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

**Washington,D.C. 20549**

 

**Form 10-QSB**

 

 

**(Markone)**

 
| **ý** |   | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------|----------------------------------------------------------------------------------------|

 

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

 
| **o** |   | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT** |
|-------|--------|---------------------------------------------------------------------------------|

 

**Commissionfile number0-24886**

 

**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 oNoý

 

State the numberof shares outstanding of each of the issuer's classes of common equity, as ofthe latest 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  - September 30, 2000 and December 31, 1999                                 |   |
|                  |                                                                                                    |   |
|                  | Consolidated  Statements of Operations for the Three and Nine Months Ended September 30,  2000 and 1999 |   |
|                  |                                                                                                    |   |
|                  | Consolidated  Statements of Cash Flows for the Nine Months Ended September 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 $1,842,565 and $3,064,609 for thethree and nine months ended September 30, 1999, respectively, and $2,795,322for the year ended December 31, 1999 which related, primarily, to the pricingof the year-end physical inventories, offset by the effects on cost of sales ofreversing revenues previously recognized. The year ended December 31, 1999 amountalso included a $563,000 increase to the inventory obsolescence reserve.  Other adjustments related to the timing ofrevenue recognition of $1,123,409 and $92,503 for the three and nine monthsended September 30, 1999, respectively, and $2,299,511 for the year endedDecember 31, 1999.  The total effect ofall adjustments increased the net loss by $729,156 and $3,243,112 for the threeand nine months ended September 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/A on April 17, 2001. See also “Accounting Review Charges,Adjustments and Restatements” (Note 2 to the consolidated financial statements)contained elsewhere in this Form 10-QSB.

 

**AcrodyneCommunications, Inc. And Subsidiary**

**ConsolidatedBalance Sheets**

 
|                                                                                                                                                                   |   | **September 30,** |          | **December 31,** |          |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------------|------------------|---------------|
|                                                                                                                                                                   |   | **2000**          |          | **1999**         |          |
| **Assets**                                                                                                                                                             |   | **(unaudited)**   |          | **(Restated)**   |          |
|                                                                                                                                                                   |   |              |          |             |          |
| Current Assets:                                                                                                                                                        |   |              |          |             |          |
| Cash  and cash equivalents                                                                                                                                             |   | $                 | 25,265        |             | $             | 664,950 |   |
| Short term  investment                                                                                                                                                 |   | -                 |          | 200,000          |          |
| Accounts  receivables, net                                                                                                                                             |   | 454,873           |          | 1,201,268        |          |
| Inventories, net                                                                                                                                                       |   | 1,615,554         |          | 3,199,549        |          |
| Prepaid assets                                                                                                                                                         |   | 233,832           |          | 348,108          |          |
| Other current  assets                                                                                                                                                  |   | 5,833             |          | 220,000          |          |
| **Total current assets**                                                                                                                                               |   | 2,335,357         |          | 5,833,875        |          |
|                                                                                                                                                                   |   |              |          |             |          |
| Property, plant  and equipment, net                                                                                                                                    |   | 446,991           |          | 570,182          |          |
| Non-compete  agreement, net                                                                                                                                            |   | -                 |          | 360,822          |          |
| License  agreement, net                                                                                                                                                |   | 1,350,000         |          | -                |          |
| Goodwill, net                                                                                                                                                          |   | -                 |          | 3,899,211        |          |
| **Total Assets**                                                                                                                                                       |   | $                 | 4,132,348     |             | $             | 10,664,090 |   |
|                                                                                                                                                                   |   |              |          |             |          |
| **Liabilities and Shareholders'  Equity (DEFICIT)**                                                                                                                    |   |              |          |             |          |
| Line of credit                                                                                                                                                         |   | 1,126,156         |          | 1,613,404        |          |
| Subordinated  debenture / Sinclair                                                                                                                                     |   | 1,000,000         |          | -                |          |
| Accounts payable                                                                                                                                                       |   | 632,670           |          | 1,801,883        |          |
| Accrued expenses                                                                                                                                                       |   | 728,669           |          | 272,155          |          |
| Customer  advances                                                                                                                                                     |   | 6,340,688         |          | 3,233,962        |          |
| Current portion  of capital lease                                                                                                                                      |   | 13,983            |          | 69,947           |          |
| Deferred revenue                                                                                                                                                       |   | 333,609           |          | 818,912          |          |
| Other current  liabilities                                                                                                                                             |   | 300,000           |          | -                |          |
| **Total current liabilities**                                                                                                                                          |   | 10,475,775        |          | 7,810,263        |          |
|                                                                                                                                                                   |   |              |          |             |          |
| Capital lease  obligations                                                                                                                                             |   | 12,021            |          | 12,021           |          |
| License fee  payable                                                                                                                                                   |   | 1,200,000         |          | -                |          |
| Non-compete  liability                                                                                                                                                 |   | 836,810           |          | 845,990          |          |
| **Total liabilities**                                                                                                                                                  |   | 12,524,606        |          | 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 September 30, 2000 and December 31, 1999, respectively |   | 69,812            |          | 69,062           |          |
|                                                                                                                                                                   |   |              |          |             |          |
| Additional  paid-in-capital                                                                                                                                            |   | 21,201,194        |          | 21,019,028       |          |
| Accumulated  deficit                                                                                                                                                   |   | (29,669,764       | )             | (19,098,774      | )             |
| Total  shareholders' equity (deficit)                                                                                                                                  |   | (8,392,258        | )             | 1,995,816        |          |
| **Total  Liabilities and Shareholders' Equity (Deficit)**                                                                                                              |   | $                 | 4,132,348     |             | $             | 10,664,090 |   |

