** **

**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**Form 10-QSB**

** **

** **

**(Markone)**

** **

**ý****QUARTERLY REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF**

**1934**

** **

**For thequarterly period ended June 30, 2000**

** **

**o****TRANSITION REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT**

** **

** **

**Commissionfile number**

**0-24886**

** **

** **

**ACRODYNE COMMUNICATIONS, INC.**

(Exact name of smallbusiness issuer as specified in its charter)

 

| **Delaware**                              |   | **11-3067564**      |
|-------------------------------------------|--------|---------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer    |
| incorporation or  organization)           |   | Identification No.) |
|                                      |   |                |
| **10706  Beaver Dam Road**                |   |                |
| **Cockeysville,  Maryland**               |   | **21030**           |
|                                      |   |                |
| (Address of principal  executive offices) |   | (Zip Code)          |

 

**410-568-1629**

Issuer's telephonenumber, including Area Code

 

Check whether theissuer  (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes oNo ý

 

State the number ofshares outstanding of each of the issuer's classes of common equity, as of thelatest practicable date: 7,409,608 shares of common stock of AcrodyneCommunications, Inc.  were outstandingon November 8, 2001.

 

 

 

 

ACRODYNE COMMUNICATIONS,INC.

 

# **INDEX**

 
| Explanatory Statement                                                                            |                                                                                              |
|--------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|
|                                                                                             |                                                                                              |   |
| PART I.   FINANCIAL INFORMATION:                                                            |                                                                                              |
|                                                                                             |                                                                                              |   |
| Item 1 – Financial Statements                                                               |                                                                                              |
|                                                                                             |                                                                                              |   |
|                                                                                             | Consolidated Balance Sheets  - June 30, 2000 and December 31, 1999                                |   |
|                                                                                             |                                                                                              |   |
|                                                                                             |                                                                                              |   |
|                                                                                             | Consolidated  Statements of Operations for the Three and Six Months Ended June 30, 2000 and  1999 |   |
|                                                                                             | .                                                                                                 |   |
|                                                                                             |                                                                                              |   |
|                                                                                             | Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999            |   |
|                                                                                             |                                                                                              |   |
|                                                                                             |                                                                                              |   |
|                                                                                             | Notes  to Consolidated Financial Statements                                                       |   |
|                                                                                             |                                                                                              |   |
| Item  2 - Management's Discussion and Analysis of Financial Condition and Results  of Operations |                                                                                              |
|                                                                                             |                                                                                              |   |
| PART II.  OTHER INFORMATION                                                                 |                                                                                              |
|                                                                                             |                                                                                              |   |
| SIGNATURES                                                                                       |                                                                                              |
|                                                                                             |                                                                                              |   |

 

 

EXPLANATORY STATEMENT

 

** **

During the third quarterof 2000, we announced that the audited financial statements for the year endedDecember 31, 1999 and the unaudited interim financial statements for thequarter ended March 31, 2000 would need to be amended and restated.   As a result of our review of our accountingrecords, certain charges and adjustments were recorded which had an effect onthe financial results for the year ended December 31, 1999, and the quarterstherein, as well as the quarter ended March 31, 2000. Most significant of theadjustments was charges to cost of sales of $573,660 and $1,222,047 during thethree and six months ended June 30, 1999, respectively, and $2,795,322 duringthe year ended December 31, 1999 which related, primarily, to the pricing ofthe period-end physical inventories, offset by the effects on cost of sales ofreversing revenues previously recognized. The year ended December 31, 1999amount also included a $563,000 increase to the inventory obsolescencereserve.  Other adjustments related tothe timing of revenue recognition of $468,750 and $1,217,911 for the three andsix months ended June 30, 1999, respectively, and $2,299,511 for the year endedDecember 31, 1999.  The total effect ofall adjustments increased the net loss by $1,054,410 and $2,513,958 for thethree and six months ended June 30, 1999, respectively, and $5,218,583 for theyear ended December 31, 1999. These adjustments were made based on our internalreview in 2000, which indicated that certain revenues should not have beenrecognized or were recognized in the improper period. The adjustments have beendetermined through a specific review of the related supporting documents and adetermination of the proper reporting period for the recognition of the revenuetransaction.

 

 

For additionalinformation see "Accounting Review Charges, Adjustments andRestatements" (Note 13 to the consolidated financial statements) filed onamended Form 10-KSB. See also “Accounting Review Charges, Adjustments andRestatements” (Note 2 to the consolidated financial statements) containedelsewhere in this Form 10-QSB/A.

 

 

**AcrodyneCommunications, Inc. And Subsidiary**

**ConsolidatedBalance Sheets**
|                                                                                                                                                                    |   | **June 30,**    |       | **December 31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|------------|------------------|--------|
|                                                                                                                                                                    |   | **2000**        |       | **1999**         |   |
|                                                                                                                                                                    |   | **(unaudited)** |       | **(Restated)**   |   |
| **Assets**                                                                                                                                                              |   |            |       |             |   |
| Current Assets:                                                                                                                                                         |   |            |       |             |   |
| Cash and cash  equivalents                                                                                                                                              |   | $               | 37,507     |             | $      | 664,950 |   |
| Short term  investment                                                                                                                                                  |   | 200,000         |       | 200,000          |   |
| Accounts  receivables, net                                                                                                                                              |   | 420,401         |       | 1,201,268        |   |
| Inventories, net                                                                                                                                                        |   | 3,267,029       |       | 3,199,549        |   |
| Prepaid assets                                                                                                                                                          |   | 109,379         |       | 348,108          |   |
| Other current  assets                                                                                                                                                   |   | 73,333          |       | 220,000          |   |
| **Total current assets**                                                                                                                                                |   | 4,107,649       |       | 5,833,875        |   |
|                                                                                                                                                                    |   |            |       |             |   |
| Property, plant  and equipment, net                                                                                                                                     |   | 490,340         |       | 570,182          |   |
| Non-compete  agreement, net                                                                                                                                             |   | 323,322         |       | 360,822          |   |
| License  agreement, net                                                                                                                                                 |   | 1,425,000       |       | -                |   |
| Goodwill, net                                                                                                                                                           |   | 3,820,963       |       | 3,899,211        |   |
| **Total Assets**                                                                                                                                                        |   | $               | 10,167,274 |             | $      | 10,664,090 |   |
|                                                                                                                                                                    |   |            |       |             |   |
| **Liabilities and Shareholders'  Equity (DEFICIT)**                                                                                                                     |   |            |       |             |   |
| Line of credit                                                                                                                                                          |   | 1,269,003       |       | 1,613,404        |   |
| Subordinated  debenture / Sinclair                                                                                                                                      |   | 400,000         |       | -                |   |
| Accounts payable                                                                                                                                                        |   | 1,036,965       |       | 1,801,883        |   |
| Accrued expenses                                                                                                                                                        |   | 596,176         |       | 272,155          |   |
| Customer  advances                                                                                                                                                      |   | 5,174,588       |       | 3,233,962        |   |
| Current portion  of capital lease                                                                                                                                       |   | 27,186          |       | 69,947           |   |
| Deferred revenue                                                                                                                                                        |   | 333,609         |       | 818,912          |   |
| Other current  liabilities                                                                                                                                              |   | 300,000         |       | -                |   |
| **Total current liabilities**                                                                                                                                           |   | 9,137,527       |       | 7,810,263        |   |
|                                                                                                                                                                    |   |            |       |             |   |
| Capital lease  obligations                                                                                                                                              |   | 12,021          |       | 12,021           |   |
| License fee  payable                                                                                                                                                    |   | 1,200,000       |       | -                |   |
| Non-compete  liability                                                                                                                                                  |   | 839,893         |       | 845,990          |   |
| **Total liabilities**                                                                                                                                                   |   | 11,189,441      |       | 8,668,274        |   |
| **SHAREHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                 |   |            |       |             |   |
| Convertible  redeemable, 8%preferred stock, par value $1.00, 1,000,000 shares authorized,  6,500 shares issued and outstanding                                          |   | 6,500           |       | 6,500            |   |
| Common stock,  par value $.01, 30,000,000 shares authorized:  6,981,161 and 6,906,161 issued and outstanding at June 30, 2000  and December 31, 1999, respectively |   | 69,812          |       | 69,062           |   |
| Additional  paid-in-capital                                                                                                                                             |   | 21,215,222      |       | 21,019,028       |   |
| Accumulated  deficit                                                                                                                                                    |   | (22,313,701     | )          | (19,098,774      | )      |
| Total  shareholders' equity (deficit)                                                                                                                                   |   | (1,022,167      | )          | 1,995,816        |   |
| **Total  Liabilities and Shareholders' Equity (Deficit)**                                                                                                               |   | $               | 10,167,274 |             | $      | 10,664,090 |   |

