-Acrodyne Investors LLC and S-A
Partners.
21.0*** Subsidiaries of the Registrant
27.0 Financial Data Schedule
- ------------------
* Incorporated by reference to the Form SB-2 filed by the Registrant
(file number 33-82910 with the U.S. Securities and Exchange Commission
on October 11, 1994.
** Incorporated by reference to the Form 10-KSB filed by the Registrant
(file number 0-24886) with the SEC for its fiscal year ended December
31, 1995.
*** Incorporated by reference to the Form 10-KSB filed by the Registrant
(file number 0-24886) with the SEC for its fiscal year ended December
31, 1996.
(b) Form 8-K filings: The Registrant filed a Form 8-K on November 23, 1998.
-26-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Acrodyne Communications, Inc.
- ------------------------------------------------------------------
(Registrant)
By /s/ Nathanial Ostroff
- ------------------------------------------------------------------
Nathanial Ostroff, Chairman of the Board of Directors
Date 3/31/99
In accordance with the Exchange Act, this report has been signed below
by the following persons on and behalf of the registrant and in the capacities
and on the dates indicated.
By /s/ A. Robert Mancuso
- ------------------------------------------------------------------
A. Robert Mancuso, President and CEO of Acrodyne
Date 3/31/99
By /s/ Martin J. Hermann
- ------------------------------------------------------------------
Martin J. Hermann, Director
Date 3/31/99
By /s/ David Smith
- ------------------------------------------------------------------
David Smith, Director
Date 3/31/99
By /s/ David Amy
- ------------------------------------------------------------------
David Amy, Director
Date 3/31/99
By /s/ Michael E. Anderson
- ------------------------------------------------------------------
Michael E. Anderson, Director
Date 3/31/99
By /s/ Richard P. Flam
- ------------------------------------------------------------------
Richard P. Flam, Director
Date 3/31/99
By /s/ Ronald R. Lanchoney
- ------------------------------------------------------------------
Ronald R. Lanchoney, CFO of Acrodyne
Date 3/31/99
-27-
<PAGE>
Acrodyne
Communications,
Inc.
Consolidated Financial Statements
December 31, 1998
-28-
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Acrodyne Communications, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Acrodyne
Communications, Inc. and its subsidiary at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, PA
March 31, 1999
-29-
<PAGE>
<TABLE>
<CAPTION>
Acrodyne Communications, Inc.
Consolidated Balance Sheets
December 31, 1998 and 1997
- -------------------------------------------------------------------------------------------------------------------
1998 1997
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 983,695 $ 3,011,294
Accounts receivable, net of allowance for doubtful accounts of
$62,565 and $24,327 at December 31, 1998 and 1997 1,497,197 943,183
Inventories 4,325,445 5,271,449
Prepaid expenses and deposits 170,958 105,067
--------------- ---------------
Total current assets 6,977,295 9,330,993
Property and equipment, net 504,469 666,395
Note receivable - 85,436
Non-compete agreement, net 435,822 510,822
Goodwill, net 4,055,707 4,212,202
--------------- ---------------
Total assets $11,973,293 $14,805,848
--------------- ---------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,119,604 $ 1,151,372
Accrued expenses 386,363 238,796
Customer advances 161,418 347,378
Line of credit 1,275,000 -
Current portion of long-term debt and capital leases 75,630 352,082
--------------- ---------------
Total current liabilities 4,018,015 2,089,628
Long-term debt and capital leases 69,824 379,196
Non-compete liability 712,168 722,647
--------------- ---------------
Total liabilities 4,800,007 3,191,471
--------------- ---------------