** **

**Seenotes to consolidated financial statements**

**Acrodyne Communications, Inc. And Subsidiary****Consolidated Statements of Operations****     (Unaudited)**
|                                                     |   | **Three Months Ended** |       | **Nine Months Ended** |   |
|----------------------------------------------------------|--------|------------------------|------------|-----------------------|--------|
|                                                     |   | **September 30,**      |       | **September 30,**     |   |
|                                                     |   | **2000**               |       | **1999**              |   | **2000** |   | **1999** |   |
|                                                     |   |                   |       | **(Restated)**        |   |   |   | **(Restated)** |   |
| Net  sales                                               |   | $                      | 1,805,406  |                  | $      | 3,453,112 |   | $ | 4,983,671 |   | $ | 7,637,897 |   |
| Cost  of sales                                           |   | 3,121,580              |       | 3,917,496             |   | 6,588,565 |   | 8,665,061 |   |
| Gross  loss                                              |   | (1,316,174             | )          | (464,384              | )      | (1,604,894 | ) | (1,027,164 | ) |
|                                                     |   |                   |       |                  |   |   |   |   |   |
| Operating  expenses:                                     |   |                   |       |                  |   |   |   |   |   |
| Engineering,  research and development                   |   | 503,837                |       | 220,079               |   | 818,703 |   | 656,470 |   |
| Selling                                                  |   | 256,411                |       | 291,555               |   | 953,805 |   | 1,072,525 |   |
| Administration                                           |   | 947,312                |       | 529,627               |   | 2,428,185 |   | 1,534,056 |   |
| Amortization                                             |   | 75,000                 |       | 57,874                |   | 265,748 |   | 173,622 |   |
| Goodwill  and non-compete write-off                      |   | 4,144,284              |       | -                     |   | 4,144,284 |   | - |   |
| Total  operating expenses                                |   | 5,926,844              |       | 1,099,135             |   | 8,610,725 |   | 3,436,673 |   |
| Operating  loss                                          |   | (7,243,018             | )          | (1,563,519            | )      | (10,215,619 | ) | (4,463,837 | ) |
|                                                     |   |                   |       |                  |   |   |   |   |   |
| Other  Income (Expense):                                 |   |                   |       |                  |   |   |   |   |   |
| Interest  expense, net                                   |   | (113,045               | )          | (33,440               | )      | (355,371 | ) | (110,203 | ) |
| Loss  before income taxes                                |   | (7,356,063             | )          | (1,596,959            | )      | (10,570,990 | ) | (4,574,040 | ) |
| Income  taxes                                            |   | -                      |       | -                     |   | - |   | - |   |
| Net  loss                                                |   | (7,356,063             | )          | (1,596,959            | )      | (10,570,990 | ) | (4,574,040 | ) |
|                                                     |   |                   |       |                  |   |   |   |   |   |
| Dividend  on 8% preferred stock                          |   | (14,028                | )          | (14,028               | )      | (42,084 | ) | (42,084 | ) |
| Net  loss available to common shares                     |   | $                      | (7,370,091 | )                     | $      | (1,610,987 | ) | $ | (10,613,074 | ) | $ | (4,616,124 | ) |
|                                                     |   |                   |       |                  |   |   |   |   |   |
| Net  loss per common share - basic and diluted           |   | $                      | (1.06      | )                     | $      | (0.24 | ) | $ | (1.52 | ) | $ | (0.70 | ) |
| Weighted  average shares outstanding - basic and diluted |   | 6,981,161              |       | 6,771,248             |   | 6,965,011 |   | 6,632,747 |   |

 

**Seenotes to consolidated financial statements**

 