 

**Seenotes to consolidated financial statements**

 

 

 

 

**AcrodyneCommunications, Inc. And Subsidiary**

**ConsolidatedStatements of Operations    ****(Unaudited)**

                                                                                                                
|                                                     |   | **Three Months Ended** |       | **Six Months Ended** |   |
|----------------------------------------------------------|--------|------------------------|------------|----------------------|--------|
|                                                     |   | **June 30,**           |       | **June 30,**         |   |
|                                                     |   | **2000**               |       | **1999**             |   | **2000** |   | **1999** |   |
|                                                     |   |                   |       | (Restated)           |   |   |   | (Restated) |   |
| Net  sales                                               |   | $                      | 954,205    |                 | $      | 1,910,853 |   | $ | 3,178,265 |   | $ | 4,184,785 |   |
| Cost  of sales                                           |   | 1,055,074              |       | 2,167,829            |   | 3,466,985 |   | 4,747,565 |   |
| Gross  loss                                              |   | (100,869               | )          | (256,976             | )      | (288,720 | ) | (562,780 | ) |
|                                                     |   |                   |       |                 |   |   |   |   |   |
| Operating  Expenses:                                     |   |                   |       |                 |   |   |   |   |   |
| Engineering,  research and development                   |   | 139,257                |       | 211,912              |   | 314,866 |   | 436,391 |   |
| Selling                                                  |   | 418,142                |       | 429,778              |   | 697,394 |   | 780,970 |   |
| Administration                                           |   | 873,367                |       | 526,317              |   | 1,518,793 |   | 1,004,429 |   |
| Amortization                                             |   | 95,374                 |       | 57,874               |   | 152,828 |   | 115,748 |   |
| Total  operating expenses                                |   | 1,526,140              |       | 1,225,881            |   | 2,683,881 |   | 2,337,538 |   |
| Operating  loss                                          |   | (1,627,009             | )          | (1,482,857           | )      | (2,972,601 | ) | (2,900,318 | ) |
|                                                     |   |                   |       |                 |   |   |   |   |   |
| Other  Income (Expense):                                 |   |                   |       |                 |   |   |   |   |   |
| Interest  expense, net                                   |   | (130,454               | )          | (53,176              | )      | (242,326 | ) | (76,763 | ) |
| Loss  before income taxes                                |   | (1,757,463             | )          | (1,536,033           | )      | (3,214,927 | ) | (2,977,081 | ) |
| Income  taxes                                            |   | -                      |       | -                    |   | - |   | - |   |
| Net  loss                                                |   | (1,757,463             | )          | (1,536,033           | )      | (3,214,927 | ) | (2,977,081 | ) |
|                                                     |   |                   |       |                 |   |   |   |   |   |
| Dividend  on 8% preferred stock                          |   | (14,028                | )          | (14,028              | )      | (28,056 | ) | (28,056 | ) |
| Net  loss available to common shares                     |   | $                      | (1,771,491 | )                    | $      | (1,550,061 | ) | $ | (3,242,983 | ) | $ | (3,005,137 | ) |
|                                                     |   |                   |       |                 |   |   |   |   |   |
| Net  loss per common share - basic and diluted           |   | $                      | (0.25      | )                    | $      | (0.23 | ) | $ | (0.47 | ) | $ | (0.46 | ) |
| Weighted  average shares outstanding - basic and diluted |   | 6,981,161              |       | 6,769,523            |   | 6,956,848 |   | 6,562,349 |   |

 

#### **See notes to consolidatedfinancial statements**

 

** **

**AcrodyneCommunications, Inc. And Subsidiary**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS    ****(Unaudited)**
|                                                                         |   | **Six months ended** |       |
|------------------------------------------------------------------------------|--------|----------------------|------------|
|                                                                         |   | **June 30,**         |       |
|                                                                         |   | **2000**             |       | **1999** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |   |                 |       | (As Restated) |   |
| Net  loss                                                                    |   | $                    | (3,214,927 | ) | $ | (2,977,081 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                 |       |   |   |
| Depreciation and  amortization                                               |   | 270,170              |       | 167,889 |   |
| Provision for  lease loan guarantee                                          |   | 146,667              |       | - |   |
| Provision  for bad debts                                                     |   | 300,000              |       | - |   |
| Changes in  assets and liabilities:                                          |   |                 |       |   |   |
| Accounts  receivable                                                         |   | 480,867              |       | 950,347 |   |
| Inventories                                                                  |   | (67,480              | )          | (386,994 | ) |
| Prepaid assets                                                               |   | 239,149              |       | 163,362 |   |
| Accounts payable                                                             |   | (764,918             | )          | (874,758 | ) |
| Accrued expenses  and other liabilities                                      |   | 324,021              |       | 213,568 |   |
| Deferred  revenue                                                            |   | (485,303             | )          | - |   |
| Customer  advances                                                           |   | 1,940,626            |       | 505,397 |   |
| Net cash used in  operating activities                                       |   | (831,128             | )          | (2,238,270 | ) |
| CASH FROM  INVESTING ACTIVITIES:                                             |   |                 |       |   |   |
| Purchase of  property, plant, and equipment                                  |   | -                    |       | (69,811 | ) |
| Net cash used in  investing activities                                       |   | -                    |       | (69,811 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |   |                 |       |   |   |
| Proceeds from  the issuance of common stock, net                             |   | -                    |       | 3,773,752 |   |
| Redemption of  Series A preferred stock                                      |   | -                    |       | (998,531 | ) |
| Proceeds from  exercise of warrants                                          |   | 225,000              |       | - |   |
| (Repayments) /  borrowings under line of credit                              |   | (344,401             | )          | 325,000 |   |
| Borrowings under  debenture                                                  |   | 400,000              |       | - |   |
| Capital lease  repayments                                                    |   | (42,761              | )          | (20,790 | ) |
| Repayments on  non-compete liability                                         |   | (6,097               | )          | (5,574 | ) |
| Cash dividends  to stockholders                                              |   | (28,056              | )          | (28,056 | ) |
| Net cash provided  by financing activities                                   |   | 203,685              |       | 3,045,801 |   |
| Net increase  (decrease) in cash and cash equivalents                        |   | (627,443             | )          | 737,720 |   |
| Cash and cash  equivalents at beginning of period                            |   | 664,950              |       | 983,695 |   |
| Cash and cash  equivalents at end of period                                  |   | $                    | 37,507     |   | $ | 1,721,415 |   |
| Supplement cash  flow information:                                           |   |                 |       |   |   |
| Cash paid for  interest                                                      |   | $                    | 63,897     |   | $ | 62,805 |   |
|                                                                         |   |                 |       |   |   |

 

 **See notes to consolidated financialstatements**

 

 

**AcrodyneCommunications, Inc. And Subsidiary**

#### **Notes to Consolidated Financial Statements (Unaudited)**

 

 

 

1.     BASIS OF PRESENTATION

 

The condensed consolidated financialstatements of Acrodyne Communications, Inc. and subsidiary (the"Company") presented herein are unaudited.  In the opinion of management, these financial statements includeall adjustments (which include normal recurring and nonrecurring adjustments,as disclosed below) necessary for a fair presentation of the financialposition, results of operations, and cash flows for the periods presentedexcept as discussed in note 2.  Theresults for interim periods are not necessarily indicative of results for theentire year.  The financial statementspresented herein should be read in connection with the financial statementsincluded in the Company's Annual Report on Form 10-KSB/A as amended for theyear ended December 31, 1999.