Commitments and contingencies (Note 12) Shareholders' equity:
Preferred stock, par value $1.00; 1,000,000 shares authorized,
333,030 and 6,500 shares outstanding in 1998 and 1997, respectively 333,030 6,500
Common stock, par value $.01; 10,000,000 shares authorized,
5,331,670 and 5,314,270 shares issued and outstanding in
1998 and 1997, respectively 53,317 53,143
Additional paid-in capital 17,720,449 17,055,970
Accumulated deficit (10,933,510) (5,501,236)
--------------- ---------------
7,173,286 11,614,377
--------------- ---------------
Total liabilities and shareholders' equity $11,973,293 $14,805,848
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-30-
<PAGE>
<TABLE>
<CAPTION>
Acrodyne Communications, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
Net sales $11,726,719 $ 8,171,612
Cost of sales 9,602,301 6,869,003
------------ -------------
Gross profit 2,124,418 1,302,609
------------ -------------
Operating expenses:
Engineering, research and development 3,171,359 823,406
Selling 1,998,915 1,609,600
Administration 2,082,741 1,543,824
Amortization 231,496 231,496
------------ -------------
Total operating expenses 7,484,511 4,208,326
------------ -------------
Operating loss (5,360,093) (2,905,658)
Other income (expense):
Interest expense, net (72,790) (15,218)
Other income 609 7,902
------------ -------------
Loss before income tax benefits (5,432,274) (2,912,974)
Income taxes - -
------------ -------------
Net loss $(5,432,274) $ (2,912,974)
------------ -------------
Dividend on 8% Convertible Redeemable Preferred Stock (81,975) (64,087)
------------ -------------
Net loss applicable to common shareholders $(5,514,249) $ (2,977,061)
------------ -------------
Net loss per share - basic and diluted $ (1.04) $ (0.65)
------------ -------------
Weighted average common shares outstanding 5,321,188 4,584,347
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-31-
<PAGE>
<TABLE>
<CAPTION>
Acrodyne Communications, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997
- -----------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,432,274) $(2,912,974)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 453,514 388,159
Other non-cash expenses (see Note 9) 65,000 -
Changes in assets and liabilities:
Accounts receivable (554,014) 1,213,925
Inventories 946,004 (783,562)
Prepaid expenses and deposits (65,891) (41,110)
Note receivable 85,426 (5,501)
Accounts payable 968,232 (273,777)
Accrued expenses 147,567 (145,026)
Customer advances (185,960) 98,112
---------------- ---------------
Net cash used in operating activities (3,572,386) (2,461,754)
---------------- ---------------
Cash used in investing activities:
Purchase of property and equipment (22,538) (74,809)
---------------- ---------------
Cash flows from financing activities:
Proceeds from the issuance of common stock - 1,951,800
Proceeds from issuance of preferred stock 972,668 -
Proceeds from exercise of warrants 35,490 100,000
Payments on promissory notes (540,000) (270,000)
Borrowings under line of credit 1,275,000 -
Capital lease repayments (83,379) (82,214)
Repayments on non-compete liability (10,479) (9,186)
Cash dividends to stockholders (81,975) (64,087)
---------------- ---------------
Net cash provided by financing activities 1,567,325 1,626,313
---------------- ---------------
Net decrease in cash and cash equivalents (2,027,599) (910,250)
Cash and cash equivalents at beginning of year 3,011,294 3,921,544
---------------- ---------------
Cash and cash equivalents at end of year $ 983,695 $ 3,011,294
---------------- ---------------
Supplemental cash flow information:
Cash paid for interest 170,302 172,819
Property and equipment acquired through capital leases 37,555 173,938
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-32-
<PAGE>
<TABLE>
<CAPTION>
Acrodyne Communications, Inc.
