U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
(Amendment No. 1)
(Mark One)
X Annual report under Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the fiscal year ended December 31, 1999
Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from _________________________ to ________________
Commission file number 0-24886
ACRODYNE COMMUNICATIONS, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 11-3067564
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
516 Township Line Road, Blue Bell, PA 19422
(Address of Principal Executive Office) (Zip Code)
215-542-7000
(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
Securities registered under Section 12(g) of the Exchange Act:
Units
(Title of Class)
Common Stock
(Title of Class)
Warrants
(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 _____
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.
$ 12,705,914
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is $17,851,193, computed by reference to the average bid and asked
prices of such stock, as of December 31, 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: 6,794,161 outstanding at March 20, 2000.
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ACRODYNE COMMUNICATIONS, INC.
FORM 10-KSB
FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PAGE
PART I.........................................................................4
Item 1....................................................................4
Description of Business..............................................4
Item 2...................................................................13
Description of Property.............................................13
Item 3...................................................................13
Legal Proceedings...................................................13
Item 4...................................................................13
Submission of Matters to a Vote of Security Holders.................13
Part II.......................................................................14
Item 5...................................................................14
Market for Common Equity and Related Stockholder Matters............14
Item 6...................................................................15
Management Discussion and Analysis..................................15
Item 7...................................................................19
Financial Statements................................................19
Item 8...................................................................19
Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...........................................19
Part III......................................................................20
Item 9...................................................................20
Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act...................20
Item 10..................................................................22
Executive Compensation..............................................22
Item 11..................................................................25
Security Ownership of Certain Beneficial Owners and Management......25
Item 12 .................................................................26
Certain Relationships and Related Transactions .....................26
Item 13 .................................................................27
Exhibits and Reports on Form 8-K....................................27
SIGNATURES. ........................................................29
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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.
On January 27, 1999, Acrodyne finalized a strategic agreement with the Sinclair
Broadcast Group. Under this agreement Sinclair invested $4.3 million in Acrodyne
in consideration for 1,431,333 shares of the Company's common stock and the
issuance of warrants to purchase up to an aggregate of 8,713,000 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 the Company's achievement of
increased product sales or products with new technology. See significant events.
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 control, telemetry and status functions, and a modular design which
allows for cost-effective expansion to higher output power levels.
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Lower Power Analog and Digital Television Transmitters
Lower power analog and digital television transmitters with power outputs of up
to 25 kilowatts and translators account for approximately 37% 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 25 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 $250,000.
Higher Power UHF Analog and Digital Television Transmitters
Higher power UHF analog television transmitters range in power from above 30
kilowatts to 240 kilowatts and higher, and account for approximately 37% 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. 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 25% 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 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 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.
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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 26% 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
Acrodyne expands solid state product line to 40 kilowatts analog and 10
kilowatts digital
The forthcoming digitization of television networks in the United States, the
world's most significant single market for television transmitters, has created
a greater demand for digital broadcasting technology. This demand offers the
opportunity to take advantage of the emerging market, not only with high power
transmitters, but also with solid-state and medium power transmitters. On
November 29, 1999 Acrodyne and Rohde & Schwartz, the worlds foremost
manufacturer of solid state transmitters formed a strategic alliance. The Rohde
& Schwarz group of companies, with headquarters in Munich, develop, produces and
markets communication and Test and Measurement instruments and systems gave
exclusive rights to Acrodyne to market and sell Rohde & Schwarz solid state
transmitter products in the United States. Rohde & Schwarz will market and sell
Acrodyne vacuum tube products in Europe. This agreement also includes technology
and product sales agreement to support a new line of Acrodyne high power
transmitter 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 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
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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.
The Acrodyne Renaissance Series (ARS) of transmitters
In 1999 the Acrodyne Renaissance Series of high power, UHF, digital and analog
television transmitters, was introduced. Broadcasters must utilize their capital
resources most efficiently during their digital plant build out, therefore,
during the design stage, special emphasis was placed on enhanced maintainability
including microprocessor monitoring, lower capital investment, and lower
operating costs without compromising reliability. This series offers the only
complete scalable solution to digital transmission. The architecture of the
system means that you can invest in the power level equipment you need today and
easily upgrade to higher power levels based on the future market growth of the
digital receiver population. The scalable characteristics of the digital product
line allow broadcasters to migrate to the digital future by using their capital
budget for the other important components required to support the station today.
New line of IOT equipped television transmitters developed at Sinclair Broadcast
Group.
On March 15, 2000, Acrodyne reached a definitive agreement with the Sinclair
Broadcast Group to exclusively manufacture and sell the Sinclair designed
"Quantum" IOT analog and digital transmitter line. Sinclair created this newly
developed line of transmitter products at its Baltimore headquarters to meet its
own internal digital and analog requirements and has licensed this technology to
Acrodyne. The Quantum line was conceived by broadcasters and designed by the
same Emmy award winning talents that invented IOT transmitters over ten years
ago. The digital version of the Quantum line is designed to be capable of both
8-VSB and COFDM service. This advanced line of transmitters will be introduced
by Acrodyne at the NAB 2000 Show in April in Las Vegas
With the addition of the Rohde & Schwarz solid state products and the
introduction of the new IOT "Quantum" products, the Company feels that Acrodyne
has the broadest transmitter product line in the industry.
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, 1999 there were construction
permits for 270 new higher power stations and 1,726 new low power stations in
the United States. As of December 31, 1999, Acrodyne had sold and delivered,
since its inception, 1750 lower power transmitters and 100 higher power
transmitters in the United States and 1650 lower power transmitters and 90
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
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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:
(g) expanding Acrodyne's sales and marketing activities; (Direct
Sales/Agents and Distributors)
(h) invest in a new, world class manufacturing facility to support growth
up to $100 million in sales
(i) expand our solid state product line to take advantage of medium power
sales opportunities
(j) introduce a new line of IOT transmitters to garner increased market
share
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 have a proven record of
reliability and cost effectiveness., 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.
In June of 1999 Acrodyne opened the industry's first e-commerce store for
transmission equipment. The primary function of the Internet site is to provide
a convenient mechanism for broadcasters to access Acrodyne's parts, components
and low power television transmission equipment over the internet. The service
also offers the opportunity to purchase various RF components and broadcast
related equipment. Since many transmission projects take place during the
overnight hours when systems can be taken off-air. The need to order replacement
parts any time of the day or night is of the utmost importance. Acrodyne's
on-line service allows
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customers to place orders for parts and components around the clock, and around
the globe. This service compliments the company's 24 hour technical support
already available. The site is an extention of Acrodyne.com, the company's
Internet website. Graphic design and site navigation is built specifically for
on-line shopping, including the ability to handle first time users and maintain
a limited database of customer information. It features shopping cart software
to format and process orders. A search function and help screens assist the
buyer in selecting the correct part or component. The site contains a secure
socket layer to encrypt sensitive information for the customer's protection. The
company has already received benefit from increased sales, through safe,
easy-to-use on-line transactions, stronger customer service, and increased
profits by reducing paperwork, telephone calls, and related order processing
costs.
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 79% of the Company's net sales in
1999. 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. 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 21% of net sales in 1999.
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
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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. Total sales to the Sinclair Broadcast
Group accounted for $3,209,565 or 25%. 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 5% of net sales in 1999.
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. 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
("ADC") 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
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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.
CURRENT MANUFACTURING
Acrodyne's manufacturing department under the new direction of a Vice President
of Manufacturing, includes 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.
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, and the
department has since been expanded in 1999 to include one technician. This
department reports directly to the president.. Quality assurance procedures are
in place 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.
11
<PAGE>
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 agreements with
its key employees, there can be no assurances that such arrangements will
adequately protect its trade secrets.
EMPLOYEES Acrodyne currently employs approximately 73 individuals on a full-time
basis, none of whom are union members. Acrodyne believes it has a good
relationship with its employees.
12
<PAGE>
Item 2. Description of Current and Future Property
Growth Necessitates Relocation of Entire Operation
Acrodyne's current 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 The current rental rate is
approximately $7.05 per square foot or $211,512. annually, excluding taxes,
insurance and maintenance which the Company is responsible for paying. This
represents a $5,112 increase over the total 1998 lease expense, resulting from
an annual price adjustment which is based on a consumer price index calculation.