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect reported amounts of assets, liabilities, income andexpenses and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts for certain revenues andexpenses during the reporting period. Future events could alter such estimates in the near term and actualresults could differ materially from those estimates.

#### ** **

#### **Operations and BusinessRisk**

 

Due to the nature of the our business, it is subject to various risksincluding, but not limited to, technological and market acceptance of theCompany’s product, capital availability, dependence on management and otherrisks.  The Company has been in theprocess of developing a new transmitter product line (“Quantum”). Related tothis process, the Company entered into a license agreement with SinclairBroadcast Group, Inc. (“Sinclair”) in March 2000 (see Note. 4).  The Company shipped the first of its Quantumtransmitters in March 2001.  To date,most of the orders for the Company’s Quantum product  have been with Sinclair.

 

Since the acquisition ofAcrodyne Industries in 1994, the Company has incurred significant lossesincluding net losses of $12,984,186 and $6,906,373 in 2000 and 1999,respectively.  In addition, the Companyhas generated operating cash flow deficits of $2,306,348 and $2,905,477** **in2000 and 1999, respectively. Additional losses and cash flow deficits havecontinued in 2001.  These losses andcash flow deficits have been funded primarily with proceeds from the sale ofequity securities, including $225,000 and $4,075,374 from common stock andwarrants sold to Sinclair in 2000 and 1999, respectively, a $2,000,000subordinated debenture provided by Sinclair, the Company’s Credit Facility withSinclair (see Note. 4) and customer advances. As of December 31, 2000, Sinclairowned 35% of our common stock and has warrants to purchase 8,644,225 additionalshares, which represented a 60% ownership interest on a fully dilutedbasis.  As of  June 30, 2000 and 1999, Sinclair owned 34% and 33%, respectively,of the issued common stock assuming no exercise of warrants.

 

Sinclair had provided aguarantee of the Company’s $2,500,000 credit facility.  In November 2000, Sinclair purchased thecredit facility from the creditor.  InMarch 2000, Sinclair agreed to provide additional funds of up to $2,000,000under terms of a subordinated debenture. From January 1, 2001 through April 24, 2001, Sinclair providedadditional funds in the amount of $1,341,247. Upon completion of the audit ofthe Company’s consolidated financial statements for the year ended December 31,2000, the Company’s independent auditors issued an opinion with an explanatoryparagraph stating that substantial doubt exists about the Company’s ability tocontinue as a going concern.  TheCompany’s ability to continue as a going concern depends upon: (1) market acceptanceof the Company’s new digital product; (2) the Company’s ability to generatesufficient revenues to achieve and sustain positive cash flow; and (3) theCompany’s ability to raise the necessary capital to fund operating needs andfinance the Company’s planned investment. The factors noted above raise substantial doubt concerning the Company’sability to continue as a going concern. The Company is currently exploringoptions available to raise capital. Among the options is a potential recapitalization of the Company bySinclair.  Under terms of the proposedrecapitalization which has yet to be executed, Sinclair could receiveadditional common stock in exchange for forgiveness of certain amounts theCompany owes to Sinclair in the amount of approximately $3,500,000 and couldcancel certain existing warrants and receive additional warrants as part of anew secured line of credit in the amount of $4,000,000.  As a result of this transaction, Sinclaircould own approximately 80% of the Company’s outstanding common shares.  In addition, Sinclair verbally committed topurchase all UHF transmitter requirements from the Company.  As of November 8, 2001, no formalrecapitalization plan has been executed.

 

2.  ACCOUNTING REVIEW CHARGES,ADJUSTMENTS AND RESTATEMENTS

 

###### **For the three andsix month periods ended June 30, 1999**

 

During the third quarterof 2000, the Company initiated a comprehensive internal review of itsaccounting records. As a result of this review, certain charges and adjustmentswere recorded to the previously audited consolidated financial statements forthe year ended December 31, 1999 and the unaudited quarters therein. Theseadjustments had a material effect on the unaudited financial statements for thethree and six-month periods ended June 30, 1999 and the 10-QSB filed for theperiod.  The following is a summary ofthese adjustments:

 
|                             |   | **Three months ended** |       | **Six months ended** |   |
|----------------------------------|--------|------------------------|------------|----------------------|--------|
|                             |   | **June  30, 1999**     |       | **June 30, 1999**    |   |
|                             |   |                   |       |                 |   |
| Cost  of sales adjustments, net  |   | $                      | (573,660   | )                    | $      | (1,222,047 | ) |
| Revenue recognition  adjustments |   | (468,750               | )          | (1,217,911           | )      |
| Accrual  adjustments             |   | (12,000                | )          | (74,000              | )      |
|                             |   |                   |       |                 |   |
| Impact of  charges on net income |   | $                      | (1,054,410 | )                    | $      | (2,513,958 | ) |

 

 

The Company's results for the three andsix month periods ended June 30, 1999 reflect net charges to cost of sales of($573,660) and ($1,222,047) in the respective periods, which relate to pricingof year-end physical inventories .The Company's third quarter accounting reviewin 2000 included a detailed review of the pricing of the physical inventorytaken as of December 31, 1999.  Thereview necessitated a number of adjustments affecting the prior valuations ofphysical inventory and cost of sales for interim periods offset by the effectsof reversing revenues previously recognized. The Company does not havesufficient information to identify the amount of the inventory adjustmentspecifically related to the interim periods in 1999. Therefore, the inventoryvaluation adjustments were spread among the quarters of 1999 based on revenuesfor the applicable quarter relative to total revenue for the year.

 

The Company has recorded adjustments to net income related to thetiming of revenue recognition for certain sales of ($468,750) and ($1,217,911)for the three and six month periods of 1999. These adjustments were made based on the Company's internal review,which indicated that certain revenues should not have been recognized or wererecognized in the improper period. A significant adjustment in the secondquarter was the reversal of ($1,200,000) of sales, which were realized, in thethird quarter.  The adjustments notedabove have been determined through a specific review of the related supportingdocuments and a determination of the proper reporting period for therecognition of the revenue transaction.

 

The Company recorded adjustments of ($12,000) and ($74,000) in therespective periods related to certain accruals and expense items, which werenot previously recognized.

 

The impact of the above charges increased net loss by $1,054,410 or$.16 per share for the quarter ended June 30, 1999 and reduced net income by$2,513,958 or $.38 per share for the six months ended June 30, 1999. Theschedules that follow show the impact on the consolidated financial statementsfrom previously reported results for the three and six months ended June 30,1999.

 

The charges described above, which include both recurring andnonrecurring items that have been aggregated for this presentation forconvenience, were reflected in the Company's financial statements as follows:

 
|                                              |   | **June  30, 1999**                              |       |
|---------------------------------------------------|--------|-------------------------------------------------|------------|
|                                              |   |                                            |       |   |   |
| **Acrodyne  Communications, Inc. And Subsidiary** |   | **As  Reported in  June 30, 1999  Form 10-QSB** |       | **As  Restated** |   |
| ASSETS                                            |   |                                            |       |   |   |
|                                              |   |                                            |       |   |   |
| CURRENT ASSETS:                                   |   |                                            |       |   |   |
| Cash and cash  equivalents                        |   | $                                               | 1,721,415  |   | $ | 1,721,415 |   |
| Accounts  receivables, net                        |   | 1,516,044                                       |       | 107,112 |   |
| Inventories, net                                  |   | 5,934,487                                       |       | 4,306,033 |   |
| Prepaid expenses  and deposits                    |   | 71,596                                          |       | 7,596 |   |
| Total current  assets                             |   | 9,243,542                                       |       | 6,142,156 |   |
|                                              |   |                                            |       |   |   |
| Property,  plant and equipment, net               |   | 522,139                                         |       | 522,139 |   |
|                                              |   |                                            |       |   |   |
| Non-compete  agreement, net                       |   | 398,322                                         |       | 398,322 |   |
| Goodwill, net                                     |   | 3,977,459                                       |       | 3,977,459 |   |
| TOTAL ASSETS                                      |   | $                                               | 14,141,462 |   | $ | 11,040,076 |   |
|                                              |   |                                            |       |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY         |   |                                            |       |   |   |
| CURRENT  LIABILITIES:                             |   |                                            |       |   |   |
| Accounts payable                                  |   | $                                               | 1,244,847  |   | $ | 1,244,846 |   |
| Accrued  expenses                                 |   | 459,931                                         |       | 459,931 |   |
| Customer  advances                                |   | 548,098                                         |       | 1,079,562 |   |
| Borrowings  under Credit Line                     |   | 1,600,000                                       |       | 1,600,000 |   |
| Current  portion capital lease obligations        |   | 75,630                                          |       | 75,630 |   |
| Other  current liabilities                        |   | -                                               |       | 140,000 |   |
| Total  current liabilities                        |   | 3,928,506                                       |       | 4,599,969 |   |
|                                              |   |                                            |       |   |   |
| Capital  lease obligations                        |   | 49,034                                          |       | 49,034 |   |
| Non-compete  liability                            |   | 706,594                                         |       | 706,594 |   |
| Total  liabilities                                |   | 4,684,134                                       |       | 5,355,597 |   |
|                                              |   |                                            |       |   |   |
| COMMITMENTS  AND CONTINGENCIES                    |   |                                            |       |   |   |
|                                              |   |                                            |       |   |   |
| SHAREHOLDERS’  EQUITY                        |   | 9,457,328                                       |       | 5,684,479 |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY  |   | $                                               | 14,141,462 |   | $ | 11,040,076 |   |