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1998 and 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Additional
Preferred Stock Common Stock paid-in
------------------------- ----------------------------
Shares Amount Shares Amount capital
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 10,500 $ 10,500 4,384,270 $ 43,843 $15,073,557
Issuance of shares in connection with warrant
exercise 30,000 300 99,700
Conversion of preferred shares into
common shares (4,000) (4,000) 100,000 1,000 3,000
Sale of common shares 800,000 8,000 1,943,800
Dividends on preferred stock (64,087)
Net loss
----------- ------------ --------------- ----------- ---------------
Balance at December 31, 1997 6,500 6,500 5,314,270 53,143 17,055,970
Issuance of shares in connection with
warrant exercise 17,400 174 35,316
Sales of Series A Preferred shares 326,530 326,530 646,138
Issuance of options for services 65,000
Dividends on preferred stock (81,975)
Net loss
----------- ------------ --------------- ----------- ---------------
Balance at December 31, 1998 333,030 $333,030 5,331,670 $ 53,317 $17,720,449
----------- ------------ --------------- ----------- ---------------
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Shareholders'
deficit equity
<S> <C> <C>
Balance at December 31, 1996 $ (2,588,262) $12,539,638
Issuance of shares in connection with warrant
exercise 100,000
Conversion of preferred shares into
common shares
Sale of common shares 1,951,800
Dividends on preferred stock (64,087)
Net loss (2,912,974) (2,912,974)
--------------- ---------------
Balance at December 31, 1997 (5,501,236) 11,614,377
Issuance of shares in connection with
warrant exercise 35,490
Sales of Series A Preferred shares 972,668
Issuance of options for services 65,000
Dividends on preferred stock (81,975)
Net loss (5,432,274) (5,432,274)
--------------- ---------------
Balance at December 31, 1998 $ (10,933,510) $ 7,173,286
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-33-
<PAGE>
Acrodyne Communications, Inc.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
1. Business and Organization
Organization
Acrodyne Holdings, Inc. (the "Company"), a Delaware corporation, was
formed in May 1991 for the purpose of acquiring an operating company. In
1995, the Company changed its name to Acrodyne Communications, Inc.
On May 16, 1994, the Company entered into agreements to acquire all of the
outstanding stock of Acrodyne Industries, Inc., a company engaged in the
manufacture and sale of TV transmitters, LPTV transmitters and TV
translators, which are produced to customer specification. The acquisition
was consummated on October 24, 1994 with proceeds obtained from a public
offering (see Note 9).
2. Summary of Significant Accounting Policies
The following summarizes the significant accounting policies employed by
the Company in preparation of its financial statements:
Consolidation
The financial statements include the accounts of the Company and its
wholly-owned subsidiary, Acrodyne Industries, Inc. All intercompany
transactions and balances are eliminated in consolidation.
Cash and cash equivalents
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents. Cash equivalents amounted
to $750,000 and $2,171,884 at December 31, 1998 and 1997, respectively. At
various times throughout the year, the Company maintains cash balances in
excess of FDIC limits.
Inventory
Inventory is valued at the lower of cost (first-in, first-out) or market.
Property and equipment
Property and equipment are carried at cost. The cost of additions and
improvements are capitalized, while maintenance and repairs are charged to
operations when incurred. The cost and related accumulated depreciation of
assets sold, retired or otherwise disposed are removed from the respective
accounts and any resulting gain or loss is recorded in the statement of
operations. Depreciation is recorded using the straight-line method over
the estimated useful lives of the assets (three to seven years). Leasehold
improvements are amortized over the shorter of their useful lives or the
remaining lease terms. Capital leases are depreciated over their useful
lives or lease term, as applicable.
Customer advances
Customer deposits received prior to completion of the contract between the
Company and its customers are recorded as a liability.
-34-
<PAGE>
Acrodyne Communications, Inc.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
Revenue recognition and accounts receivable
The Company recognizes revenue from the sale of transmitters when title
and risks of ownership are transferred to the customer, which generally
occurs upon shipment or customer pick-up. A customer may be invoiced for
and receive title to transmitters prior to taking physical possession when
the customer has made a fixed, written commitment for the purchase, the
transmitters have been completed and are available for pick-up or
delivery, and the customer has requested that the Company hold the
transmitters until the customer determines the most economical means of
taking physical possession. Upon such a request, the Company has no
further obligation except to segregate the transmitters, invoice the
customer under normal billing and credit terms, and hold the transmitter
for a short period of time as is customary in the industry, until pick-up
or delivery. Transmitters are built to customer specification and no right
of return or exchange privileges are granted. Accordingly, no provision
for sales allowances or returns is recorded.
Concentration of credit risk
The Company's customers are primarily domestic and international
television stations, broadcasters, government entities, not-for-profit
organizations and educational institutions. International sales
approximated $3,405,339 and $2,439,841 for the years ended December 31,
1998 and 1997, respectively. No individual customer represented more than
10% of sales in either 1998 or 1997.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make reasonable
estimates and assumptions, based upon all known facts and circumstances,
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
Research and development
Research and development expenditures related to the design and
development of new products are expensed as incurred and as such are
included in engineering, research and development in the accompanying
financial statements. Research and development costs of $3,171,359 and
$823,406 were charged to expense during the years ended December 31, 1998
and 1997, respectively.