In late October 1999, Acrodyne announced the signing of an agreement for the
construction of a 44,000 square foot facility. The new Building will include the
corporate headquarters, the sales/marketing, engineering, financial, and
operations teams, plus a state-of-the-art manufacturing capable of continuing
the transition of the company into the digital era and beyond. The manufacturing
facility will be designed to incorporate modern flow manufacturing techniques
with greatly expanded capabilities for high power testing of new technology
transmitters. A complete training facility will also be included for customer
seminars and instructions. Relocation is scheduled for the summer of 2000. The
new headquarters and operations facility will be located in Oaks, Montgomery
County, Pennsylvania, a suburb of Philadelphia. The financial arrangements for
the construction and occupation of this new facility were supported by the
financial strength of the Sinclair Broadcast Group. See Significant and Recent
Events. The Company also leases a premises located at 704 Forman Rd, Souderton,
PA. This facility consists of 5,000 square feet of warehouse and manufacturing
space The lease 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. This facility housed the Acrodyne machine shop, until
early 1999, when the Company sub-leased the premises and incorporated that
capability into its existing facility.
Item 3. Legal Proceedings
There were no legal proceedings pending to which the Company is party as of year
end December 31, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Security Holders in the fourth quarter of
1999.
13
<PAGE>
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 March 15, 2000, there were 1,931 beneficial holders of record of the
Company's Common Stock, along with 119 holders of record.
DIVIDENDS
No dividends on the Company's Common Stock were declared during fiscal 1999. 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 $89,361 during fiscal 1999 to the holders of the Company's 8%
convertible redeemable preferred stock as required by the terms of such stock
agreements.
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.
High Low
---- ---
March 31, 1998...........................$4-1/4 $4-3/8
June 30, 1998............................4-3/16 4
September 30, 1999.......................3-1/16 2-7/8
December 31, 1998........................4 3-13/16
March 31, 1999...........................3-1/32 3
June 30, 1999............................3-1/16 3
September 30, 1999.......................1-27/32 1-13/16
December 31, 1999........................3 2-1/8
As of the close of business on March 13, 2000 the high and low bid price for the
Company's Common Stock was $4-7/16 and $3-7/8 respectively.
14
<PAGE>
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, 1999 and 1998.
CONSOLIDATED STATEMENTS OF OPERATIONS
ACRODYNE COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
For the Year Ended December 31
1999 1998
------------ ------------
<S> <C> <C>
NET SALES $ 12,705,914 $ 11,726,719
COST OF SALES 9,573,561 9,602,301
------------ ------------
Gross profit 3,132,353 2,124,418
------------ ------------
OPERATING EXPENSES:
Engineering, research and development 920,047 3,171,359
Selling 1,387,737 1,998,915
Administration 1,983,423 2,082,741
Amortization of intangible assets 231,496 231,496
Charge for non-compete liability adjustment 145,226 --
------------ ------------
Total operating expenses 4,667,929 7,484,511
------------ ------------
Operating loss (1,535,576) (5,360,093)
OTHER INCOME (EXPENSE):
Interest expense, net (154,713) (72,790)
Other income 2,499 609
------------ ------------
Loss before income taxes (1,687,790) (5,432,274)
INCOME TAXES -- --
------------ ------------
NET LOSS $ (1,687,790) $ (5,432,274)
============ ============
DIVIDEND ON 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK (89,361) (81,975)
------------ ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (1,777,151) $ (5,514,249)
============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.27) $ (1.04)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED 6,659,304 5,321,188
============ ============
</TABLE>
15
<PAGE>
Net Sales for the year ended December 31, 1999 were $12,705,914 as compared to
$11,726,719 in 1998. This reflects an 8.35% increase and is primarily
attributable to the sales to Sinclair, Davis Television and Christian Television
Network. Even though sales were up slightly in 1999 over 1998, the Company is
still experiencing lower than anticipated sales growth as compared to its
forecasted sales volume for 1999. The Company believes that the broadcasters
have postponed any significant transmission equipment expenditures pending a
clearer plan for the emergence of Digital Television. The Company believes that
the delay in the purchase of Digital transmitters is also partially due to the
broadcasters desire to increase transmitted power, requiring further
authorization from the FCC.
The gross margins rose from 18.12% in 1998 to 24.66% in 1999. This is mainly due
to lower sales volume of Low Band VHF products which historically has lower
profit margins due to more labor intensive manufacturing. The sale of high power
transmitters increased in 1999 along with the sales of Rohde & Schwarz products,
which also contributed to the rise in gross profit margin.
The Company incurred significant Research and Development charges of $3,171,359
in 1998 for launch of new products which were delivered in the last half of
1998. Research and Development charges for 1999 were $37,613.
Selling expenses declined by $611,178 , to $1,387,737 as compared to 1998,
reflecting a 30.58% decrease. This was mainly due to the reorganization and
restructuring of the sales force, by elimination of outside legal and consulting
firms and by a reduction in advertising costs.
Administrative expenses declined by 4.77%, or $99,318, to $ 1,983,423 due to a
reduction in legal fees.
Included in 1999 operating expenses is a charge of $145,226 in connection with a
revision of the estimate of the Company's remaining liability under a non
compete agreement with a former shareholder.
Interest expense in 1999 increased due to an increase in the weighted-average
outstanding borrowings and an increase in interest rates.
No federal or state income tax benefits associated with the 1999 or 1998 losses
has been recorded due to management's concerns that such benefits will not be
realized.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Acrodyne has financed its activities primarily from customer
deposits, internally generated funds, sale of equity securities and use of its
credit facility. At December 31, 1999 the Company's working capital increased
$1,271,806 as compared to December 31, 1998. This increased was primarily due to
an increase in inventories, net of reserves, to $6,401,277 at December 31, 1999
from $4,325,445 in 1998. This increase in inventories is due to lower than
forecasted sales volume without a corresponding reduction in inventory, slow
turnover due to delayed purchasing of Digital transmission equipment, the
Company's strategy to have sufficient inventories on hand to provide quick
turnaround to strengthen its market position, and a higher volume of purchasing
by the Company to take advantage of discount opportunities.
Accounts receivable at December 31, 1999 were $1,335,158 which reflects a
$162,039 decrease compared to December 31, 1998. Prepaid assets and deposits
increased by $241,150 from $170,958 in 1998 to $412,108 in 1999. This is mainly
due to deposits placed with major suppliers for antenna and tower equipment,
which together with the manufacture of a 50KW Digital UHF TV Transmitter, is
expected to be installed in the summer of 2000. The Customer is KDNL-TV (ABC)
Channel 31D, in St. Louis, Mo, and is a Sinclair owned
16
<PAGE>
station. Correspondingly, the increase in customer advances from $161,418 in
1998 to $984,268, an increase of $822,850, is mainly due to cash deposits
received by KDNL-TV.
In September of 1999, the Company and Acrodyne, as co-borrowers, established a
new $2,500,000 credit facility (the "Credit Facility") arrangement with a bank
for working capital purposes to replace its then existing bank credit
facilities. The credit facility bears interest at LIBOR rate plus 200 basis
points The new facility is now available on a standard formula basis involving
qualified Accounts Receivable and Inventory and contain certain covenants having
to do with the maintance of a minimum tangible net worth. As of December 31,
1999, the Company was not in compliance with the terms of the credit facility.
The bank has provided a waiver for the 1999 event of default. The credit
facility is collateralized by all personal property of the Company and expires
on July 31, 2000. In connection with this facility, the bank required as a
condition of the loan that Sinclair unconditionally and irrevocably guarantee
all of the Company's obligations under the facility . The Company has
compensated Sinclair with $200,000 payable in the Company's common stock And in
addition, on October 1, 2000 and on each year thereafter, until the bank no
longer requires the guarantee from Sinclair, the Company shall pay Sinclair not
less than an amount determined by formula equal to $1,700,000 multiplied by
12.5% and payable in the form of Common Stock. The $200,000 for the guarantee
was capitalized as "Other Assets" on the Balance Sheet, and is being amortized
as interest expense over the guarantee period. $50,000 of interest expense was
recorded in the last quarter of 1999.
The Company has experienced net losses and incurred cash flow deficits in prior
years. These losses and cash flow deficits have continued unto March of 2000.
