U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark one) |
ý QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2002 |
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o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT |
Commission file number
0-24886
ACRODYNE COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware |
| 11-3067564 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
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10706 Beaver Dam Road |
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Cockeysville, MD |
| 21030 |
(Address of principal executive offices) |
| (Zip Code) |
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Issuer’s telephone number: 410-568-1629 |
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Check whether the issuer (1) has 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 the past 90 days.
Yes ý No o
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 7,409,608 shares of common stock of Acrodyne Communications, Inc. were outstanding on August 7, 2002.
ACRODYNE COMMUNICATIONS, INC.
INDEX
2
Acrodyne Communications, Inc.
|
| June 30, |
| December 31, |
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| (unaudited) |
| (audited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
| $ | 974,933 |
| $ | 17,687 |
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Accounts receivable, net of allowance for doubtful accounts of $500,000 at both June 30, 2002 and December 31, 2001, respectively |
| 1,214,475 |
| 1,466,788 |
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Inventories, net |
| 1,520,242 |
| 1,281,512 |
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Prepaid assets and deposits |
| 180,633 |
| 44,955 |
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Total current assets |
| 3,890,283 |
| 2,810,942 |
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PROPERTY, PLANT AND EQUIPMENT, net |
| 3,598,078 |
| 3,771,969 |
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LICENSE AGREEMENT, net of accumulated amortization of $675,000 and $525,000 at June 30, 2002 and December 31, 2001, respectively |
| 825,000 |
| 975,000 |
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Total assets |
| $ | 8,313,361 |
| $ | 7,557,911 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) |
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CURRENT LIBILITIES: |
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Line of credit – related party |
| 5,133,759 |
| 5,133,759 |
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Subordinated debenture – related party |
| 2,000,000 |
| 2,000,000 |
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Current portion of capital lease obligations |
| 351,237 |
| 116, 478 |
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Accounts payable |
| 1,755,804 |
| 1,946,907 |
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Accrued expenses |
| 1,057,769 |
| 1,185,828 |
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Customer advances |
| 3,229,643 |
| 2,879,995 |
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Deferred revenue |
| 14,103 |
| 14,103 |
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Other current liabilities |
| 1,901,167 |
| 1,445,016 |
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Total current liabilities |
| 15,443,482 |
| 14,722,086 |
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CAPITAL LEASE OBLIGATION, net of current portion |
| 3,745,466 |
| 3,757,987 |
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LICENSE FEE PAYABLE - long term |
| 825,000 |
| 975,000 |
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NON-COMPETE LIABILITY |
| 845,912 |
| 845,912 |
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Total liabilities |
| 20,859,860 |
| 20,300,985 |
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SHAREHOLDERS’ EQUITY (DEFICIT) |
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|
|
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Common stock, par value $.01; 30,000,000 shares authorized; 7,409,608 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively |
| 74,096 |
| 74,096 |
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Additional paid-in-capital |
| 22,071,641 |
| 22,071,641 |
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Accumulated deficit |
| (34,692,236 | ) | (34,888,811 | ) | ||
Total shareholders’ equity (deficiency) |
| (12,546,499 | ) | (12,743,074 | ) | ||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) |
| $ | 8,313,361 |
| $ | 7,557,911 |
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See notes to consolidated financial statements
3
Acrodyne Communications, Inc.