 

 
|                                                             |   | **For  the Three Months Ended June30, 1999**    |      |
|------------------------------------------------------------------|--------|-------------------------------------------------|-----------|
|                                                             |   |                                            |      |   |   |
| **Acrodyne  Communications, Inc. And Subsidiary**                |   | **As  Reported in  June 30, 1999  Form 10-QSB** |      | **As  Restated** |   |
|                                                             |   |                                            |      |   |   |
| Net  sales                                                       |   | $                                               | 2,379,605 |   | $ | 1,910,853 |   |
| Cost of sales                                                    |   | 1,594,169                                       |      | 2,167,829 |   |
| Gross profit  (loss)                                             |   | 785,436                                         |      | (256,976 | ) |
|                                                             |   |                                            |      |   |   |
| Operating  expenses:                                             |   |                                            |      |   |   |
| Engineering,  research and development                           |   | 211,912                                         |      | 211,912 |   |
| Selling                                                          |   | 429,778                                         |      | 429,778 |   |
| Administration                                                   |   | 526,317                                         |      | 526,317 |   |
| Amortization on  intangible assets                               |   | 57,874                                          |      | 57,874 |   |
| Total operating expenses                                         |   | 1,225,881                                       |      | 1,225,881 |   |
| Operating loss                                                   |   | (440,445                                        | )         | (1,482,857 | ) |
|                                                             |   |                                            |      |   |   |
| Other expense:                                                   |   |                                            |      |   |   |
| Interest  expense, net                                           |   | (41,178                                         | )         | (53,176 | ) |
|                                                             |   |                                            |      |   |   |
| Net loss before income taxes                                     |   | (481,623                                        | )         | (1,536,033 | ) |
|                                                             |   |                                            |      |   |   |
| Income taxes                                                     |   | -                                               |      | - |   |
|                                                             |   |                                            |      |   |   |
| Net loss                                                         |   | (481,623                                        | )         | (1,536,033 | ) |
|                                                             |   |                                            |      |   |   |
| Dividends on 8% Preferred Stock                                  |   | (14,028                                         | )         | (14,028 | ) |
|                                                             |   |                                            |      |   |   |
| Net loss to  common shareholders                                 |   | $                                               | (495,651  | ) | $ | (1,550,061 | ) |
| Net Loss Per  Common Share- Basic and Diluted                    |   | $                                               | (0.07     | ) | $ | (0.23 | ) |
| Weighted Average  Common Shares Outstanding -- Basic and Diluted |   | 6,769,523                                       |      | 6,769,523 |   |

 

 
|                                                            |   | **For  the Six Months Ended June 30, 1999**     |      |
|-----------------------------------------------------------------|--------|-------------------------------------------------|-----------|
|                                                            |   |                                            |      |   |   |
| **Acrodyne  Communications, Inc. And Subsidiary**               |   | **As  Reported in  June 30, 1999  Form 10-QSB** |      | **As  Restated** |   |
|                                                            |   |                                            |      |   |   |
| Net  sales                                                      |   | $                                               | 5,402,696 |   | $ | 4,184,785 |   |
| Cost of sales                                                   |   | 3,525,518                                       |      | 4,747,565 |   |
| Gross  profit (loss)                                            |   | 1,877,178                                       |      | (562,780 | ) |
|                                                            |   |                                            |      |   |   |
| Operating  expenses:                                            |   |                                            |      |   |   |
| Engineering, research  and development                          |   | 436,391                                         |      | 436,391 |   |
| Selling                                                         |   | 780,970                                         |      | 780,970 |   |
| Administration                                                  |   | 954,429                                         |      | 1,004,429 |   |
| Amortization on  intangible assets                              |   | 115,748                                         |      | 115,748 |   |
| Total Operating  Expenses                                       |   | 2,287,538                                       |      | 2,337,538 |   |
|                                                            |   |                                            |      |   |   |
| Operating loss                                                  |   | (410,360                                        | )         | (2,900,318 | ) |
|                                                            |   |                                            |      |   |   |
| Other income  (expense):                                        |   |                                            |      |   |   |
| Interest  expense, net                                          |   | (52,763                                         | )         | (76,763 | ) |
|                                                            |   |                                            |      |   |   |
| Net  loss before income taxes                              |   | (463,123                                        | )         | (2,977,081 | ) |
|                                                            |   |                                            |      |   |   |
| Income taxes                                                    |   | -                                               |      | - |   |
|                                                            |   |                                            |      |   |   |
| Net loss                                                        |   | (463,123                                        | )         | (2,977,081 | ) |
|                                                            |   |                                            |      |   |   |
| Dividend on 8%  Preferred Stock                                 |   | (28,056                                         | )         | (28,056 | ) |
|                                                            |   |                                            |      |   |   |
| Net loss  available to common shareholders                      |   | $                                               | (491,179  | ) | $ | (3,005,137 | ) |
| Net loss Per  Common Share - Basic and Diluted                  |   | $                                               | (0.07     | ) | $ | (0.46 | ) |
| Weighted Average  Common Shares Outstanding - Basic and Diluted |   | 6,545,047                                       |      | 6,562,349 |   |

 

 

As discussed above, theCompany recorded significant adjustments in the years ended December 31, 2000and 1999, certain of which affect account balances applicable to the quarterended March 31, 2000 and the three and six months ended June 30, 1999.  However, the Company does not havesufficient information to identify the specific amounts of the inventoryvaluation adjustments reflected above attributable to these 2000 and 1999interim periods.  For the three and sixmonths ended June 30, 2000, the Company was not able to determine the cost ofsales for these 2000 interim periods. As such, the Company has spread the inventory valuation adjustmentsamong the four unaudited quarters of the year and determined cost of sales in amanner that provided a negative margin of 5.0% and 13.4% for each of the firstthree unaudited quarters of 2000 and 1999, respectively.  Accordingly, the Company has concluded thatits internal controls for the preparation of interim financial information didnot provide an adequate basis for its independent public accountants tocomplete reviews of the quarterly data for the quarters in the six-monthperiods ended June 30, 2000 and 1999 in accordance with standards establishedby the American Institute of Certified Public Accountants.  As discussed above, the Company believesthat portions of the adjustments to inventory and the cost of sales that wererecorded in the quarters ended June 30, 2000 and 1999 may relate to otherindividual interim periods within 2000 or 1999. The Company is committingresources to mitigate previously identified control weaknesses.  A full physical inventory was completed inAugust of 2000.  In addition, theCompany will complete physical inventories on a quarterly basis.  Management believes that as a result ofthese efforts that its processes will continue to improve, although there canbe no assurance this will be the case.