The Company expects to fund its cash requirements in 2000 with proceeds from its
credit facility and a $2,000,000 subordinated debenture with Sinclair. Sinclair
has further committed to provide the necessary level of financial support to the
Company to enable it to pay its debts as they become due and fund operations and
investing needs through January 1, 2001.
SIGNIFICANT AND RECENT EVENTS
On January 27, 1999, Sinclair invested $4,300,000 in the Company in return for
1,431,333 shares of the Company'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. Sinclair also acquired an additional 800,000 shares of
common stock previously held by outside investors. As of December 31, 1999,
Sinclair holds an aggregate of 2,231,333 shares of the Company's common stock,
representing approximately 32.8% of issued common stock assuming no warrants are
exercised.
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 was redeemable by the
Company at any time and carried an 8% dividend rate . The Series A Preferred was
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 with the proceeds from the sale of stock and warrants to Sinclair.
17
<PAGE>
Subsequent Events
In February 2000, the Company terminated 18 of its employees in an effort to
control costs in anticipation of lower than forecasted sales volume and to
maintain its' working capital.
During March 2000, the Company entered into a license agreement (the License
Agreement") with Sinclair for the exclusive right to manufacture and sell
certain Sinclair designed analog and digital transmitter lines. Under the terms
of the License Agreement, the Company will pay to Sinclair an annual royalty of
$300,000 for five years. Following the fifth year of the License Agreement, the
Company shall pay to Sinclair an annual royalty equal to 1.0% of revenues
realized by the Company attributable to the License Agreement.
During March 2000, the Company entered into a subordinated debenture agreement
(the "Debenture") with Sinclair. Under the terms of the Debenture, the Company
may borrow up to $2,000,000 at an interest rate of 10.5%. The first payment of
interest shall be made April 1, 2000 and on a monthly basis thereafter.
Principal is payable upon demand of Sinclair. Further, Sinclair has the right,
at any time, to convert all, but not less than all, of the principal owed to
Sinclair into the Company's common stock at $3.45 per share. As of March 22,
2000 Acrodyne has drawn $660,000 against this Debenture to fund operating needs.
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
Many computer programs have been written using two digits rather than four to
define the applicable year. Any computer programs with time-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 and 1999, 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 were easily
upgraded to be Year 2000 compliant. Since December 31, 1999, the Company has not
experienced any adverse effects associated with the Year 2000 issues.
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. In addition on May 24, 1999,
the Company filed a Form 8-K/A-2 notifying the SEC of the changes in
Registrant's Certifying Accountant.
18
<PAGE>
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, 1999
and 1998, 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, as amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activity, required
to be adopted by the Company on January 1, 2001. Management is currently
assessing the effect of this statement on the financial disclosures of the
Company, however management does not expect adoption of this statement to have a
material effect on the Company's consolidated financial position or results of
operations.
Item 7.
The consolidated financial statements required in response to this Item are
listed under Item I of Part IV of this report.
Item 8.
On May 24, 1999, Acrodyne's Board of Directors unanimously resolved to appoint
Arthur Andersen LLP as the Company's independent accountant for the fiscal year
ending December 31, 1999, and to discontinue the services of
PricewaterhouseCoopers LLP, which had served as the company's independent
accountant since May 1991. In connection with its audits for the past two fiscal
years ended December 31, 1998 and 1997, there were no disagreements with
PricewaterhouseCoopers, LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. In the past two
fiscal years, PricewaterhouseCoopers' report did not contain an adverse opinion,
or disclose an opinion and was not modified as to uncertainty, audit scope, or
accounting principals.
19
<PAGE>
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
With Section 16(a) of the Exchange Act.
The directors, officers and significant employees of the Company are as follows:
<TABLE>
<CAPTION>
Served as Director/
Name Age Position with Company Officer Since
- ---- --- --------------------- -------------
<S> <C> <C> <C>
Nat S. Ostroff 59 Chairman of the Board of Directors January 1999
A. Robert Mancuso 61 President and CEO of the Company and Acrodyne May 1991
Martin J. Hermann 60 Director of the Company May 1991
David S. Smith 49 Director of the Company January 1999
David B. Amy 47 Director and Secretary of the Company January 1999
Richard P. Flam 56 Director of the Company January 1999
Michael E. Anderson 44 Director of the Company March 1999
Ronald R. Lanchoney 53 CFO of Acrodyne August 1998
William H. Barclay 58 Vice President Manufacturing of Acrodyne June 1999
</TABLE>
NAT S. OSTROFF has served as Chairman of the Board of Directors since he
was elected at the special meeting of the stockholders of the Company, on
January 27, 1999. Mr. Ostroff is Vice President for New Technology since joining
Sinclair in January of 1996. Prior to joining Sinclair, he was the President and
CEO of Comark Communications, Inc., a manufacturer of UHF transmission
equipment. Mr. Ostroff founded Acrodyne Industries, Inc. in 1968 and served as
its first President and CEO. He is the Chairman of ALTV Engineering Advisory
Committee.
A. ROBERT MANCUSO has been President and Chief Executive Officer of the
Company since May 1991. Mr. Mancuso had also served as the Chairman of the Board
of Directors of the Company from October 1994 through January 1999. Mr. Mancuso
has also served as President and Chief Executive Officer of Acrodyne Industries,
Inc. a wholly-owned subsidiary of the Company, since its acquisition by the
Company in October 1994. From July 1991 to October 1994, he was also president
of R.M. Hudson Co., Inc. financial consultants for mergers and acquisitions.
From January 1987 to June 1991, he served as vice president of Reichhold
Chemicals, a specialty chemical company. From January 1987 to June 1991, he also
served as president of RBH Dispersions, another specialty chemical company. From
July 1986 to December 1989, he was senior vice president of Polychrome
Corporation, a manufacturer of film and printing plates for the ink industry.
Prior to 1986, Mr. Mancuso was employed by Union Carbide Corporation for 26
years.
MARTIN J. HERMANN has served as Secretary and General Counsel of the
Company from May 1991 through January 27, 1999. Mr. Hermann serves as Director,
a position he has held since May 1991. Mr. Hermann has been engaged in the
private practice of law since 1963.
20
<PAGE>
DAVID D. SMITH has served as Director since he was elected at the special
meeting of stockholders of the Company held on January 27, 1999. Mr. Smith has
served as President, Chief Executive Officer and Chairman of the Board of
Sinclair since September 1990. From 1984 to 1990, he served as General Manager
of WPTT in Pittsburgh, Pennsylvania. In 1980, Mr. Smith founded Comark
Television, Inc. From 1978 to 1986, Mr. Smith co-founded and served as an
officer and director of Comark Communications, Inc.
DAVID B. AMY has served as Director since he was elected at the special
meeting of stockholders of the Company held on January 27, 1999. Mr. Amy has
served as Chief Financial Officer of Sinclair since October 1994. In addition,
he serves as Secretary of Sinclair Communications, Inc., a Sinclair subsidiary,
which owns and operates Sinclair's broadcasting operations. From 1986 until
October 1994, Mr. Amy served as Sinclair's Corporate Controller. Mr. Amy
originally joined Sinclair in 1986, as a business manager for WPTT in
Pittsburgh, Pennsylvania.
RICHARD P. FLAM has served as Director since he was elected at the special
meeting of stockholders of the Company held on January 27, 1999. Mr. Flam is a
Consultant of RF, Microwave and Antenna technology to companies in the
Electronics Manufacturing sector. From 1980 to 1996 he was President and CEO of
Flam & Russell, Inc., a producer of sophisticated RF Equipment and Systems for
military applications and a leader in test systems for Stealth Technology.
Previously, he held management and engineering positions with Hazeltine
Corporation and American Electronic Laboratories, Inc. Mr. Flam is a Fellow of
the Institute of Electrical and Electronic Engineers and holds B.S. and M.S.
degrees in Physics from Rensselaer Polytechnic institute and Rutgers University,
respectively
MICHAEL E. ANDERSON has served as Director since March 22, 1999. Mr.
Anderson is a Managing Director in the Media Group at Merrill Lynch with a
primary focus on the Broadcasting and Cable industries. Prior to joining Merrill
Lynch in June 1999, Mr. Anderson was a member of the Media/Telecom Group at
Salomon Smith Barney having joined the firm in June 1992. Mr. Anderson was
formerly a Senior Vice President at Kidder, Peabody & Co. Incorporated, having
served from 1983 to 1992 in various capacities, including assignments in the
Media and Communications and Advisory group, as well as two years in their
London office. From 1977 to 1981, Mr. Anderson served as an officer in the U.S.