Consolidated Statements of Operations (Unaudited)
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| Three Months Ended |
| Six Months Ended |
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| 2002 |
| 2001 |
| 2002 |
| 2001 |
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NET SALES |
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Related party sales, net |
| $ | 4,377,881 |
| $ | 409,762 |
| $ | 7,652,317 |
| $ | 409,762 |
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Other sales, net |
| 1,488,012 |
| 262,572 |
| 4,035,213 |
| 2,488,750 |
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NET SALES |
| 5,865,893 |
| 672,334 |
| 11,687,530 |
| 2,898,512 |
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COST OF SALES |
| 4,023,226 |
| 751,499 |
| 8,500,539 |
| 2,734,890 |
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Gross Profit (Loss) |
| 1,842,667 |
| (79,165 | ) | 3,186,991 |
| 163,622 |
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OPERATING EXPENSES |
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Engineering |
| 537,651 |
| 586,403 |
| 1,052,971 |
| 1,163,327 |
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Selling |
| 427,399 |
| 284,657 |
| 757,106 |
| 546,989 |
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Administration |
| 548,770 |
| 631,217 |
| 827,281 |
| 1,355,720 |
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Amortization of intangible assets |
| 75,000 |
| 75,000 |
| 150,000 |
| 150,000 |
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Total Operating Expenses |
| 1,588,820 |
| 1,577,277 |
| 2,787,358 |
| 3,216,036 |
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Operating Income (Loss) |
| 253,847 |
| (1,656,442 | ) | 399,633 |
| (3,052,414 | ) | ||||
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OTHER (EXPENSES) INCOME |
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Interest Expense, Net |
| (212,533 | ) | (217,494 | ) | (432,894 | ) | (430,968 | ) | ||||
Other Income (Loss), Net |
| 73,569 |
| (5,284 | ) | 229,837 |
| 172,220 |
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Net Income (Loss) |
| 114,883 |
| (1,879,220 | ) | 196,576 |
| (3,311,162 | ) | ||||
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Dividends on 8% convertible preferred stock |
| 0 |
| (14,028 | ) | 0 |
| (28,056 | ) | ||||
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS |
| $ | 114,883 |
| ($1,893,248 | ) | $ | 196,576 |
| ($3,339,218 | ) | ||
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NET INCOME (LOSS) PER COMMON SHARE – BASIC AND DILUTED |
| $ | 0.02 |
| $ | (0.27 | ) | $ | 0.03 |
| $ | (0.48 | ) |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC AND DILUTED |
| 7,409,608 |
| 6,981,161 |
| 7,409,608 |
| 6,981,161 |
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See notes to consolidated financial statements
4
Acrodyne Communications, Inc.
Consolidated Statements of Cash Flows (Unaudited)
|
| Six Months Ended |
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|
| June 30, |
| June 30, |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net Income (Loss) |
| $ | 196,576 |
| $ | (3,311,162 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Depreciation and amortization |
| 190,530 |
| 355,885 |
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Increase in capital lease obligations |
| 222,236 |
| — |
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Changes in assets and liabilities: |
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Accounts receivable and other |
| 252,313 |
| 483,261 |
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Inventories |
| (238,730 | ) | (454,788 | ) | ||
Prepaid expenses and deposits |
| (135,678 | ) | 10,211 |
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Accounts payable |
| (191,103 | ) | 8,485 |
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Accrued expenses |
| (128,059 | ) | 564,395 |
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Other current liabilities |
| 456,151 |
| 18,864 |
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Deferred revenue |
| — |
| (830,332 | ) | ||
Customer advances |
| 349,648 |
| 1,245,064 |
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Net cash provided (used) in operating activities |
| 973,884 |
| (1,910,117 | ) | ||
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CASH FROM INVESTING ACTIVITIES: |
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Purchase of property, plant, and equipment |
| (16,638 | ) | (8,329 | ) | ||
Net cash provided (used) in investing activities |
| (16,638 | ) | (8,329 | ) | ||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from the issuance of warrants |
| — |
| 336,000 |
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Borrowings under line of credit |
| — |
| 2,254,222 |
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Capital lease and license agreement |
| — |
| (147,624 | ) | ||
Cash dividends on convertible preferred stock |
| — |
| (28,056 | ) | ||
Net cash provided by financing activities |
| — |
| 2,414,542 |
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Net increase in cash and cash equivalents |
| 957,246 |
| 496,096 |
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Cash and cash equivalents at beginning of period |
| 17,687 |
| 86,959 |
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Cash and cash equivalents at end of period |
| $ | 974,933 |
| 583,055 |
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See notes to consolidated financial statements
5
Acrodyne Communications, Inc.
Notes to Consolidated Financial Statements (unaudited)
1. Unaudited Consolidated Financial Statements
The accompanying consolidated balance sheets of Acrodyne Communications, Inc. and its subsidiaries (the “Company” or “Acrodyne”) at June 30, 2002 and the related consolidated statements of operations and of cash flows for the six months ended June 30, 2002 and 2001 have been prepared by management. In the opinion of management, all adjustments (consisting of normal recurring adjustments only) necessary to present fairly the financial position at June 30, 2002, and the results of operations and cash flows for the six months ended June 30, 2002 and 2001 have been made.