Income taxes
The Company records deferred income taxes related to estimated future tax
effects of temporary differences between financial statement carrying
amounts and the tax bases of existing assets and liabilities.
Fair value of financial instruments
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate.
Accounts receivable, notes receivable and debt are financial instruments
that are subject to possible material market variations from the recorded
book value. The fair value of these financial instruments approximate
their recorded book value as of December 31, 1998 and 1997.
-35-
<PAGE>
Acrodyne Communications, Inc.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
Impairment of long-lived assets
The Company periodically performs analyses on the recoverability of
long-lived assets. Any excess of the carrying amount of an asset over the
estimated future undiscounted cash flows associated with the asset would
be recorded as an impairment loss in the statement of operations.
New accounting pronouncements
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting on Comprehensive Income." SFAS 130 requires
that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements and (b) display the accumulated
balance of other comprehensive income separately from retained earnings
and additional paid-in-capital on the balance sheet. During the years
ended December 31, 1998 and 1997, the Company did not experience any
comprehensive gains or losses which would require disclosure.
The Company has also adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information" in the current fiscal year. The Company
currently has one principal line of business in the manufacture and sale of
TV transmitters, LPTV transmitters and TV translators.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity." Management is currently assessing the
effect of this statement on the financial disclosures of the Company,
however management does not expect such effect to be significant.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. Earnings Per Share
Basic earnings per share are computed by dividing net income available to
common shareholders by the weighted average number of shares outstanding
during the period, as restated for shares issued in business combinations
accounted for as poolings-of-interests and stock dividends. Diluted
earnings per share are computed using the weighted average number of
shares determined for the basic computations plus the number of shares of
common stock that would be issued assuming all contingently issuable
shares having a dilutive effect on earnings per share were outstanding for
the period.
-36-
<PAGE>
Acrodyne Communications, Inc.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997
<S> <C> <C>
Net loss $ (5,432,274) $(2,912,974)
Preferred stock dividends (81,975) (64,087)
------------ -----------
Net loss applicable to common shareholders $ (5,514,249) $(2,977,061)
------------ -----------
Weighted average common shares outstanding (basic) 5,321,188 4,584,347
Convertible Preferred Stock (Note 9) (*) (*)
Employee Stock Options (Note 9) (*) (*)
Options and warrants issued in connection with various
transactions (Note 9) (*) (*)
------------ -----------
Weighted average common shares outstanding (diluted) 5,321,188 4,584,347
------------ -----------
Loss per share (basic) $ (1.04) $ (0.65)
------------ -----------
Loss per share (diluted) $ (1.04) $ (0.65)
------------ -----------
</TABLE>
(*) Due to the Company's loss from continuing operations in 1998 and 1997,
the incremental shares issuable in connection with these instruments are
anti-dilutive and accordingly not considered in the calculation.
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
<S> <C> <C>
Raw materials $2,779,646 $2,815,710
Work in process 576,973 1,035,065
Finished goods 1,324,826 1,854,530
---------- ----------
4,681,445 5,705,305
Reserve for excess/obsolete inventory (356,000) (433,856)
---------- ----------
$4,325,445 $5,271,449
---------- ----------
</TABLE>
The reserve for excess/obsolete inventory reduces inventory to its estimated
net realizable value.
-37-
<PAGE>
Acrodyne Communications, Inc.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
5. Property and Equipment
Property and Equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
<S> <C> <C>
Test equipment $ 585,678 $559,511
Machinery and equipment 59,564 59,564
Office equipment 272,993 239,067
Automobile 11,043 11,043
Leasehold improvements 76,205 76,205
Purchased computer software 29,342 29,342
---------- ---------
1,034,825 974,732
Accumulated depreciation (530,356) (308,337)
---------- ---------
$ 504,469 $666,395
---------- ---------
</TABLE>
Depreciation expense amounted to $222,019 and $156,664 for the years ended
December 31, 1998 and 1997, respectively.
Property and equipment at December 31, 1998 and 1997 includes assets
(primarily test equipment) under capital leases of $235,093 and $319,666,
net of accumulated depreciation of $82,883 and $62,980, respectively.