Navy. He received his M.B.A. from Columbia University and a B.S. from Cornell
University.
Directors will serve in such capacity until the next annual meeting of
stockholders or until their successors have been duly elected and qualified.
Executive officers are elected by the Board of Directors on an annual basis and
serve at the discretion of the Board or pursuant to an employment agreement.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACTS
Section 16(a) of the Securities Exchange Act of 1934 requires the officers,
Directors and persons who own more than 10% of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and the NASD. Officers,
Directors and greater than ten-percent shareholders are required by Securities
and Exchange Commission regulations to furnish the Company with copies of all
such reports they file.
Based solely on a review of the copies of such reports furnished to the
Company, or written representations that no Form 5 was required, the Company
believes that all Section 16(a) filing requirements applicable to its officers,
Directors and greater than ten-percent beneficial owners were complied with
through December 31, 1999 and 1998.
21
<PAGE>
Item 10. Executive Compensation
EXECUTIVE COMPENSATION The following table summarizes the compensation earned by
the Company's executive officers, for services provided during fiscal years
1999-1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------- --------------
Securities
Name and Fiscal Other Underlying
Principal Position Year Salary Compensation Options (#)
- ------------------ ---- ------ ------------ -----------
<S> <C> <C> <C> <C>
A. Robert Mancuso 1999 $175,000 $900/month 175,000
President and CEO 1998 $150,000 auto allowance None
Nat S. Ostroff 1999 $150,000 300,000
Chairman of the Board 1998 None None
Ronald R. Lanchoney 1999 $90,000 None
CFO 1998 90,000 50,000
William H. Barclay 1999 125,000 55,000
Vice-President Manufacturing 1998 None None
</TABLE>
Mr. Lanchoney was hired as Chief Financial Officer on March 2, 1998 at an annual
salary of $80,000. During the one month period prior to that date, Mr. Lanchoney
served as consulting CFO to the Company, providing financial consulting services
to the Company on a part-time basis. On August 31, 1998, Mr. Lanchoney began
receiving compensation of $90,000. On March 17, 2000, Mr. Lanchoney resigned his
position as CFO in order to pursue other interests.
On January 27, 1999 Mr. Nat Ostroff was elected as Chairman of the Board of
Directors and Chairman of the Management committee of the Company and was
granted compensation in the amount of $150,000 annually.
On June 1, 1999, William Barclay entered into an employment agreement with
Acrodyne Industries, Inc. for a term of two years and was granted compensation
in the amount of $125,000 annually.
Options/SAR Grants in Last Fiscal Year
The Company has three stock option plans approved by the Board of Directors and
the Company's stockholders: the 1993 Stock Option Plan , the 1997 Stock Option
Plan and the newly adopted 1999 Long-Term Incentive Plan.
The purpose of the Stock Plans are to advance the interests of the
Corporation by encouraging and enabling the acquisition of a larger personal
propriety interest in the Corporation by employees and directors of, and
consultants to, the Corporation and its Subsidiaries upon whose judgments and
keen interest the Corporation is largely dependent for the successful conduct of
its operations and by providing such employees, directors and consultants with
incentives to put forth maximum efforts for the success of the Corporation's
business. It is also expected that such incentives will enable the Corporation
and its Subsidiaries to attract desirable personnel.
22
<PAGE>
1993 Stock Option Plan. Under this plan, options for 250,000 were granted
to executive employees in 1993 and 1994, all of which are exercisable.
1997 Stock Option Plan. Under this plan, options for 650,000 shares of
Common Stock were granted. The exercise price of 450,000 was $4.50 per share. On
October 16, 1998, the Board of Directors repriced the exercise price of these
options to $3.00 per share. In January 1999, Mr. Mancuso received 175,000 stock
options from this plan, at an exercise price of $3.88, as part of his 1999
Employment Agreement. In December of 1998, the Company granted 25,000 stock
options from this plan at an exercise price of $3.50, to a consultant, Mesa
Capital, for services. Such options were valued at $65,000 at the time of
issuance and were recorded as an expense for fiscal year ending December 31,
1998.
Both plans were amended on November 19, 1998 to make options exercisable
for 10 years from the date of grant, unless prior to the expiration of such
options, the option holder ceases to be employed by Acrodyne due to Acrodyne's
termination for cause, the option holder's voluntary termination, or the option
holder's death or permanent and total disability. In such events, the option
remains exercisable for a period not extending beyond three months after the
date of cessation of employment.
1999 Long-Term Incentive Plan In March 1999, the Company adopted the 1999
Long-Term Incentive Plan under which awards may be granted in the form of stock,
restricted stock, stock options, stock appreciation rights or cash. Under the
1999 Plan, the Company may make stock-based awards of up to an aggregate of
2,000,000 shares of Common Stock. On August 23, 1999 the Board granted 370,000
options to employees and Board members. The options have an exercise price of
$2.34 per share.
OPTION/SAR GRANTS IN LAST FISCAL YEAR 1999
(Individual Grants)
<TABLE>
<CAPTION>
Name Percent of
Number of Total Options
Securities Granted to Exercise
Underlying Employees Price Expiration
Options In 1999 per Share Date
------- ------- --------- ----
<S> <C> <C> <C> <C>
A. Robert Mancuso 175,000 32.15 % $3.88 January 1, 2009
Nat Ostroff 300,000 55.05 % $2.34 August 23, 2009
William Barclay 55,000 10.10 % $2.34 August 23, 2009
Martin Hermann 5,000 .90 % $2.34 August 23, 2009
Richard Flam 5,000 .90 % $2.34 August 23, 2009
Michael Andersen 5,000 .90 % $2.34 August 23, 2009
Total grants in fiscal 1999 545,000 100 %
</TABLE>
In January 1999, Mr. Mancuso received 175,000 stock options from the 1997 Stock
Option Plan, at an exercise price of $3.88, as part of his 1999 Employment
Agreement, 58,334 of these options became exercisable on January 4, 1999 and
January 4, 2000. The remaining 58,334 options will become exercisable on January
4, 2001.
23
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options In-the-Money Options
Number Shares at Year End at Year End
of Held Acquired Exercisable (E)/ Exercisable (E)/
Name Options on Exercise Unexercisable (U) Unexercisable
- ---- ------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
A. Robert Mancuso 612,500 - 0 - E 554,166 E $84,400
U 58,334 U $0
Nat Ostroff 300,000 - 0 - E 300,000 E $123,000
U None U $0
Ronald R. Lanchoney 50,000 - 0 - E 50,000 E $0
U None U $0
William H. Barclay 55,000 - 0 - E 27,500 E 11,275
U 27,500 U 11,275
Directors 15,000 - 0 - E 15,000 E 6,150
U None U $0
</TABLE>
Employment Agreements
Mancuso Employment Agreement
As a condition to the Sinclair investment, the Company entered into an
employment agreement with Mr. Mancuso (the "Employment Agreement"). The
Employment Agreement has an initial three year term, and commences on January 4,
1999 and automatically renews for successive two year terms. Mr. Mancuso is
entitled to a minimum base salary of $175,000 per year and an annual bonus, not
to exceed his base salary, equal to 5% of Acrodyne's earnings before interest
and taxes for each fiscal year, excluding costs for research and development, as
determined from Acrodyne's audited statement of operations. In addition, Mr.
Mancuso was given options to purchase up to 175,000 shares of Common Stock under
the 1997 stock option plan Mr. Mancuso also has an automobile allowance of
$900.00 per month. Mr. Mancuso's employment agreement includes a non-competition
obligation that extends for two years following the expiration of the agreement
or the earlier termination of his employment. Mr. Mancuso is entitled, upon his
termination without cause, to a severance payment in an amount equal to his base
salary for the then-remaining term of his employment agreement plus one
additional year of base salary.
Barclay Employment Agreement
The Company entered into an employment agreement with Mr. Barclay (the
"Employment Agreement"). The Employment Agreement has an initial two year term
commencing on June 1, 1999. The agreement may be renewed and or renegotiated for
an additional two (2) year terms or more after the Term subject to the mutual
approval of Employee and Company management. Mr. Barclay is entitled to an
annual base salary of $125,000 during the term. The base salary may be increased
from time to time by the Company at its discretion.