These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2001 as filed with the Securities and Exchange Commission. The results of operations for interim periods are not necessarily indicative of the results to be obtained for the entire year.
2. Inventories
Inventories are comprised of:
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| June 30, |
| December 31, |
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Raw materials |
| $ | 2,707,320 |
| $ | 2,192,096 |
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Work in process |
| 173,248 |
| 449,742 |
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Finished Goods |
| 116,110 |
| 116,110 |
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Total inventory |
| 2,996,678 |
| 2,757,948 |
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Allowance for obsolete inventory |
| (1,476,436 | ) | (1,476,436 | ) | ||
Inventory (net) |
| $ | 1,520,242 |
| $ | 1,281,512 |
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3. Property and Equipment
Property and equipment consist of the following:
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| June 30, |
| December 31, |
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Test Equipment |
| $ | 692,632 |
| $ | 690,273 |
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Machinery and equipment |
| 63,805 |
| 52,755 |
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Office furniture and equipment |
| 440,095 |
| 436,866 |
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Building lease/leasehold improvements |
| 3,781,167 |
| 3,781,167 |
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Purchased computer software |
| 120,646 |
| 120,646 |
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| 5,098,345 |
| 5,081,707 |
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Accumulated depreciation and amortization |
| (1,500,268 | ) | (1,309,738 | ) | ||
Property, plant and equipment, net |
| $ | 3,598,077 |
| $ | 3,771,969 |
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6
4. Earnings Per Share
Basic earnings (loss) per share is computed by dividing the net loss available to common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share is 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.
The following table sets forth the computation of basic and diluted earnings per share.
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| Three Months Ended |
| Six Months Ended |
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|
| June |
| June |
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|
| 2002 |
| 2001 |
| 2002 |
| 2001 |
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Numerator |
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Net income (loss) |
| $ | 114,883 |
| $ | (1,893,248 | ) | $ | 196,576 |
| $ | (3,339,218 | ) |
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Denominator |
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Denominator for basic income Per share – weighted average shares |
| 7,409,608 |
| 6,981,161 |
| 7,409,608 |
| 6,981,161 |
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Dilutive effect of options and warrants |
| — |
| — |
| — |
| — |
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Basic income (loss) per share |
| $ | 0.02 |
| $ | (0.27 | ) | $ | 0.03 |
| $ | (0.48 | ) |
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Diluted income (loss) per share |
| $ | 0.02 |
| $ | (0.27 | ) | $ | 0.03 |
| $ | (0.48 | ) |
Exercise price of outstanding options and warrants to purchase shares of the Company stock are in excess of the market price and are excluded from the computation of diluted income per share.
Due to the Company’s net loss in 2001 the incremental shares issuable in connection with convertible preferred stock, stock options and warrants were anti-dilutive and, accordingly, are not considered in the calculation.
5. Related Party Transactions
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 up to 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. On December 20, 1999, the Company committed to issue 112,000 shares to Sinclair with respect to the terms of a Guaranty and Lease Compensation Agreement (see discussion below). As of December 31, 2000, the Company is obligated to issue 589,506 shares to Sinclair with respect to the terms of the Guaranty and Lease Compensation Agreement. As of June 30, 2002 and December 31, 2001, Sinclair held an aggregate of 2,418,333 shares of the Company’s common stock, representing approximately 32.6% of issued common stock assuming no warrants are exercised.
7
In September 1999, we established a new $2,500,000 credit facility (the “Credit Facility”) arrangement with a bank for working capital purposes to replace our then existing bank credit facilities. As of December 31, 1999, we were not in compliance with terms of the credit facility. The bank provided a waiver for the 1999 event of default. The credit facility was collateralized by all of our personal property and expired on October 31, 2000. In connection with obtaining this facility, the bank required, as a condition of the loan, that Sinclair unconditionally and irrevocably guarantee all of our obligations under the facility. We agreed to issue Sinclair $200,000 of our common stock (83,000 shares) as compensation for the guarantee. In October 2000, Sinclair purchased the line of credit from the bank and filed related UCC liens against our personal property, which eliminated the Sinclair guarantee. At June 30, 2002 and December 31, 2001 the borrowing on this facility was $1,158,753. On April 27, 2001, we secured an additional $4,000,000 line of credit facility with Sinclair. The credit facility requires monthly interest-only payments at a fixed rate of interest of 12% per annum and matures upon demand by Sinclair. At June 30, 2002 we had borrowed approximately $3,975,000 against the line.