 

 

 

2. INVENTORIES

 

Inventories comprise:
|            |   | **June 30, 2000** |      | **December 31, 1999** |   |
|-----------------|--------|-------------------|-----------|-----------------------|--------|
|            |   |              |      |                  |   |
| Raw materials   |   | $                 | 1,176,130 |                  | $      | 1,220,965 |   |
| Work in process |   | 718,746           |      | 764,048               |   |
| Finished goods  |   | 1,372,153         |      | 1,214,536             |   |
|            |   | $                 | 3,267,029 |                  | $      | 3,199,549 |   |

 

3. EARNINGS PER SHARE

 

Basic earnings per shareis computed by dividing net income available to common shareholders by theweighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average numberof shares determined for the basic computations plus the number of shares ofcommon stock that would be issued assuming all contingently issuable shareshaving a dilutive effect on earnings per share were outstanding for theperiod.  Due to the Company's net lossfor the periods presented, the incremental shares issuable in connection withconvertible stock, stock options and warrants are anti-dilutive andaccordingly, not considered in the calculation of earnings per share.

 

4. RELATED PARTY TRANSACTION

 

Sales to Sinclair Broadcast Group, Inc. (Sinclair) amounted to $421,608for the three months ended June 30, 2000 and $1,511,243 for six months endedJune 30, 2000.  This represents 44% and48% and of the Company's total sales for the respective periods.

 

On January 27, 1999,Sinclair invested $4,300,000 in the Company in return for 1,431,333 shares ofthe Company's common stock and warrants to purchase up to an aggregate of8,719,225 shares over a term of up to seven years at prices ranging from $3.00to $6.00 per share.  Sinclair alsoacquired an additional 800,000 shares of common stock previously held byoutside investors.  At June 30, 1999Sinclair owned approximately 33% of the common stock issued.

 

During November 1999, the Company entered into a Guaranty and LeaseCompensation Agreement (the "Guaranty Agreement") with Sinclair,intended to be effective September 16, 1999. In connection with its $2,500,000Credit Facility, the bank required, as a condition of the loan, that Sinclairunconditionally and irrevocably guarantee all of the Company’s obligation withrespect to the Credit Facility. Under the Guaranty Agreement and as compensationto Sinclair for the guarantee, the Company committed to provide Sinclair thefollowing: (1) $200,000 payable in Company common stock (based upon the closingprice as quoted on September 16, 1999), and (2) on October 1, 2000 and payableeach year thereafter until the bank no longer requires the guarantee fromSinclair, the Company shall pay Sinclair an amount equal to the average of theline of credit outstanding balances as of the last day of each of the precedingtwelve months (not to be less than $1,700,000) multiplied by 12.5% and payablein the form of Company common stock. The $200,000 due Sinclair under the termsof the guarantee was capitalized and was amortized as interest expense over theguarantee period. Of the $200,000 related to this guarantee, $150,000 and$50,000 were recorded as interest expense during 2000 and 1999,respectively.  During the three and sixmonths ended June 30, 2000, the Company recorded $50,000 and $100,000,respectively, as interest expense.  Noamounts were recorded during the three and six months ended June 30, 1999. Forthe year ended December 31, 2000, the Company recorded additional interestexpense related to the Guarantee Agreement of $235,500. In November 2000,Sinclair purchased the credit facility discussed and assumed all rights of thebank.  Sinclair filed the UCC liensagainst the Company’s personal property, which eliminated the Sinclairguaranty.

 

During November of 1999, the Company entered into a sublease agreement(the “Lease Agreement”) with Sinclair. Under the terms of the Lease Agreementand as compensation for the Lease Agreement, the Company agreed to compensateSinclair as follows: (1) on the lease execution date, $70,000 payable in theform of Company common stock calculated as the average closing price for thefive business days preceding the lease execution date and (2) on each leaseanniversary date, $70,000 payable in the form of Company common stockcalculated as the average closing price for the five business days precedingthe lease anniversary date.

 

**During March 2000, the Companyentered into a 10-year license agreement (the “License Agreement") withSinclair for the exclusive right to manufacture and sell certain Sinclairdesigned transmitter lines. Under terms of the License Agreement, the Companywill pay Sinclair an annual royalty of $300,000 for five years.  For years six through ten, the Company shallpay Sinclair an annual royalty equal to 1.0% of revenues realized by theCompany attributable to the License Agreement. At the end of the tenth year, the Company has the option to purchase theSinclair technology.  The purchase pricewould be twice the cumulative royalty amount paid to Sinclair for years sixthrough ten.**

 

During March 2000, theCompany entered into a subordinated debenture agreement (the"Debenture") with Sinclair. Under the terms of the Debenture, theCompany may borrow up to $2,000,000 at an interest rate of 10.5%. The firstpayment of interest was to be made April 1, 2000 and on a monthly basisthereafter.  Principal is payable upondemand of Sinclair. Further, Sinclair has the right, at any time, to convertall, but not less than all, of the principal owed to Sinclair into theCompany's common stock at $3.45 per share. The Company borrowed $400,000 underthe debenture through June 30, 2000 and through May 7, 2001 the Company hadborrowed $2,000,000 under the terms of this arrangement.  During 2000, the Company paid $47,903 ofinterest due under the Debenture.  Nopayments of interest were made during the first two quarters of 2000.

 

On February 29, 2000 Sinclair exercised warrants for 75,000 shares ofthe Company's stock for $225,000. At the end of the quarter Sinclair held2,418,333 shares of the Company's common stock, representing 34.6% of issuedcommon stock assuming no warrants are exercised.

 

On April 27, 2001, the Company entered into a $4,000,000 line of  credit facility with Sinclair.   The line of credit requires monthlyinterest-only payments at a fixed rate of interest of 12% per annum and maturesupon demand by Sinclair.

 

 

5. REVENUE RECOGNITION

 

In December 1999, the Securities and Exchange Commission issued StaffAccounting Bulletin (“SAB”) No. 101, “Revenue Recognition in FinancialStatements.”  SAB No. 101 summarizes thestaff's views in applying generally accepted accounting principles to selectedrevenue recognition issues.  Guidance isprovided with respect to the recognition, presentation and disclosure ofrevenue in the financial statements. The Company implemented the provisions ofSAB 101 in the fourth quarter of 2000, retroactive to January 1, 2000.  Effective January 1, 2000, the Companychanged its method of accounting for transmitter sales such that the Companyrecognizes revenue from the sale of transmitters when title and risks ofownership are transferred to the customer, which generally occurs uponshipment, customer pick-up or completion of the installation process if theCompany is obligated to perform the installation. A customer may be invoicedfor and receive title to transmitters prior to taking physical possession whenthe customer has made a fixed, written commitment for the purchase, thetransmitters have been completed, tested and are available for pick-up ordelivery, and the customer has requested that the Company hold the transmittersuntil the customer determines the most economical means of taking physicalpossession. Upon such a request, the Company recognizes revenue if it has nofurther obligation except to segregate the transmitters, invoice the customerunder normal billing and credit terms, and hold the transmitter for a shortperiod of time as is customary in the industry, until pick-up or delivery.  Transmitters are built to customerspecification and no right of return or exchange privileges are granted.Accordingly, no provision for sales allowances or returns is recorded.  The Company records revenue for servicesrelated to installation of transmitters upon completion of the installationprocess. Amounts, which cannot be recognized in accordance with the abovepolicy, are recorded as deferred revenue in the accompanying consolidatedbalance sheets.

 

The adoption of SAB No. 101, in the fourth quarter of 2000, resulted inan increase in reported revenues for the year 2000 of $539,698 of which$194,698 related to the first quarter and is reflected in the accompanyingfinancial statements there was no was no affect on sales for the second quarterof 2000; there is no change in earnings as the cost approximated the revenue.In accordance with the bulletin, prior year consolidated financial statementshave not been restated to apply SAB 101 retroactively.

 

6. NEW ACCOUNTING PRONOUNCEMENTS

 

In June 1998, the Financial Accounting Standards Board issued SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities."SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is required to beadopted by the Company on January 1, 2001. SFAS No. 133 establishes theaccounting and financial reporting requirements for derivative instruments andrequires companies to recognize derivatives as either assets or liabilities onthe balance sheet and measure these instruments at fair value.  This statement is not expected to have amaterial effect on the Company's consolidated financial position or results ofoperations upon adoption in 2001.