Depreciation expense related to these assets was $15,255 and $31,634 for
the years ended December 31, 1998 and 1997, respectively.
6. Non-Compete Agreement
Simultaneous with the Acrodyne acquisition, the Company and the former
majority shareholder entered into a non-compete agreement. In
consideration for this agreement not to compete, the Company is obligated
to make lifetime annual payments to this former shareholder equal to
$65,000 and provide certain benefits at no cost to him for the remainder
of his life. The Company recorded the estimated actuarial present value of
$750,000 related to this agreement as an asset and established a
corresponding liability. During the years ended December 31,1998 and 1997,
the Company recorded interest expense of $64,231 and $64,215,
respectively, relating to this liability.
The intangible asset associated with the non-compete agreement is being
amortized on a straight-line basis over a ten-year period. Amortization
expense of $75,000 was recorded during each of the years ended December
31, 1998 and 1997. Accumulated amortization totaled $314,178 and $239,178
at December 31, 1998 and 1997, respectively.
-38-
<PAGE>
Acrodyne Communications, Inc.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
7. Goodwill
The Company recorded goodwill totaling $4,711,274 representing the excess
of purchase price over the fair value of net assets acquired of Acrodyne
Industries, Inc. Goodwill is being amortized on a straight line basis over
30 years. Amortization charged to expense during the years ended December
31, 1998 and 1997 amounted to $156,495 each year. Accumulated amortization
at December 31, 1998 and 1997 totaled $655,567 and $499,072, respectively.
The Company periodically reviews goodwill to assess recoverability through
a non-discounted cash flow analysis and any perceived impairment would be
charged to operations in the period in which such impairment becomes
evident.
8. Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
<S> <C> <C>
Senior Subordinated Installment Promissory Note $ - $540,000
Capital lease obligations 145,454 191,278
----------- ---------
145,454 731,278
Current portion (75,630) (352,082)
----------- ---------
$ 69,824 $379,196
----------- ---------
</TABLE>
In 1998, the 9% senior Subordinated Installment Promissory Note payable to
the former majority shareholder was repaid in full.
Principal payments on long-term debt are as follows:
1999 $ 75,630
2000 57,455
2001 12,360
---------
$ 145,454
---------
The Company has up to a $2,000,000 line of credit facility with a bank. As
collateral for the line of credit, the bank requires the assignment of a
certificate of deposit in the amount of $750,000. This facility provides
for an interest rate of prime rate plus 1.5% on borrowings up to $750,000
and at the bank's prime rate in excess of $750,000. The borrowings are
formula-based with qualified accounts receivables and inventories and
contains certain financial covenants. Borrowings under the line of credit
totaled $1,275,000 and $0 at December 31, 1998 and 1997, respectively.
In connection with the line of credit, the Company is obligated to
maintain specified financial ratios such as their working capital ratio
and their debt to equity ratio. As of December 31, 1998, the Company was
not in compliance with the terms of the line of credit with respect to
their working capital ratio. The
-39-
<PAGE>
Acrodyne Communications, Inc.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
Company has obtained a waiver for the 1998 event of default and has
restructured its loan agreement for 1999 to reflect a revised working
capital ratio requirement.
9. Shareholders' Equity
Preferred stock
Preferred stock consists of 1,000,000 shares, par value $1 per share,
which may be issued in series from time to time with such designation,
rights, preferences and limitations as the Board of Directors of the
Company may determine by resolution. Any and all such rights that may be
granted to preferred stockholders may be in preference to common
stockholders.
During 1996, the Company sold 10,500 shares of 8% Convertible Redeemable
Preferred Stock (the "8% Preferred Stock") in a private placement. The 8%
Preferred Stock has a liquidation preference of $100 per share plus all
outstanding and unpaid dividends and is redeemable at the discretion of
the Company for the amount of the liquidation value after one year from
issuance date provided certain stipulations are met. The 8% Preferred
Stock is convertible at the option of the holder into the number of common
shares obtained by dividing the liquidation value by the $3.71 per share
conversion price, subject to adjustment. Holders of the 8% Preferred Stock
vote on a fully converted basis with the holders of common stock and, in
the event of certain dividend arrearages, have the right to elect a
director to the Company's Board. During 1997, 4,000 shares of the 8%
Preferred Stock were converted into Common Stock at a conversion price of
$4.00 per share.