On November 19, 1999 we entered into a sublease agreement with Sinclair for approximately 44,000 square feet of space on Hollow Road in Upper Providence, Montgomery County, Pennsylvania. Our relocation to this facility was completed in the fourth quarter of 2000. The lease commenced at that time. Lease payments were not made due to liquidity and are recorded as current liabilities on the balance sheet.
During March 2000, the Company entered into a 10-year license agreement (the “License Agreement”) with Sinclair for the exclusive right to manufacture and sell certain Sinclair designed transmitter lines. Under terms of the License Agreement, the Company will pay Sinclair an annual royalty of $300,000 for five years. For years six through ten, the Company shall pay Sinclair an annual royalty equal to 1.0% of revenues realized by the Company attributable to the License Agreement. At end of the tenth year, the Company has the option to purchase the Sinclair technology. The purchase price would be twice the cumulative royalty amount paid to Sinclair for years six through ten.
During March 2000, the Company entered into a subordinated debenture agreement (the “Debenture”) with Sinclair. Under the terms of the Debenture, the Company could borrow up to $2,000,000 at an interest rate of 10.5%. The first payment of interest was to be made April 1, 2000 and on a monthly basis thereafter. Principal is payable upon demand by 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. The Company had borrowed $2,000,000 under the terms of this arrangement on June 30, 2002 and December 31, 2001.
In the first quarter of 2001 it was determined by Sinclair that in order for Sinclair to meet their SEC public financial filing requirements that Acrodyne would have to accelerate their audit schedule. Sinclair agreed to pay $150,000 of Acrodyne’s audit fees for the year ended 2000, in order to meet the expedited schedule.
8
6. Significant Accounting Policies
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for the Company are as follows:
• All business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interests method of accounting is prohibited except for transactions initiated before July 1, 2001.
• Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability.
• Goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized.
• Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization.
• Effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator.
• All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting.
On January 1, 2002, the Company adopted SFAS 142 and as required discontinued amortization of goodwill and certain intangible assets determined to have indefinite useful lives acquired prior to July 1, 2001. This statement also required that within the first interim period of adoption, the intangible assets with indefinite lives should be tested for impairment as of the date of adoption, and that if any impairment results, it should be recognized as a change in accounting principle. Additionally, SFAS 142 requires that, within six months of adoption, goodwill be tested for impairment at the reporting unit level as of the date of adoption. If any impairment is indicated to have existed upon adoption, it should be measured and recorded before the end of the year of adoption. SFAS 142 requires that any goodwill impairment loss recognized as a result of initial application be reported in the first interim period of adoption as a change in accounting principle and that the income per share effects of the accounting change be separately disclosed. The Company company has no goodwill or indefinitely lived intangible assets. The adoption of SFAS 142 had no impact on the financial, position or results of operations of the Company.
In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 applies to all entities, including rate-regulated entities, that have legal obligations associated with the retirement of a tangible long-lived asset that result from acquisition, constructions or development and (or) normal operations of the long-lived asset. The application of this Statement is not limited to certain specialized industries, such as the extractive or nuclear industries. This Statement also applies, for example, to a company that operates a manufacturing facility and has a legal obligation to dismantle the manufacturing plant and restore the underlying land when it ceases operation of that plant. A liability for an asset retirement obligation should be recognized if the obligation meets the definition of a liability and can be reasonable estimated. The initial recording should be at fair value. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002, with earlier application encouraged. The provisions of the Statement are not expected to have an impact on the financial condition or results of operations of the Company.
9
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. However, SFAS 144 makes changes to the scope and certain measurement requirements of existing accounting guidance. SFAS 144 also changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The adoption of this Statement is not expected to have an impact on the financial condition or results of operations of the Company.