 

The Financial Accounting Standards Board’s Emerging Issues Task Forcereleased Issue 00-10 “Accounting for Shipping and Handling Fees and Costs,”which requires amounts charged to customers for shipping and handling to beclassified as revenue and the related costs to be classified as cost ofsales.  Issue 00-10 is applicable nolater than the fourth quarter of fiscal years beginning after December 15,1999, and has been adopted by the Company in 2000.  As a result of the adoption of Issue 00-10, the Company hasclassified approximately $135,000 of charges to customers for shipping andhandling as net sales within the consolidated statement of operations for theyear ended December 31, 2000.  Thispolicy had no effect on the Company’s consolidated financial position orresults of operations for the year ended December 31, 2000.  The Company was unable to obtain theinformation required for 1999 due to the nature in which the required data wasrecorded and maintained. Accordingly, no reclassification was made to the 1999consolidated financial statements.

 

 

7. CONTINGENT LIABILITIES

 

In September 2000, theCompany was joined as a defendant along with two of its officers and directors,in a class action in the United States District Court for the District ofMaryland. The lawsuit asserts that the Company issued false and misleadingfinancial statements. The Company has reached a settlement with plaintiffs’counsel. The settlement requires the Company to issue plaintiffs warrants topurchase 1,600,000 shares of the Company’s common stock at an exercise price of$1.00 per share. The warrants will expire after five years. The Company alsohas agreed to pay the plaintiffs $750,000. The cash portion of the settlement will be funded by its officers’ anddirectors’ indemnity insurance policy. A Memorandum of Understanding reflectingthe material terms of the settlement was filed with the Court on March 1, 2001.On April 6, 2001, a Stipulation and Agreement of Settlement was submitted tothe Court along with all required documents to effectuate the settlement.  On April 9, 2001, the Court approved theproposed settlement but reserved its right to review the settlement and/orenter a final judgment approving the settlement and dismissing thelawsuit.  On June 26, 2001, the Court(i) found the settlement to be fair, reasonable, and adequate and in the bestinterests of the parties; (ii) settled, released, discharged and dismissed withprejudice the cases against the defendants; (iii) determined that neither the settlementnor any of the documents or statements associated therewith are, or shall beconstrued as, a concession or admission by the defendants of the existence ofany damages or wrongdoing; and (iv) awarded the plaintiffs’ counsel 25% of thegross amount of the settlement fund as attorneys’ fees, which amount is to bepaid out of the settlement fund. As a result of the settlement, during thethree months ended March 31, 2001, the Company will record a charge tooperations of approximately $336,000 which represents the fair value of thewarrants issued.

 

8. SUBSEQUENT EVENTS

 

On April 27, 2001, we entered into a $4,000,000 line of  credit facility with Sinclair.   The line of credit requires monthlyinterest-only payments at a fixed rate of interest of 12% per annum and maturesupon demand by Sinclair.

 

On July 17, 2001, we entered into an agreement to exchange all theoutstanding shares of our 8% Convertible Redeemable Preferred Stock for 428,447shares of our Common Stock.

**ITEM2.**

 

 **MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND**

** RESULTS OF OPERATIONS**

 

 

##### OVERVIEW

 

We are Acrodyne Holdings,Inc., a Delaware corporation, which was formed in May 1991. In 1995, we changedour name to Acrodyne Communications, Inc. which we operate in one industrysegment – the design, manufacture and marketing of television transmitters andtranslators, which are sold in the United States and internationally.

 

On May 16, 1994, we entered into agreements to acquire all of theoutstanding stock of Acrodyne Industries, Inc., a company engaged in themanufacture 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 proceedsobtained from a public offering of our common stock.

 

### ** **

##### BASISOF PRESENTATION

 

Upon completion of the audit of our consolidated financial statementsfor the year ended December 31, 2000, our independent auditors issued anopinion with an explanatory paragraph stating that substantial doubt existsabout our ability to continue as a going concern. Our ability to continue as agoing concern depends upon: (1) market acceptance of our new digital product;(2) our ability to generate sufficient revenues to achieve and sustain positivecash flow; and (3) our ability to raise the necessary capital to fund operatingneeds and finance the planned investment. The factors noted above raise substantial doubt concerning our abilityto continue as a going concern. The consolidated financial statements do notinclude any adjustments relating to the recoverability and classification ofasset carrying amounts or the amount and classification of liabilities thatmight result should we be unable to continue as a going concern.  We are currently exploring our options toraise capital.  Among the options is apotential recapitalization by Sinclair Broadcast Group, Inc. (“Sinclair”).  Under terms of the proposed recapitalizationwhich has yet to be executed, Sinclair could receive additional common stock inexchange for forgiveness of certain amounts that we owe to Sinclair in theamount of $3,500,000 and could cancel certain existing warrants and receiveadditional warrants as part of a new secured line of credit in the amount of$4,000,000.  As a result of thistransaction, Sinclair could own approximately 80% of our common stock. Inaddition, Sinclair has orally committed to purchase all UHF transmitterrequirements from us.  As of November 8,2001, no formal recapitalization plan has been executed. See “Significant andSubsequent Events” below for additional information concerning futureliquidity.

#####  

##### OPERATIONSAND 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 ofdeveloping a new transmitter product line (“Quantum”).  Related to this process, we entered into alicense agreement with Sinclair Broadcast Group, Inc. (“Sinclair”) in March2000 (see Note. 4).  We shipped thefirst of our Quantum transmitters in March 2001.  To date, most of the orders for our Quantum product are fromSinclair, which total $6,908,814.

 

Since the acquisition ofAcrodyne Industries in 1994, we have incurred significant losses including netlosses of $12,984,186 and $6,906,373 in 2000 and 1999, respectively.  In addition, we have generated operatingcash flow deficits of $2,306,348 and $2,905,477 in 2000 and 1999,respectively.  Additional losses andcash flow deficits have continued in 2001. These losses and cash flow deficits have been funded primarily withproceeds from the sale of equity securities, including $225,000 and $4,075,374from common stock and warrants sold to Sinclair in 2000 and 1999, respectively,a $2,000,000 subordinated debenture provided by Sinclair, our Credit Facilitywith Sinclair (see Note. 4) and customer advances. As of December 31, 2000,Sinclair owned 35% of our common stock and has warrants to purchase 8,644,225additional shares, which represented a 60% ownership interest on a fullydiluted basis. For the quarters ended June 30, 2000 and 1999 Sinclair owned 35%and 33% of the issued common stock assuming no exercise of warrants.

 

Sinclair had provided aguarantee of our $2,500,000 credit facility. In November 2000, Sinclair purchased the credit facility from thecreditor.  In March 2000, Sinclairagreed to provide additional funds to us of up to $2,000,000 under terms of asubordinated debenture**. **FromJanuary 1, 2001 through May 8, 2001, Sinclair provided additional funds to usin the amount of $1,341,247. Upon completion of the audit of our consolidatedfinancial statements for the year ended December 31, 2000, our independentauditors issued an opinion with an explanatory paragraph stating thatsubstantial doubt exists about our ability to continue as a going concern.  Our ability to continue as a going concerndepends upon: (1) market acceptance of our new digital product; (2) our abilityto generate sufficient revenues to achieve and sustain positive cash flow; and(3) our ability to raise the necessary capital to fund operating needs andfinance the planned investment.  Thefactors noted above raise substantial doubt concerning our ability to continueas a going concern. We are currently exploring options available to us to raisecapital.  Among the options is apotential recapitalization of us by Sinclair. Under terms of the proposed recapitalization which has yet to beexecuted, Sinclair could receive additional common stock in exchange forforgiveness of certain amounts we owe to Sinclair in the amount ofapproximately $3,500,000 and could cancel certain existing warrants and receiveadditional warrants as part of a new secured line of credit in the amount of$4,000,000.  As a result of thistransaction, Sinclair could own approximately 80% of us.  In addition, Sinclair verbally committed topurchase all UHF transmitter requirements from us.  As of November 8, 2001, no formal recapitalization plan has beenexecuted.