24
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the beneficial
ownership of shares of Common Stock, as of December 31, 1999, and 8% Preferred
Stock, as of the same date, by (i) each person known by the Company to be the
owner of more than 5% of the outstanding shares of Common Stock or 8% Preferred
Stock, (ii) each director, (iii) each director nominee, (iv) the executive
officers and (v) all directors and officers as a group:
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Percent
Name & Address Amount & Nature of of Voting
Title of Class of Beneficial Owner (a) Beneficial Ownership Stock
- -------------- ----------------------- -------------------- --------
<S> <C> <C>
Common Stock Sinclair 3,676,666 shares (b) 44.63%
Common Stock A. Robert Mancuso 609,166 shares (c) 8.97%
Common Stock Martin J. Hermann 68,000 shares (d) 0.90%
Common Stock Scorpion 500,000 shares (e) 7.36%
Common Stock Ronald R. Lanchoney 50,000 shares (f) 0.35%
Common Stock Nat Ostroff 300,000 shares (g) 4.42%
Common Stock William H .Barclay 27,500 shares (h) 0.41%
All officers and directors
as a group (8 persons) 1,054,666 shares (i) 15.53%
Preferred Stock
assuming conversion
into Common Stock
-------------------
8% Preferred Stock Furst Associates 85,116 shares (j) 1.26%
8% Preferred Stock Eagle Partners 45,672 shares (j) 0.68%
8% Preferred Stock FM Partners 35,292 shares (j) 0.52%
8% Preferred Stock Dynamic Value Partners 13,840 shares (j) 0.21%
<FN>
(a) The address of Sinclair Broadcast Group, Inc. is 10706 Beaver Dam Road,
Cockeysville, Maryland 21030 The address of Mr. Mancuso, Mr. Lanchoney, Mr.
Ostroff and Mr. Barclay is c/o the Company, 516 Township Line Road, Blue
Bell, Pennsylvania 19422. The address of Mr. Hermann is 725 Glen Cove
Avenue, Glen Head, New York 11545. The address of Furst Associates, Eagle
Partners and FM Partners is Suite 105, 621 E. Germantown Pike, Plymouth
Valley, Pennsylvania 19401. The address of Dynamic Value Partners is 1959
Fourth Street, South Naples, Florida 34102.
(b) Includes 1,431,333 shares of Common Stock issued to Sinclair under the
subscription agreement, includes 800,000 shares of Common Stock which
Sinclair purchased from the Scorpion Investors and 1,333,333 shares of
Common Stock issuable upon the exercise of warrants exercisable immediately
after the closing of the Sinclair Investment on January 27, 1999, includes
112,00 shares issued in accordance with the Lease and Loan Agreement.
(c) Includes 237,500 shares of Common Stock issuable upon the exercise of stock
options granted to Mr. Mancuso consisting of (i) 137,500 shares of Common
Stock issuable pursuant to the 1993 Stock Option Plan, of which 100,000 and
37,500 options vested on October 14, 1995 and June 9, 1996, respectively
and (ii) 100,000 shares of Common Stock issuable upon the exercise of
options issued pursuant to the terms of Mr. Mancuso's 1994 employment
agreement, of which 33,333 options vested on January 1, 1995, 1996 and
1997. Includes 200,000 shares of Common Stock granted under the 1997 Stock
Option Plan of which 200,000 vested on June 30, 1997, 1998 and 1999.
Includes 175,000 shares of Common Stock granted according to the 1999
Employment Agreement under the 1997 Stock Option Plan of which 116,666
vested on January 4, 1999 and January 4, 2000
25
<PAGE>
(d) Includes 20,000 shares of Common Stock issuable upon the exercise of vested
options granted under Acrodyne's 1997 Stock Option Plan.. Includes 5,000
shares of Common Stock upon the exercise of vested options under the 1999
Long Term Incentive Plan.
(e) Includes 500,000 shares of Common Stock issuable upon the exercise of
warrants granted under a Stock Purchase Plan.
(f) Includes 50,000 shares of Common Stock issuable upon the exercise of vested
options granted under the 1997 Stock Option Plan.
(g) Includes 300,000 shares of Common Stock issuable upon the exercise of
options granted under the 1999 Long Term Incentive Plan.
(h) Includes 27,500 shares of Common Stock issuable upon the exercise of vest
on options granted under the 1999 Long Term Incentive Plan.
(i) Reflects beneficial ownership of all directors and officers and includes
1,054,666 shares of Common Stock issuable upon the exercise of options.
None of the officers or directors of Acrodyne beneficially owns any shares
of Preferred Stock.
(j) Preferred Stockholders own in aggregate 6,500 share of Preferred Stock at a
conversion rate at which one share of Preferred Stock equals 27.68 shares
of Common Stock. Furst Associates owns 3,075 shares of Preferred Stock or
47.31% of the issued and outstanding Preferred Stock. Eagle Partners owns
1,650 shares of Preferred Stock or 25.38% of the issued and outstanding
Preferred Stock. FM Partners owns 1,275 shares of Preferred Stock or 19.62%
of the issued and outstanding Preferred Stock and Dynamic Value Partners
owns 500 shares of Preferred Stock or 7.69% of the issued and outstanding
Preferred Stock. Since the Preferred class does not vote as an independent
class, this table assumes the conversion of all Preferred Stock to Common
Stock to accurately reflect beneficial ownership.
</FN>
</TABLE>
Certain Relationships and Related Transactions
On January 27, 1999 Sinclair Broadcast Group acquired a significant equity
interest in Acrodyne. 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 32.85%
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 70.59% of all
outstanding voting stock on a fully diluted basis.
Acrodyne and the Company established a $2,500,000 credit facility with a bank
for working capital purposes, described in Liquidity and Capital Resources. The
bank required that Sinclair guarantee the Company's obligations. Interest is
payable on a formula basis and in the form of the Company's common stock. The
Company has compensated Sinclair with $200,000 payable in the form of the
Company's common stock for this guarantee.
26
<PAGE>
During November 1999, the Company entered into a sub-lease agreement with
Sinclair for its' new manufacturing facility. Under the terms of this agreement,
the Company has compensated Sinclair on the lease execution date, $70,000
payable in the form of the Company's common stock and also on each lease
anniversary date $70,000 payable in the form of the Company's common stock.
During March 2000, the Company entered into a license agreement with Sinclair
for the exclusive right to manufacture and sell certain Sinclair designed analog
and digital transmitters lines. Under the terms of this agreement, the Company
will pay to Sinclair an annual royalty of $300,000 for 5 years. Following the
fifth year of the License agreement, the Company shall pay to Sinclair an annual
royalty equal to 1.0% of revenues realized by the Company attributable to the
License Agreement.
During March 2000, the Company entered into a subordinated debenture agreement
with Sinclair. Under the terms of the Debenture, the Company may borrow up to
$2,000,000 at an interest rate of 10.5%. Further, Sinclair has the right, at any
time, to convert all, but not less than all, of the principal owed to Sinclair
into the Company's common stock at $3.45 per share.
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. toAcrodyne
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-
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.
27
<PAGE>
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
10.20**** Form of PNC Bank Loan Agreement
10.21**** Form of Guaranty and Lease Compensation Agreement
10.22**** Form of Barclay Employment Agreement
10.23**** Form of Debenture Agreement with Sinclair
21.0*** Subsidiaries of the Registrant
23.1**** Consent of Independent Accountants
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.
**** 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,
1999.
(b) Form 8-K filings: The Registrant filed a Form 8-K on November 23, 1998.