Other Intangible Assets
Effective January 1, 2002, the Company adopted SFAS 142, “Goodwill and Other Intangible Assets.” The following table reflects the components of intangible assets,
|
| June 30, 2002 |
| January 1, 2002 |
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| Gross Carrying |
| Accumulated |
| Gross Carrying |
| Accumulated |
| ||||
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License agreement |
| $ | 1,500,000 |
| $ | 675,000 |
| $ | 1,500,000 |
| $ | 525,000 |
|
The following sets forth the estimated amortization expense on intangible assets for the fiscal years ending December 31,:
2002 |
| $ | 300,000 |
|
2003 |
| $ | 300,000 |
|
2004 |
| $ | 300,000 |
|
2005 |
| $ | 75,000 |
|
2006 |
| $ | 0 |
|
Income Taxes:
The Company recorded no tax expense for the six months ended June 30, 2002 due to the use of net operating loss carryforwards.
10
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
We are Acrodyne Holdings, Inc., a Delaware corporation, which was formed in May 1991. In 1995, we changed our name to Acrodyne Communications, Inc. which we operate in one industry segment – the design, manufacture and marketing of television transmitters and translators, which are sold in the United States and internationally.
On May 16, 1994, we entered into agreements to acquire all of the outstanding stock of Acrodyne Industries, Inc., a company engaged in the manufacture and sale of TV transmitters, LPTV transmitters and TV translators, which are produced to customer specification. The acquisition was consummated on October 24, 1994 with proceeds obtained from a public offering of our common stock.
On January 27, 1999, we finalized a strategic agreement with the Sinclair Broadcast Group, Inc. (“Sinclair”). Under this agreement Sinclair invested $4.3 million in consideration for 1,431,333 shares of our common stock and the issuance of 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 our achievement of increased product sales or products with new technology. See additional discussion in the Significant and Recent Events section of this document.
BASIS OF PRESENTATION
Upon completion of the audit of our consolidated financial statements for the year ended December 31, 2001, our independent auditors issued an opinion with an explanatory paragraph stating that substantial doubt exists about our ability to continue as a going concern. Our ability to continue as a going concern depends upon: (1) market acceptance of our new digital product; (2) our ability to generate sufficient revenues to achieve and sustain positive cash flow; and (3) our ability to raise the necessary capital to fund operating needs and finance the planned investment. The factors noted above raise substantial doubt concerning our ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern. We are currently exploring our options to raise capital. Among the options is a potential recapitalization by Sinclair Broadcast Group (“Sinclair”). Under the potential recapitalization, Sinclair could receive additional common stock in exchange for forgiveness of certain amounts that we owe to Sinclair. As of August 7, 2002 a recapitalization plan has not been executed. In addition, Sinclair has orally committed to purchase all UHF transmitters requirements from us.
BUSINESS OF ACRODYNE
We have 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 over 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.
11
ACRODYNE PRODUCTS AND SERVICES
We design, manufacture and market 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. Our 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 us to respond to specific customer requests. We classify our 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 our 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. We believe that our 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.
We expanded our 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 single most significant market for television transmitters, has created 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 world’s foremost manufacturer of solid-state transmitters formed a strategic alliance. The Rohde & Schwarz group of companies, with headquarters in Munich, Germany, develops, produces and markets communication test and measurement instruments and systems. It gave exclusive rights to us to market and sell Rohde & Schwarz solid state transmitter products in the United States. This agreement also includes technology and product sales agreement to support a new line of our high power transmitter products.
New line of IOT-equipped television transmitters developed at Sinclair
In March 2000, we reached a definitive agreement with Sinclair to exclusively manufacture and sell the Sinclair designed “Quantum” IOT transmitter line. Sinclair created this newly developed line of transmitter products at its Hunt Valley, Maryland, headquarters to meet its own internal digital and analog requirements and has licensed this technology to us. 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. We introduced this advanced line of transmitters at the National Association of Broadcasters April 2001 Show in Las Vegas.
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OPERATIONS AND BUSINESS RISK
Due to the nature of our business, we are subject to various risks including, but not limited to, technological and market acceptance of our product, capital availability, dependence on management and other risks.
We have been in the process of developing products and applications using digital transmission technology. Related to this process, we entered into a license agreement with Sinclair in March 2001 (see Note 5 to Financial Statements). We shipped the first of our digital transmitters in March 2001. To date, most of the orders for our digital product are from Sinclair.