During 1998, the Company sold 326,530 shares of Series A 8% Convertible
Redeemable Preferred Stock (the "Series A Preferred Stock") in a private
placement for net proceeds of $972,668. On January 27, 1999, the Series A
Preferred Stock was redeemed by the Company for $1,031,780 as described in
Note 13. In connection with the sale of Series A Preferred Stock, the
Company issued warrants to purchase up to 525,000 shares of common stock
at an exercise price of $3.00 per share. The warrants are exercisable
through November 7, 2002.
Common stock
On November 7, 1997 the Company sold 800,000 shares of common stock and
warrants to purchase up to an additional 500,000 shares of common stock
for aggregate net proceeds of $1,951,800. The warrants issued in
connection with this transaction carry an exercise price of $3.00 per
common share and expire on November 7, 2002.
Warrants and options
In 1998 a warrant holder exercised warrants to purchase 13,000 shares of
common stock for proceeds of $35,490. In addition, the warrant holder
utilized the cashless exercise feature of an additional 5,600 warrants to
acquire 4,400 shares of common stock of the Company.
Also in 1998, the Company issued options to purchase 25,000 shares of
common stock at an exercise price of $3.50 to a consultant for services.
The options expire on June 5, 2008 and were valued at $65,000 at the time
of issuance. Such amount was recorded as additional paid in capital and as
an administrative expense.
-40-
<PAGE>
Acrodyne Communications, Inc.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
The following warrants and options (excluding employee stock options) were
outstanding at December 31, 1998 and 1997:
Exercise
1998 1997 Price Expiration Date
16,000 16,000 $6.30 June 30, 1999
50,000 50,000 3.00 October 24, 1999
131,400 150,000 2.73 October 24, 1999
-0- 90,000 4.00 December 31, 1998
140,000 140,000 4.50 March 31, 1999
225,000 225,000 5.00 March 31, 1999
200,000 200,000 6.00 May 24, 2001
500,000 500,000 3.00 November 7, 2002
25,000 - 3.50 June 5, 2008
525,000 - 3.00 September 4, 2003
--------- ---------
1,812,400 1,371,000
--------- ---------
Employee stock options
In December 1993, the Company adopted the 1993 Stock Option Plan. A total
of 250,000 shares of common stock options were issuable under the 1993
Plan. The options may be incentive stock options or non-qualified stock
options. The maximum term of each option under the 1993 Plan is 10 years.
In 1993, an employee was granted an option to purchase an additional
100,000 shares of common stock at an exercise price of $3.00 per share
pursuant to his employment agreement.
In April 1997, the Company adopted the 1997 Stock Option Plan under which
650,000 options have been authorized. In June 1998, the Board granted
450,000 options under the 1997 Plan to employees. The options had an
exercise price of $4.50 per share. On October 16, 1998, the Board resolved
to reprice such options to $3.00 per share.
-41-
<PAGE>
Acrodyne Communications, Inc.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
The Company applies APB Opinion 25 and related interpretations in
accounting for its plan. For all other options granted, no compensation
cost has been recognized for its stock option plan. Had compensation cost
for the Company stock-based compensation plan been determined based on the
fair value at the grant date for awards under that plan consistent with
the method of SFAS 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
December 31,
--------------------------------
1998 1997
Net loss:
As reported $(5,432,274) $(2,912,974)
Pro forma (6,094,774) (2,912,974)
EPS:
As reported $ (1.04) $ (0.65)
Pro forma (1.16) (0.65)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model using the following
parameters: 60% volatility, 5.5% risk-free rate, 0% dividend yield and 5
year option life.