28
<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/Nathaniel Ostroff
- -------------------------------------------------------------------
Nathaniel Ostroff, Chairman of the Board of Directors
Date 5-04-2000
In accordance with the Exchange Act, this report has been signed below
by the following persons on the 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 5-04-2000
By /s/Martin J. Hermann
- --------------------------------------------------------------------------------
Martin J. Hermann, Director
Date 5-04-2000
By /s/David Smith
- --------------------------------------------------------------------------------
David Smith, Director
Date 5-04-2000
By /s/David Amy
- --------------------------------------------------------------------------------
David Amy, Director
Date 5-04-2000
By /s/Michael E. Anderson
- --------------------------------------------------------------------------------
Michael E. Anderson, Director
Date 5-04-2000
By /s/Richard P. Flam
- --------------------------------------------------------------------------------
Richard P. Flam, Director
Date 5-04-2000
By /s/Dr. Shamir A. Ally
- --------------------------------------------------------------------------------
Dr. Shamir A. Ally, Corporate Controller of Acrodyne
Date 5-04-2000
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Acrodyne Communications, Inc.:
We have audited the accompanying consolidated balance sheet of Acrodyne
Communications, Inc. and subsidiary as of December 31, 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Acrodyne Communications, Inc.
and subsidiary as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Philadelphia, Pa.,
March 28, 2000
30
<PAGE>
Report of Independent Accountants
To the board of Directors and Shareholders
Acrodyne Communications, Inc.:
In our opinion, the accompanying consolidated balance sheet 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 the results of
their operations and their cash flows for year then ended in conformity with
accounting principles generally accepted in the United States. 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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, 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 audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, PA
March 31, 1999
31
<PAGE>
ACRODYNE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------------
1999 1998
------------ ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 664,950 $ 983,695
Short-term investments 200,000 --
Accounts receivable, net of allowance for doubtful accounts
of $60,000 and $62,565 at December 31, 1999 and 1998 1,335,158 1,497,197
Inventories 6,401,277 4,325,445
Prepaid assets and deposits 412,108 170,958
Other assets 220,000 --
------------ ------------
Total current assets 9,233,493 6,977,295
PROPERTY, PLANT AND EQUIPMENT, net 570,182 504,469
NON-COMPETE AGREEMENT, net 360,822 435,822
GOODWILL, net 3,899,211 4,055,707
------------ ------------
TOTAL ASSETS $ 14,063,708 $ 11,973,293
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,801,883 $ 2,119,604
Accrued expenses 516,405 386,363
Customer advances 984,268 161,418
Line of credit 1,613,404 1,275,000
Current portion capital lease obligations 69,947 75,630
Other current liabilities 16,500 --
------------ ------------
Total current liabilities 5,002,407 4,018,015
CAPITAL LEASE OBLIGATIONS 12,021 69,824
NON-COMPETE LIABILITY (Note 6) 845,990 712,168
------------ ------------
Total liabilities 5,860,418 4,800,007
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Convertible, redeemable, preferred stock, par value $1.00;
1,000,000 shares authorized, 6,500 and 333,030 shares
outstanding in 1999 and 1998, respectively 6,500 333,030
Common stock, par value, $.01; 30,000,000 shares authorized,
6,794,161 and 5,331,670 shares issued and outstanding in
1999 and 1998, respectively 67,942 53,317
Additional paid-in capital 20,750,148 17,720,449
Accumulated deficit (12,621,300) (10,933,510)
------------ ------------
Total shareholders' equity 8,203,290 7,173,286
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,063,708 $ 11,973,293
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
ACRODYNE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
December 31
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
NET SALES $ 12,705,914 $ 11,726,719
COST OF SALES 9,573,561 9,602,301
------------ ------------
Gross profit 3,132,353 2,124,418
------------ ------------
OPERATING EXPENSES:
Engineering, research and development 920,047 3,171,359
Selling 1,387,737 1,998,915
Administration 1,983,423 2,082,741
Amortization of intangible assets 231,496 231,496
Charge for non-compete liability adjustment 145,226 --
------------ ------------
Total operating expenses 4,667,929 7,484,511
------------ ------------
Operating loss (1,535,576) (5,360,093)
OTHER INCOME (EXPENSE):
Interest expense, net (154,713) (72,790)
Other income 2,499 609
------------ ------------
Loss before income taxes (1,687,790) (5,432,274)
INCOME TAXES -- --
------------ ------------
NET LOSS $ (1,687,790) $ (5,432,274)
============ ============
DIVIDEND ON 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK (89,361) (81,975)
------------ ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (1,777,151) $ (5,514,249)
============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.27) $ (1.04)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED 6,659,304 5,321,188
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
ACRODYNE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------------------------------------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 6,500 $ 6,500 5,314,270 $ 53,143
Issuance of shares in connection
with warrant exercise -- -- 17,400 174
Sales of Series A preferred shares 326,530 326,530 -- --
Issuance of options for services -- -- -- --
Dividends on preferred stock -- -- -- --
Net loss -- -- -- --
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1998 333,030 333,030 5,331,670 53,317
Redemption of Series A preferred
shares (326,530) (326,530) -- --
Issuance of stock and warrants -- -- 1,431,333 14,313
Exercise of warrants -- -- 31,158 312
Dividends on preferred stock -- -- -- --
Net loss -- -- -- --
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1999 6,500 $ 6,500 6,794,161 $ 67,942
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Additional Total
Paid-In Accumulated Shareholders'
Capital Deficit Equity
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 $ 17,055,970 $ (5,501,236) $ 11,614,377
Issuance of shares in connection
with warrant exercise 35,316 -- 35,490
Sales of Series A preferred shares 646,138 -- 972,668
Issuance of options for services 65,000 -- 65,000
Dividends on preferred stock (81,975) -- (81,975)
Net loss -- (5,432,274) (5,432,274)
------------ ------------ ------------
BALANCE AT DECEMBER 31, 1998 17,720,449 (10,933,510) 7,173,286
Redemption of Series A preferred
shares (672,001) -- (998,531)
Issuance of stock and warrants 3,791,061 -- 3,805,374
Exercise of warrants -- -- 312
Dividends on preferred stock (89,361) -- (89,361)
Net loss -- (1,687,790) (1,687,790)
------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 $ 20,750,148 $(12,621,300) $ 8,203,290
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
ACRODYNE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(1,687,790) $(5,432,274)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 371,763 453,514
Other non-cash expenses (see Note 9) 145,226 65,000
Changes in assets and liabilities--
Accounts receivable 162,039 (554,014)
Inventories (2,075,832) 946,004
Prepaid expenses and deposits (461,150) (65,891)
Note receivable -- 85,436
Accounts payable (317,721) 968,232
Accrued expenses and deferred revenue 146,542 147,567
Customer advances 822,850 (185,960)
----------- -----------
Net cash used in operating activities (2,894,073) (3,572,386)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (205,980) (22,538)
Purchase of short-term investment (200,000) --
----------- -----------
Net cash used in investing activities (405,980) (22,538)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 3,805,374 --
Proceeds from issuance of preferred stock -- 972,668
Redemption of Series A preferred stock (998,531) --
Proceeds from exercise of warrants 312 35,490
Payments on promissory notes -- (540,000)
Borrowings under line of credit 338,404 1,275,000
Capital lease repayments (63,486) (83,379)
Repayments on non-compete liability (11,404) (10,479)
Cash dividends to stockholders (89,361) (81,975)
----------- -----------
Net cash provided by financing activities 2,981,308 1,567,325
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (318,745) (2,027,599)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 983,695 3,011,294
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 664,950 $ 983,695
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 221,209 $ 170,302
=========== ===========
Property and equipment acquired through capital leases $ 20,350 $ 37,555
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
ACRODYNE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. BACKGROUND:
Organization
Acrodyne Holdings, Inc. (the "Company"), a Delaware corporation, was formed in
May 1991. 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. ("Acrodyne Industries"), 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).
Operations and Business Risk
Due to the nature of the Company's business, it is subject to various risks
including, but not limited to, technological and market acceptance of its
product, capital availability, dependence on management and other risks
associated with companies in similar stages of development.
Since the acquisition of Acrodyne Industries in 1994, the Company has incurred
significant losses and, as of December 31, 1999, has an accumulated deficit of
$12,621,300. In addition, the Company has incurred operating cash flow deficits
of $2,894,073 and $3,572,386 in 1999 and 1998, respectively. These losses have
been funded primarily with proceeds from the sale of equity securities,
including $3,805,374 from common stock and warrants sold to Sinclair Broadcast
Group, Inc. ("Sinclair") in 1999. As of December 31, 1999, Sinclair owns 32.8%
of the Company's common stock and has warrants to purchase 8,719,225 additional
shares (see Notes 9 and 11). Sinclair has provided a guarantee of the Company's
$2,500,000 credit facility. In March 2000, Sinclair agreed to provide additional
funds to the Company of up to $2,000,000 under the terms of a subordinated
debenture. Sinclair has committed to provide the necessary level of financial
support to the Company to enable it to pay its debts as they become due and fund
operating and investing needs through January 1, 2001. Achieving profitability
depends upon: (1) market acceptance of the Company's product and (2) the
Company's ability to raise the necessary capital to fund operating needs and
finance the planned investment. There can be no assurance that the Company will
be able to obtain the necessary capital to fund operating and investment needs,
or to generate sufficient revenues to achieve or sustain profitability in the
future.