Since the acquisition of Acrodyne Industries in 1994, we have incurred significant losses including a net loss of $2,569,204 and a cash flow deficit of $3,877,708 in 2001. These losses and cash flow deficits have been funded primarily with proceeds from the sale of equity securities, including $225,000 and $3,805,374 from common stock and warrants sold to Sinclair in 2000 and 1999, respectively, a $2,000,000 subordinated debenture provided by Sinclair, our Credit Facility with Sinclair (see Note 5 to Financial Statements) and customer advances. As of June 30, 2002 and December 31, 2001 Sinclair owned 32.6% of our common stock, and has warrants to purchase 8,644,225 additional shares (see Notes 5 to Financial Statements), which represented 60.4% of our common stock on a fully diluted basis.
In March 2000, Sinclair agreed to provide additional funds to us of up to $2,000,000 under terms of a subordinated debenture (see Note 5 to Financial Statments). On April 27, 2001, we entered into an additional $4,000,000 line of credit facility with Sinclair. This line of credit requires monthly interest-only payments at a fixed rate of interest of 12% per annum and matures upon demand by Sinclair. Our ability to continue as a going concern depends upon: (1) market acceptance of our new digital product; (2) our ability to generate sufficient revenues to achieve and sustain positive cash flow; and (3) our ability to raise the necessary capital to fund operating needs and finance the planned investment. The factors noted above raise substantial doubt concerning our ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern. We are currently exploring options available to raise capital. Among the options is a potential recapitalization by Sinclair. Under terms of the proposed recapitalization which has yet to be executed, Sinclair could receive additional common stock in exchange for forgiveness of certain amounts owed to Sinclair by us and could cancel certain existing warrants and receive additional warrants as part of a new secured line of credit. In addition, Sinclair has orally committed to purchase all UHF transmitter requirements from us.
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RESULTS OF OPERATIONS
The following compares the Company’s summary results of operations for the three and six months ended June 30, 2002 to the three and six months ended June 30, 2001:
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| Three Months Ended June 30, |
| Six Months Ended June 30 |
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| 2002 |
| 2001 |
| 2002 |
| 2001 |
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| $ |
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Net Sales |
| 5,865,893 |
| 100.0 |
| 672,334 |
| 100.0 |
| 11,687,530 |
| 100.0 |
| 2,898,512 |
| 100.0 |
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Cost of Sales |
| 4,023,226 |
| 68.6 |
| 751,499 |
| 111.8 |
| 8,500,539 |
| 72.7 |
| 2,734,890 |
| 94.4 |
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Gross Profit (Loss) |
| 1,842,667 |
| 31.4 |
| (79,165 | ) | (11.8 | ) | 3,186,991 |
| 27.3 |
| 163,622 |
| 5.6 |
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Operating Expenses |
| 1,588,820 |
| 27.1 |
| 1,577,278 |
| 234.6 |
| 2,787,358 |
| 23.9 |
| 3,216,036 |
| 110.9 |
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Operating Income (Loss) |
| 253,847 |
| 4.3 |
| (1,656,443 | ) | (246.4 | ) | 399,633 |
| 3.4 |
| (3,052,414 | ) | (105.3 | ) |
Net sales for the three months and six month periods ended June 30, 2002 increased 772.5% and 303.2%, respectively over net sales for the periods ended June 30, 2001. Sales for the prior year, both the three and six month periods, resulted from the slower than anticipated design and start of production of the Quantum product line. Significant quantities of the Quantum transmitter were not produced and shipped until the third quarter of 2001. The majority of sales in the 2001 period were products produced by year end 2000. Recording of sales on the company’s books was deferred to comply with revenue recognition criteria issued in SAB 101.
Gross margin on sales in 2002, as a percentage of sales and in dollars, improved substantially from the prior year. Margin for both the second quarter and the first half of 2001 were negatively effected by unabsorbed overhead, resulting from the low sales volume.
Total operating expenses remained about the same for the three months ended June 30, 2002 from the same period in 2001. The six month comparison of operating expenses shows a 13.3% decrease from $3,216,036 for the six months ended June 30, 2001 to $2,787,358 for June 30, 2002. The decrease is attributable to cost incurred in the first quarter of 2001 for legal, consulting, and settlement fees associated with our financial restatements and shareholder lawsuit. A $336,000 charge was booked in the first quarter of 2001 for the issuance of 1,600,000 warrants in settlement of the lawsuit.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our activities primarily from customer advances, internally generated funds, proceeds from the sale of equity securities and use of our credit facilities. At June 30, 2002, we had a working capital deficit of $11,553,199 compared to a working capital deficit of $11,911,144 at December 31, 2001. The reduced deficit resulted from increases in cash and inventory being offset by a reduction in receivables and increases in liabilities for customer deposits, the current portion of lease obligations, license fees payable to Sinclair, and accruals for warranty reserves.