 

 

 

 

SIGNIFICANT AND SUBSEQUENT EVENTS

 

In February 2000, we terminated 18 of our employees in an effort tocontrol costs in anticipation of lower than forecasted sales volume in the nearterm and to maintain our working capital.

 

**During March 2000, we entered intoa 10-year license agreement (the “License Agreement") with Sinclair forthe exclusive right to manufacture and sell the Quantum product line. Underterms of the License Agreement, we will pay Sinclair an annual royalty of$300,000 for five years.  For years sixthrough ten, we shall pay Sinclair an annual royalty equal to 1.0% of revenuesattributable to the License Agreement. At end of the tenth year, we have the option to purchase the Sinclairtechnology.  The purchase price would betwice the cumulative royalty amount paid to Sinclair for years six through ten.**

 

During March 2000, we entered into a subordinated debenture agreement(the "Debenture") with Sinclair. Under the terms of the Debenture, we may borrow up to $2,000,000 at aninterest rate of 10.5%.  The firstpayment of interest shall be made April 1, 2000 and on a monthly basisthereafter.  Principal is payable upondemand of Sinclair.  Further, Sinclairhas the right, at any time, to convert all, but not less than all, of theprincipal owed to Sinclair into our common stock at $3.45 per share.  As of April 24, 2001, we have drawn$2,000,000 against this Debenture to fund operating needs.

 

In July 2000, we announced that the corporate headquarters would berelocating to Cockeysville, MD, and that manufacturing and support would moveto Phoenixville, PA.  This move wascompleted in the fourth quarter of 2000.

 

During August 2000, we announced that it was necessary to defer filingthe Company’s Form 10-QSB for the quarter ended June 30, 2000.  We also announced that prior years' auditedconsolidated financial statements would have to be amended and restated alongwith the previously filed first quarter consolidated financial statements forthe three months ended March 31, 2000.

 

In September 2000, we announced that we would voluntarily delist afterdelisting proceedings were announced by the Nasdaq for not filing timelyfinancial information.  The shares maytrade on the OTC Bulletin Board, but not before we file our Form 10-QSB for theperiods ended September 30, 2000, June 30, 2000, March 31, 2000 (restated) andForm 10-KSB for the year ended December 31, 2000 and the restated Form 10-KSBfor the years ended December 31, 1999 and 1998.   We filed the restated Form 10-KSB for the year ended December31, 1999 on April 17, 2001.

 

In September 2000, wewere named as defendant, along with two of our directors, in four class actionlawsuits filed in the United States District Court for the District of Maryland(Northern Division).  These fourlawsuits were consolidated into a single lawsuit.  A description of this lawsuit and its proposed settlement iscontained in Part I, Item 3.  LegalProceedings of the Company's 1999 Form 10-KSB as amended.

 

On April 27, 2001, we entered into a $4,000,000 line of  credit facility with Sinclair.   The line of credit requires monthlyinterest-only payments at a fixed rate of interest of 12% per annum and maturesupon demand by Sinclair.

 

On July 17, 2001, we entered into an agreement to exchange all theoutstanding shares of our 8% Convertible Redeemable Preferred Stock for 428,447shares of our Common Stock.

 

**RESULTSOF OPERATIONS**

 

Within the following discussion, unless otherwise stated, “quarter” and“ six-month period” refer to the second quarter of fiscal 2000 and the sixmonths ended June 30, 2000. All comparison discussions are with thecorresponding periods in the previous year unless otherwise stated.

 

The following compares our summary results of operations for the threeand six-month periods ended June 30, 2000 and 1999:

                                                                                                                                                
|                   |   | **Three Months Ended June 30,** |       | **Six Months Ended June 30** |   |
|------------------------|--------|---------------------------------|------------|------------------------------|--------|
|                   |   | **2000**                        |       |                         |   | **1999** |   |   |   | **2000** |   |   |   | **1999** |   |   |   |
|                   |   |                            |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  Sales             |   | $                               | 954,205    |                         | 100    | % | $ | 1,910,853 |   | 100 | % | $ | 3,178,265 |   | 100 | % | $ | 4,184,785 |   | 100 | % |
| Cost  of Sales         |   | 1,055,074                       |       | 111                          | %      | 2,167,829 |   | 113 | % | 3,466,985 |   | 109 | % | 4,747,565 |   | 113 | % |
| Gross  Loss            |   | (100,869                        | )          | (11                          | )%     | (256,976 | ) | (13 | )% | (288,720 | ) | (9 | )% | (562,780 | ) | (13 | )% |
| Operating  Expenses    |   | 1,526,140                       |       | 160                          | %      | 1,225,881 |   | (64 | )% | 2,683,881 |   | 84 | % | 2,337,538 |   | 56 | % |
| Operating  Loss   |   | (1,627,009                      | )          | (171                         | )%     | (1,482,857 | ) | (77 | )% | (2,972,601 | ) | (93 | )% | (2,900,318 | ) | (69 | )% |
| Interest  expense, net |   | 130,454                         |       | 13                           | %      | 53,176 |   | 3 | % | 242,326 |   | 8 | % | 76,763 |   | 2 | % |
| Net  loss              |   | $                               | (1,757,463 | )                            | (184   | )% | $ | (1,536,033 | ) | (80 | )% | $ | (3,214,927 | ) | (101 | )% | $ | (2,977,081 | ) | (71 | )% |

 

Sales decreased by $956,648 or 50% for the quarter and $1,006,520 or24% for the six-month period. The reduction in sales is mainly due to the delayin purchasing of digital transmission equipment by broadcasters. We believe thatthe broadcasters have postponed any significant transmission equipmentexpenditures pending a clearer plan for the emergence of digital television andrelated transition. We also believe the delay in purchases is due to a desireby broadcasters to increase transmission power, which requires authorizationfrom the FCC.

 

Gross loss on sales was (11%) for the quarter and  (9%) for the six month period compared to(13)% in the corresponding periods in 1999. Margins on a quarter-to-quarter basis improved slightly but were stilladversely affected by lower sales volume and a higher sales of low marginproduct mix. Also, contributing to the negative profit margins were excessfield installation costs and warranty repairs.

 

Operating   expenses for thequarter increased by  $300,259 or 24%and by $346,343 or 15% for the six-month period. The increase for the quarteris primarily attributable to a $295,000 increase to the reserve for bad debts.The six-month period increased due to the reserve previously mentioned andincrease in legal and professional service cost experienced during thesix-month period.

 

Interest expense increased primarily due to charges incurred relatingto Sinclair’s guarantee of the Company’s line of credit and facilities leaseand an increase in borrowings under terms of our lines of credit.

 

#### **LIQUIDITY AND CAPITALRESOURCES**

 

 

Historically, we havefinanced our activities primarily from internally generated funds, customeradvances, use of our credit facilities and sales of equity securities and, morerecently, through investments and funding by Sinclair. For the six-month periodour working capital decreased to ($5,029,878) as compared to  ($1,976,388) at December 31, 1999, mainlydue to increased customer advances, which is a liability for cash paymentsreceived on orders and the license fee payable to Sinclair. Net cash used inoperating activities was ($831,548) for the current six-month period ascompared to $(2,238,270) a year ago. The current six-month period benefitedfrom an increase in customer advances of $1,940,626.

 

Accounts receivable atthe end of the quarter were $420,401 net of a reserve for bad debts of$360,000.  The gross decrease was$480,867 from December 31, 1999 reflecting lower sales volume of the six-monthperiod. As mentioned previously $295,000 increase to the bad debt reserve wasrecorded during the quarter and $300,000 for the six-month period.

 

Cash flow from financing activities decreased significantly from theprior six-month period. The current six-month-period net financing activitiesgenerated $203,685 compared to $3,045,801 in the same period last year.  In the prior year period, Sinclair invested$4,300,000 in return for 1,431,333 shares of our stock and warrants, this financingsource was offset by the retirement of our Series A preferred stock in theamount of $998,531.