36
<PAGE>
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. 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.
Short-term Investments
Short-term investments of $200,000 at December 31, 1999 is comprised of a
certificate of deposit with an original maturity of six months.
Inventory
Inventory is valued at the lower of cost or market on a first-in, first-out
basis.
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 (primarily 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.
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
37
<PAGE>
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 domestic and international television stations,
broadcasters, government entities, not-for-profit organizations and educational
institutions. International sales approximated $2,671,475 and $3,403,339 for the
years ended December 31, 1999 and 1998, respectively. One customer (see Note 11)
represented approximately 25% of sales in 1999. Sales made to this customer
totaled $3,209,565 and $0 during 1999 and 1998, respectively.
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 consolidated statement of
operations. Research and development costs of $37,613 and $3,171,359 were
charged to expense during the years ended December 31, 1999 and 1998,
respectively.
Income Taxes
The Company records deferred income taxes for the estimated future tax effects
of temporary differences between financial statement carrying amounts and the
tax bases of existing assets and liabilities. A valuation allowance is recorded
against deferred tax assets when it is concluded that it is more likely than not
that the related tax benefit will not be realized.
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. The Company's
financial instruments include accounts receivable and debt. The fair value of
38
<PAGE>
these financial instruments approximate their recorded book value as of December
31, 1999 and 1998.
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 consolidated statement of operations. No impairment
losses were recorded during 1999 or 1998.
New Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 130 and No. 131, which
were required to be adopted in 1998, had no effect on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activity." SFAS No. 133, as
amended by SFAS No. 137, is required to be adopted by the Company on January 1,
2001. Management is currently assessing the effect of this pronouncement;
however, management does not expect adoption of this statement to have a
material effect on the Company's consolidated financial position or results of
operations.
3. EARNINGS PER SHARE:
Basic earnings per share are computed by dividing the net loss applicable to
common shareholders by the weighted average number of shares outstanding during
the period. 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.
Due to the Company's net loss in 1999 and 1998, the incremental shares issuable
in connection with convertible preferred stock, stock options and warrants are
anti-dilutive and, accordingly, are not considered in the calculation (see Note
9).
39
<PAGE>
4. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $ 2,508,061 $ 2,779,646
Work-in-process 2,536,386 576,973
Finished goods 1,743,830 1,324,826
----------- -----------
6,788,277 4,681,445
Reserve for excess and obsolete inventory (387,000) (356,000)
----------- -----------
$ 6,401,277 $ 4,325,445
=========== ===========
</TABLE>
The reserve for excess and obsolete inventory reduces inventory to its estimated
net realizable value.
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
December 31
---------------------------------
1999 1998
----------- -----------
Test equipment $ 674,417 $ 585,678
Machinery and equipment 63,522 59,564
Office equipment 320,212 272,993
Automobile 11,043 11,043
Leasehold improvements 76,205 76,205
Purchased computer software 98,666 29,342
----------- -----------
1,244,065 1,034,825
Accumulated depreciation (673,883) (530,356)
----------- -----------
$ 570,182 $ 504,469
=========== ===========
Depreciation expense amounted to $140,267 and $222,019 for the years ended
December 31, 1999 and 1998, respectively.
Property and equipment at December 31, 1999 and 1998 includes assets (primarily
test equipment) under capital leases of $226,787 and $235,093, net of
accumulated depreciation of $76,498 and $82,883, respectively.
40
<PAGE>
6. NON-COMPETE AGREEMENT:
In connection with the acquisition of Acrodyne Industries, the Company entered
into a non-compete agreement with the selling shareholder. In consideration for
this agreement not to compete, the Company is obligated to make annual payments
to the selling shareholder equal to $65,000 and pay for certain benefits for the
remainder of his life. The Company recorded the actuarial present value of the
estimated payments of $750,000 related to this agreement as an asset and
established a corresponding liability. During the years ended December 31, 1999
and 1998, the Company recorded interest expense of $63,661 and $64,231,
respectively, relating to this liability.
The intangible asset associated 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, 1999 and 1998. Accumulated amortization totaled
$389,178 and $314,178 at December 31, 1999 and 1998, respectively.
In 1999, the Company recorded a charge of $145,226 in the accompanying statement
of operations to adjust the liability to its estimated actuarial net present
value. The significant actuarial assumptions used to compute this liability at
December 31, 1999 include:
Discount rate - 8%
Mortality - 1983 Group Mortality Table
7. GOODWILL:
In connection with the 1994 acquisition of Acrodyne Industries (see Note 1), the
Company recorded goodwill totaling $4,711,274 representing the excess of
purchase price over the fair value of net assets acquired. Goodwill is being
amortized on a straight-line basis over 30 years. Amortization charged to
expense during the years ended December 31, 1999 and 1998 amounted to $156,495
in each year. Accumulated amortization at December 31, 1999 and 1998 totaled
$812,062 and $655,567, respectively.
8. DEBT:
Capital lease obligations and lines of credit consist of the following:
December 31
---------------------------------
1999 1998
----------- -----------
Line of credit $ 1,613,404 $ 1,275,000
Capital lease obligations 81,968 145,454
----------- -----------
1,695,372 1,420,454
Current portion (1,683,351) (75,630)
----------- -----------
$ 12,021 $ 1,344,824
=========== ===========
41
<PAGE>
Principal payments on debt over the next five years are as follows:
2000 $ 1,683,351
2001 12,021
2002 --
2003 --
2004 --
Thereafter --
-------------
$ 1,695,372
=============
In September 1999, the Company entered into a new credit facility (the "Credit
Facility") with PNC Bank, National Association which provides for a $2,500,000
line of credit. The Credit Facility bears interest at LIBOR plus 200 basis
points and replaced a prior $2,000,000 line of credit facility maintained with
another bank. The Credit Facility is collateralized by all personal property of
the Company and is guaranteed by Sinclair. The Credit Facility expires on July
31, 2000. The weighted-average interest rate and total interest expense related
to the lines of credit during 1999 were 6.4% and $78,610, respectively. Average
borrowings related to the line of credit during 1999 were $1,221,000. Borrowing
during 1999 ranged from $0 to $1,700,000.
In connection with the Credit Facility, the Company is obligated to maintain
minimum tangible net worth, as defined, of $4,500,000. As of December 31, 1999,
the Company was not in compliance with the terms of the Credit Facility with
respect to minimum tangible net worth. The Company has obtained a waiver for the
1999 event of default.
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.
42
<PAGE>
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. In connection with this private
placement, 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. On January 27, 1999, the Series A
Preferred Stock was redeemed by the Company for $998,531.
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 $1,981,800. The warrants issued in connection with
this transaction carry an exercise price of $3.00 per common share and expire on
November 7, 2002.
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 in a private placement
for aggregate proceeds of $4,300,000. The warrants carry exercise prices ranging
from $3.00 to $6.00 per share and expire in 2 to 7 years. As a condition of the
transaction, Sinclair has the right to appoint three of the Company's five
directors. Transaction costs of approximately $495,000 were incurred in
connection with this transaction. The Company utilized $998,531 of the proceeds
from this transaction to redeem the Series A Preferred Stock as discussed above.
Warrants and Options
In 1998, warrants to purchase 13,000 shares of common stock were exercised 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.
43
<PAGE>
The following warrants and options (excluding employee stock options) were
outstanding at December 31, 1999 and 1998:
Exercise
1999 1998 Price Expiration Date
-- 16,000 $6.30 June 30, 1999
-- 50,000 3.00 October 24, 1999
-- 131,400 2.73 October 24, 1999
-- 140,000 4.50 March 31, 1999
-- 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 25,000 3.50 June 5, 2008
525,000 525,000 3.00 September 4, 2003
2,000,000 -- 3.00 January 26, 2006
714,225 -- 3.00 January 26, 2006
6,000,000 -- 3.00 - 6.00 January 26, 2006
------------ ------------
9,964,225 1,812,400
============ ============
Employee Stock Options
In December 1993, the Company adopted the 1993 Stock Option Plan (the "1993
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 April 1997, the Company adopted the 1997 Stock Option Plan (the "1997 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 of Directors
repriced the exercise price of these options to $3.00 per share.