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In September 1999, we established a new $2,500,000 credit facility (the “Credit Facility”) arrangement with a bank for working capital purposes to replace our then existing bank credit facilities. As of December 31, 1999, we were not in compliance with terms of the credit facility. The bank provided a waiver for the 1999 event of default. The credit facility was collateralized by all of our personal property and expired on October 31, 2000. In connection with obtaining this facility, the bank required, as a condition of the loan, that Sinclair unconditionally and irrevocably guarantee all of our obligations under the facility. We agreed to issue Sinclair $200,000 of our common stock (83,000 shares) as compensation for the guarantee. In October 2000, Sinclair purchased the line of credit from the bank and filed related UCC liens against our personal property, which eliminated the Sinclair guarantee. At June 30, 2002 and December 31, 2001 the borrowing on this facility was $1,158,753. On April 27, 2001, we secured an additional $4,000,000 line of credit facility with Sinclair. The credit facility requires monthly interest-only payments at a fixed rate of interest of 12% per annum and matures upon demand by Sinclair. At June 30, 2002 we had borrowed approximately $3,975,000 against the line.
Our ability to continue as a going concern depends upon: (1) market acceptance of our new digital product; (2) our ability to generate sufficient revenues to achieve and sustain positive cash flow; and (3) our ability to raise the necessary capital to fund operating needs and finance the planned investment. The factors noted above raise substantial doubt concerning our ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern. We are currently exploring options available to raise capital. Among the options is a potential recapitalization by Sinclair. Under terms of the proposed recapitalization which has yet to be executed, Sinclair could receive additional common stock in exchange for forgiveness of certain amounts owed to Sinclair by us and could cancel certain existing warrants and receive additional warrants as part of a new secured line of credit. In addition, Sinclair has orally committed to purchase all UHF transmitter requirements from us.
Significant and Recent Events
The SEC is currently conducting an investigation of the facts and circumstances that required the company’s financial statements and filings to be restated for the year ending 1999 and the first two quarters of 2000. Acrodyne has not been charged with any wrongdoing, is cooperating fully with the investigation, and has supplied documents to assist in the SEC investigation. Several former employees, a current employee of the company, as well as a Sinclair employee have been subpoenaed and testified before attorneys for the SEC. The duration, facts, and outcome of the investigation cannot be estimated by the company at this time.
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Forward Looking Statements
Certain statements contained in this report that do not relate to historical information are “forward looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and thus are prospective. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed, projected or implied by such forward-looking statements. Such factors include, but are not limited to, economic, competitive, and broadcast industry conditions. These factors are discussed in greater detail in the Company’s filings with the United States Securities regulators. The Company disclaims any responsibility to update any such forward-looking statements.
ACRODYNE COMMUNICATIONS, INC.
Item 6. None
(a) No Exhibits
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Acrodyne Communications, Inc. |
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| (Registrant) | |
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Date: August 14, 2002 |
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| By /s/ John Strzelecki |
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| John Strzelecki, Executive Vice President, | |
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| By /s/ Robert E. Woodruff, Jr. |
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| Robert E. Woodruff, Jr., Chief Financial Officer |
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CERTIFICATION OF PERIODIC REPORT
I, Nathaniel Ostroff, CEO of Acrodyne Communications (the “Company”), certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10Q of the Company for the quarterly period ended June 30, 2002 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 14, 2002 |
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| By /s/ Nathaniel Ostroff |
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| Nathaniel Ostroff, Chief Executive Officer |
I, Robert E. Woodruff, Jr., CFO of Acrodyne Communications (the “Company”), certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10Q of the Company for the quarterly period ended June 30, 2002 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 14, 2002 |
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| By /s/ R. E. Woodruff, Jr. |
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| Robert E. Woodruff, Jr., Chief Financial Officer |
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