A summary of the Company's stock option plan as of December 31, 1998 and
1997 and changes during the years ending on those dates is presented
below:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------------ ---------------------------------
Weighted Weighted
Shares Average Shares Average
Exercise Price Exercise Price
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 350,000 $ 3.36 350,000 $3.36
Granted 900,000 $ 3.75 -
Exercised - -
Rescinded (450,000) $ 4.50 -
--------- --------
Outstanding at
end of year 800,000 $ 3.16 350,000 $3.36
--------- --------
Options exercisable
at year end 600,000 350,000
Weighted average
fair value of options granted
during the year $ 2.00 n/a
</TABLE>
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<PAGE>
Acrodyne Communications, Inc.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
10. Income Taxes
The provision for income taxes differs from the amount computed using the
federal income tax rate as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------
1998 1997
<S> <C> <C>
Income tax (benefit) at statutory federal rates $(1,901,296) $(1,019,541)
State tax (benefit) net of federal tax benefit (271,614) (145,649)
Goodwill amortization 62,598 62,598
Non-deductible compensation 26,000 -
Other permanent differences 11,601 12,400
Increase in valuation allowance 2,072,711 1,090,192
------------ ------------
$ - $ -
------------ ------------
</TABLE>
The components of the net deferred income tax asset (liability) are as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
<S> <C> <C>
Tax loss carryforwards (book basis) $ 4,156,097 $2,083,386
Deferred tax assets
Uniform tax cost capitalization 319,749 389,676
Non-compete agreement 211,576 165,484
Inventory reserves 142,400 173,542
Other deferred tax assets 85,407 66,712
-------------- --------------
4,915,229 2,878,800
Deferred tax liability - tax in excess of book depreciation (38,218) (37,026)
-------------- --------------
Net deferred tax asset and loss carryforward 4,877,011 2,841,774
Valuation allowance (4,877,011) (2,841,774)
-------------- --------------
$ - $ -
-------------- --------------
</TABLE>
A full valuation allowance has been established against the Company's net
deferred tax asset and loss carryforwards due to the uncertainty about the
realizability of the tax benefits related to such items. During 1998,
$37,474 of the valuation allowance was applied against the decrease in net
deferred tax assets (excluding loss carryforwards) and an additional
$2,072,711 of valuation allowance was recorded against the 1998 loss
carryforward.
The Company's tax loss carryforwards, which begin to expire in 2011,
totaled approximately $8,600,000 and $3,300,000 at December 31, 1998 and
1997, respectively.
-43-
<PAGE>
Acrodyne Communications, Inc.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
11. Note Receivable
The Company had a note receivable outstanding from the former majority
shareholder in the amount of $66,850 plus accrued interest of $18,586 as
of December 31, 1997. This note bore interest at 9% and was repaid in full
(including all accrued interest in 1998) upon full satisfaction of amounts
due under the Senior Subordinated Installment Promissory Note (see Note
8).
12. Commitments and Contingencies
The Company has operating leases for its manufacturing facility and office
space which expire July 31, 2000 and include a five-year extension option
as well as options to terminate the current lease if a larger facility is
needed. Rental expense was $222,931 and $219,900 for the years ended
December 31, 1998 and 1997, respectively.
The Company also leases certain test equipment under capital leases. These
leases are collateralized by the related equipment. Future minimum lease
payments under noncancelable leases are as follows:
Operating Capital
Fiscal year leases leases
1999 $221,200 $ 89,626
2000 102,375 61,808
2001 14,588 13,547
---------- ----------
$338,163 $164,981
----------
Interest portion (19,527)
----------
Present value of capital lease obligations $145,454
----------
The Company is involved in several claims in the ordinary course of
business. Management believes the resolution of these outstanding claims
will not have a material impact on the financial position, results of
operations or cash flows of the Company.
13. Subsequent Events
On January 27, 1999, the Company increased the number of authorized shares
of common stock from 10,000,000 to 30,000,000. Concurrent with this
change, the Company sold 1,431,333 shares of common stock and warrants to
purchase up to an additional 8,719,225 shares of common stock to Sinclair
Broadcast Group Inc. ("Sinclair") for aggregate proceeds of $4,300,000.
The warrants carry exercise prices ranging from $3.00 to $6.00 per share
and expire in two to seven years. As a condition of the transaction,
Sinclair has the right to appoint three of the Company's five directors.
Transaction costs of approximately $520,000 were incurred in connection
with this transaction. The Company utilized $1,031,780 of the proceeds
from this transaction to redeem the Series A Preferred Stock as
described in Note 9.
-44-