 

In September 1999, weestablished a new $2,500,000 credit facility (the "Credit Facility")arrangement with a bank for working capital purposes to replace our thenexisting bank credit facilities.  Thecredit facility bears interest at LIBOR rate plus 200 basis points.  The new facility is available on a standardformula basis involving qualified accounts receivable and inventory andcontains certain covenants having to do with the maintenance of a minimumtangible net worth.  As of December 31,1999, we were not in compliance with terms of the credit facility.  The bank provided a waiver for the 1999event of default.  The credit facilitywas collateralized by all of our personal property and expired on October 31,2000.  In connection with obtaining thisfacility, the bank required, as a condition of the loan, that Sinclairunconditionally and irrevocably guarantee all of our obligations under thefacility.  We agreed to issue Sinclair$200,000 of our common stock as compensation for the guarantee.  In November 2000, Sinclair purchased the$2,500,000 line of credit from the bank and filed related UCC liens against ourpersonal property, which eliminated the Sinclair guarantee.  The $200,000 obligation for the guaranteewas capitalized as "Other Assets," and is being amortized as interestexpense over the guarantee period of one year.

 

 

**MaterialCommitments for Capital Expenditures**

 

We do not have any material commitments for capital expenditures otherthan our commitment under the sublease agreement with Sinclair. This subleaseagreement entered into in September 1999 relates to our new manufacturing andsupport facility located in Phoenixville, Pa. We moved into the new buildingduring November 2000 and recorded the lease with Sinclair as a capital lease.Minimum lease payments due under this building lease are as follows:

 

                                                                

| 2001                 |   | $         | 424,453   |   |
|----------------------|--------|-----------|-----------|--------|
| 2002                 |   | 416,374   |      |
| 2003                 |   | 427,553   |      |
| 2004                 |   | 448,103   |      |
| 2005                 |   | 505,341   |      |
| 2006 and  thereafter |   | 5,759,784 |      |
|                 |   | $         | 7,981,608 |   |

 

 

**FutureLiquidity**

 

Upon completion of theaudit of our consolidated financial statements for the year ended December 31,2000, our independent auditors issued an opinion with an explanatory paragraphstating that substantial doubt exists about our ability to continue as a goingconcern. Our ability to continue as a going concern depends upon: (1) marketacceptance of our new digital product; (2) our ability to generate sufficientrevenues to achieve and sustain positive cash flow; and (3) our ability toraise the necessary capital to fund operating needs and finance the plannedinvestment.  The factors noted aboveraise substantial doubt concerning our ability to continue as a going concern.The consolidated financial statements do not include any adjustments relatingto the recoverability and classification of asset carrying amounts or theamount and classification of liabilities that might result should we be unableto continue as a going concern.  We arecurrently exploring our options to raise capital.  Among the options is a potential recapitalization bySinclair.  Under terms of the proposedrecapitalization which has yet to be executed, Sinclair could receiveadditional common stock in exchange for forgiveness of certain amounts that we oweto Sinclair in the amount of $3,500,000 and could cancel certain existingwarrants and receive additional warrants as part of a new secured line ofcredit in the amount of $4,000,000.  Asa result of this transaction, Sinclair could own approximately 80% of ourcommon stock. In addition, Sinclair has orally committed to purchase all UHFtransmitter requirements from us.  As ofNovember 8, 2001, no formal recapitalization plan has been executed. See“Significant and Subsequent Events” above for additional information concerningfuture liquidity.

 

 

#### **Forward LookingStatements**

 

 

Certain informationcontained in this report including, without limitation, information appearingunder Item 2.,”Management’s Discussion and Analysis of Financial Condition andResults of Operations,” are forwarding-looking statements within the meaning ofthe Securities Act of 1933 and the Exchange Act of 1934 (also known as thePrivate Securities Litigation Reform Act of 1995). Words and expressions thatdo not relate to historical information are "forward looking statements”.Such forward-looking statements are subject to risks, uncertainties and otherfactors  which could cause actual  results to differ  materially  fromfuture  results  expressed,  projected  or  implied by  such   forward-looking statements. Such factorsinclude, but are not limited to the following:

 

•      Our high level of indebtedness and ourability to refinance our substantial debt and contractual

obligations,

•      Our ability to make interest and principalpayments on debt and other contractual obligations,

•      Our ability to improve operatingperformance,

•      The outcomes of pending lawsuits involvingour financial reporting and other matters,

•      Our ability to manufacture and sell thenew Quantum Transmission product line in a timely manner,

•      Regulatory changes governing transmissionplatforms,

•      General economic and marketplaceconditions,

•      Interest rate fluctuations, access tocapital, and

•      Our ability to develop, implement andmaintain reliable and adequate internal accounting systems and controls.

 

 

 

Part II   OTHERINFORMATION

 

#### ** Item 1 Legal Proceedings**

 

In September 2000, theCompany was joined as a defendant along with two of its officers and directors,in a class action in the United States District Court for the District ofMaryland. The lawsuit asserts that the Company issued false and misleadingfinancial statements. The Company has reached a settlement with plaintiffs’counsel. The settlement requires the Company to issue plaintiffs warrants topurchase 1,600,000 shares of the Company’s common stock at an exercise price of$1.00 per share. The warrants will expire after five years. The Company alsohas agreed to pay the plaintiffs $750,000. The cash portion of the settlement will be funded by its officers’ anddirectors’ indemnity insurance policy. A Memorandum of Understanding reflectingthe material terms of the settlement was filed with the Court on March 1, 2001.On April 6, 2001, a Stipulation and Agreement of Settlement was submitted tothe Court along with all required documents to effectuate the settlement.  On April 9, 2001, the Court approved theproposed settlement but reserved its right to review the settlement and/orenter a final judgment approving the settlement and dismissing thelawsuit.  On June 26, 2001, the Court(i) found the settlement to be fair, reasonable, and adequate and in the bestinterests of the parties; (ii) settled, released, discharged and dismissed withprejudice the cases against the defendants; (iii) determined that neither thesettlement nor any of the documents or statements associated therewith are, orshall be construed as, a concession or admission by the defendants of theexistence of any damages or wrongdoing; and (iv) awarded the plaintiffs’counsel 25% of the gross amount of the settlement fund as attorneys’ fees,which amount is to be paid out of the settlement fund. As a result of thesettlement, during the three months ended March 31, 2001, the Company willrecord a charge to operations of approximately $336,000 which represents thefair value of the warrants issued.

 

 

#### **Item2.    CHANGES IN SECURITIES AND USE OFPROCEEDS**

                Not applicable

 

#### **Item3.    DEFAULTS UPON SENIOR SECURITIES**

                Not applicable

 

#### **Item4.    SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

                No matters were submitted to a vote of the securityholders during the quarter ended March 31, 2000

 

#### **Item5.    OTHER INFORMATION**

#### **                Not applicable**

 

#### **Item6.    EXHIBITS AND REPORTS ON FORM 8-K**

#### ** **

(b)           8-K filed on April 17, 2001 - Financial results for secondand third quarters 2000 and restated results for 1998, 1999 and first quarter2000; preliminary settlement of stockholders class action litigation andrelated financial matters.  Incorporatedherein by reference.

 

                8-Kfiled on April 17,2001 – consolidated balance sheets, related consolidatedstatements of operations, shareholders equity, and cash flows for the two yearsended December 31, 2000 and 1999.

 

                8-Kfiled on May 10, 2001 – The position of Vice President and Chief FinancialOfficer was eliminated as of May 8, 2001

 

 

**SIGNATURES**

 

 

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 undersignedthereunto duly authorized.

 

.
|   ACRODYNE COMMUNICATONS, INC.                     |
|---------------------------------------------------------|
|                                                    |   (Registrant) |
|                                                    |   |   |
|                                                    |   |   |
|                                                    |   |   |
|                                                    | By: | /s/ Nathaniel Ostroff |
| Nathaniel Ostroff,  Chairman of the Board of Directors, |
|                                                    | Chief Executive Officer  and Interim President |
|                                                    |   |   |
|                                                    |   |   |
|                                                    |   |   |
|                                                    |   |   |
|                                                    |   |   |
|                                                    | By: | /s/  Robert E. Woodruff |
| Robert E. Woodruff,  Chief Accounting Officer           |
|                                                    |   |   |
|                                                         |  |  |  |

 

Date    November 8, 2001