In January 1999, the Board granted 175,000 options under the 1997 Plan to an
employee. The options had an exercise price of $3.88 per share. The fair market
value of the Company's stock on the date of grant was $2.81. No compensation
related to the option grant was recorded in 1999.
In March 1999, the Company adopted the 1999 Long-Term Incentive Plan (the "1999
Plan") under which awards may be granted in the form of stock, restricted stock,
stock options, stock appreciation rights or cash. Under the 1999 Plan, the
Company may make stock-based awards of up to an aggregate of 2,000,000 shares of
common stock. In August 1999, the Board granted 370,000 options to employees and
Board members under the 1999 Plan. The majority of these options vested
immediately. The options had an exercise price of $2.34 per share. The fair
market value of the Company's stock on the date of grant was $2.31. No
compensation related to these option grants was recorded in 1999.
44
<PAGE>
The Company applies Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for its option plans. Had compensation cost for
the Company stock-based plans been determined based on the fair value at the
grant date for awards consistent with the method of SFAS No. 123, the Company's
net loss and loss per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
December 31
--------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Net loss:
As reported $ (1,687,790) $ (5,432,274)
Pro forma (2,332,784) (6,094,774)
Net loss per common share (basic and diluted):
As reported $ (0.27) $ (1.04)
Pro forma (0.35) (1.16)
</TABLE>
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 five-year option life.
A summary of the awards under the Company's stock option plan during the years
ended December 31, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at
beginning of year- 800,000 $ 3.16 350,000 $ 3.36
Granted 545,000 $ 2.83 900,000 $ 3.75
Exercised -- --
Rescinded/forfeited -- (450,000) $ 4.50
------------ ------------
Outstanding at end of year 1,345,000 $ 3.03 800,000 $ 3.16
============ ============
Options exercisable at year-end 900,833 600,000
Weighted average fair value of
options granted during the year $ 2.31 $ 2.00
</TABLE>
45
<PAGE>
10. INCOME TAXES:
The provision for income taxes differs from the amount computed using the
federal income tax rate as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------
1999 1998
<S> <C> <C>
Income tax (benefit) at statutory federal rates $ (590,727) $ (1,901,296)
State tax (benefit), net of federal tax benefit (84,390) (271,614)
Goodwill amortization 62,598 62,598
Non-deductible compensation -- 26,000
Other permanent differences 11,600 11,601
Increase in valuation allowance 600,919 2,072,711
------------- -------------
$ -- $ --
============= =============
</TABLE>
The components of the net deferred income tax asset (liability) are as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------
1999 1998
<S> <C> <C>
Tax loss carryforwards (book basis) $ 4,831,213 $ 4,156,097
Deferred tax assets:
Uniform tax cost capitalization 478,615 319,749
Non-compete agreement 257,862 211,576
Inventory reserves 154,800 142,400
Book in excess of tax depreciation 6,460 --
Other deferred tax assets 88,380 85,407
-------------- -------------
5,817,330 4,915,229
Deferred tax liability in excess of depreciation -- (38,218)
-------------- -------------
Net deferred tax assets 5,817,330 4,877,011
Valuation allowance (5,817,330) (4,877,011)
-------------- -------------
$ -- $ --
============== =============
</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.
The Company's tax loss carryforwards, which begin to expire in 2011, totaled
approximately $10,288,000 and $8,600,000 at December 31, 1999 and 1998,
respectively.
46
<PAGE>
11. RELATED PARTY:
As discussed in Note 9, on January 27, 1999, Sinclair invested $4,300,000 in the
Company in return for 1,431,333 shares of the Company'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. Sinclair also acquired an
additional 800,000 shares of common stock previously held by outside investors.
As of December 31, 1999, Sinclair holds an aggregate of 2,231,333 shares of the
Company's common stock, representing approximately 32.8% of issued common stock
assuming no warrants are exercised.
During November 1999, the Company entered into a guarantee and lease
compensation agreement (the "Agreement") with Sinclair, intended to be effective
September 16, 1999. In connection with the $2,500,000 Credit Facility discussed
in Note 8, the bank required, as a condition of the loan, that Sinclair
unconditionally and irrevocably guarantee all of the Company's obligation with
respect to the Credit Facility. Under the Agreement and as compensation to
Sinclair for the guarantee, the Company will compensate Sinclair as follows: (1)
$200,000 payable in Company common stock (based upon the closing price as quoted
on September 16, 1999), and (2) on October 1, 2000 and on each year thereafter
until the bank no longer requires the guarantee from Sinclair, the Company shall
pay Sinclair an amount equal to the average of the line of credit outstanding
balances as of the last day of each of the preceding twelve months (not to be
less than $1,700,000) multiplied by 12.5% and payable in the form of Company
common stock. The $200,000 due Sinclair under the terms of the guarantee was
capitalized and is being amortized as interest expense over the guarantee
period. Related to this guarantee, $50,000 of interest expense was recorded
during 1999.
During November of 1999, the Company entered into a sub-lease agreement with
Sinclair (see Note 12). Under the terms of the Agreement and as compensation for
the sub-lease agreement, the Company agreed to compensate Sinclair as follows:
(1) on the lease execution date, $70,000 payable in the form of Company common
stock calculated as the average closing price for the five business days
preceding the lease execution date and (2) on each lease anniversary date,
$70,000 payable in the form of Company common stock calculated as the average
closing price for the five business days preceding the lease anniversary date.
During March 2000, the Company entered into a license agreement (the "License
Agreement") with Sinclair for the exclusive right to manufacture and sell
certain Sinclair designed analog and digital transmitter lines. Under the terms
of the License Agreement, the Company will pay to Sinclair an annual royalty of
$300,000 for five years. Following the fifth year of the License Agreement, the
Company shall pay to Sinclair an annual royalty equal to 1.0% of revenues
realized by the Company attributable to the License Agreement.
During March 2000, the Company entered into a subordinated debenture agreement
(the "Debenture") with Sinclair. Under the terms of the Debenture, the Company
may borrow up to $2,000,000 at an interest rate of 10.5%. The first payment of
interest shall be made April 1, 2000 and on a monthly basis thereafter.
Principal is payable upon demand of Sinclair. Further, Sinclair has the right,
47
<PAGE>
at any time, to convert all, but not less than all, of the principal owed to
Sinclair into the Company's common stock at $3.45 per share.
Sales made to Sinclair during 1999 and 1998 totalled $3,209,565 and $0,
respectively.
12. COMMITMENTS AND CONTINGENCIES:
The Company has operating leases for its manufacturing facility and office space
which expire July 31, 2000 and October 31, 2001, respectively. Rental expense
was $229,012 and $222,931 for the years ended December 31, 1999 and 1998,
respectively. During September 1999, the Company entered into a sub-lease
agreement with Sinclair (see Note 11) for the lease of a 44,000 square foot
building. Minimum lease payments due under this building lease are as follows:
year 1 - $360,000, year 2 - $370,000, year 3 - $381,924, year 4 - $393,381, year
5 - $459,393, and year 6-15 in aggregate - $5,399,664.
Future minimum lease payments under noncancelable operating leases, excluding
the sub-lease agreement with Sinclair discussed above, are as follows:
2000 $ 140,882
2001 14,583
2002 --
2003 --
2004 --
Thereafter --
-------------
$ 155,465
=============
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 or results of operations of the
Company.
13. SUBSEQUENT EVENTS:
During February of 2000, the Company terminated 18 of its employees. Total
severance payments of $44,400 are expected to be made to these individuals and
expensed during 2000.
As discussed in Note 11, the Company entered into a new lease agreement,
subordinated debenture agreement and license agreement with Sinclair during
2000. Also, in February 2000, Sinclair exercised warrants for the purchase of
75,000 common shares of the Company generating proceeds of $225,000. During
March 2000, the Company borrowed $660,000 in connection with the subordinated
debenture agreement.
48