**AcrodyneCommunications, Inc. And Subsidiary****CONSOLIDATED STATEMENTS OF CASH FLOWS****     (Unaudited)**

 
|                                                                         |   | **Nine months ended** |        |
|------------------------------------------------------------------------------|--------|-----------------------|-------------|
|                                                                         |   | **September 30,**     |        |
|                                                                         |   | **2000**              |        | **1999** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |   |                  |        | **(As  Restated)** |   |
| Net loss                                                                     |   | $                     | (10,570,990 | ) | $ | (4,574,040 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                  |        |   |   |
| Depreciation and  amortization                                               |   | 389,359               |        | 348,493 |   |
| Provision for  lease loan guarantee                                          |   | 214,167               |        | - |   |
| Provision for  bad debts                                                     |   | 496,990               |        | - |   |
| Write-off of  goodwill and non-compete                                       |   | 4,144,284             |        | - |   |
| Changes in  assets and liabilities:                                          |   |                  |        |   |   |
| Accounts  receivable                                                         |   | 249,405               |        | 7,750 |   |
| Inventories                                                                  |   | 1,583,995             |        | 938,560 |   |
| Prepaid assets                                                               |   | 114,276               |        | (136,955 | ) |
| Accounts payable                                                             |   | (1,169,633            | )           | (548,923 | ) |
| Accrued expenses  and other liabilities                                      |   | 456,514               |        | 64,321 |   |
| Deferred revenue                                                             |   | (485,303              | )           | - |   |
| Customer  advances                                                           |   | 3,106,726             |        | 1,856,363 |   |
| Net cash used in  operating activities                                       |   | (1,470,210            | )           | (2,044,431 | ) |
| CASH FROM  INVESTING ACTIVITIES:                                             |   |                  |        |   |   |
| Purchase of  property, plant, and equipment                                  |   | -                     |        | (158,942 | ) |
| Sale of  short-term investment                                               |   | 200,000               |        | - |   |
| Net cash  provided by (used in) investing activities                         |   | 200,000               |        | (158,942 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |   |                  |        |   |   |
| Proceeds from  the issuance of common stock, net                             |   | -                     |        | 3,772,311 |   |
| Redemption of  Series A preferred stock                                      |   | -                     |        | (998,531 | ) |
| Proceeds from  exercise of warrants                                          |   | 225,000               |        |   |   |
| (Repayments) /  borrowings under line of credit                              |   | (487,248              | )           | 338,404 |   |
| Borrowings under  debenture                                                  |   | 1,000,000             |        | - |   |
| Capital lease  repayments                                                    |   | (55,964               | )           | (41,071 | ) |
| Repayments on  non-compete liability                                         |   | (9,180                | )           | (8,456 | ) |
| Cash dividends  to stockholders                                              |   | (42,084               | )           | (42,084 | ) |
| Net cash  provided by financing activities                                   |   | 630,524               |        | 3,020,573 |   |
| Net increase  (decrease) in cash and cash equivalents                        |   | (639,686              | )           | 817,200 |   |
| Cash and cash  equivalents at beginning of period                            |   | 664,950               |        | 983,695 |   |
| Cash and cash  equivalents at end of period                                  |   | $                     | 25,264      |   | $ | 1,800,895 |   |
| Supplement cash  flow information:                                           |   |                  |        |   |   |
| Cash paid for  interest                                                      |   | $                     | 91,214      |   | $ | 135,040 |   |

**Seenotes to consolidated financial statements**

**Acrodyne Communications, Inc. And Subsidiary****Notesto Consolidated Financial Statements****(Unaudited)**

 

1.     BASIS OFPRESENTATION

 

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 actual resultscould differ materially from those estimates.

** **

**Operations and Business Risk**

 

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 in 2000and 1999, respectively. Additional losses and cash flow deficits have continuedin 2001.  These losses and cash flowdeficits have been funded primarily with proceeds from the sale of equitysecurities, including $225,000 and $4,075,374 from common stock and warrantssold to Sinclair in 2000 and 1999, respectively, a $2,000,000 subordinateddebenture provided by Sinclair, the Company’s Credit Facility with Sinclair(see Note. 4) and customer advances. As of December 31, 2000, Sinclair owned35% of our common stock and has warrants to purchase 8,644,225 additional shares,which represented a 60% ownership interest on a fully diluted basis. As ofSeptember 30, 2000 and 1999, Sinclair owned 34% and 33%, respectively, of theissued 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 ANDRESTATEMENTS

 

**For the three and nine month periods endedSeptember 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 quarters therein. These adjustmentshad a material effect on the financial statements for the three and nine-monthperiods ended September 30, 1999 and the 10-QSB filed for the period.  The following is a summary of theseadjustments:

 
|                             |   |   | **Three months ended** |       | **Nine months ended**   |   |
|----------------------------------|--------|--------|------------------------|------------|-------------------------|--------|
|                             |   |   | **September 30, 1999** |       | **September  30, 1999** |   |
|                             |   |   |                   |       |                    |   |
| Cost  of sales adjustments, net  |   |   | $                      | (1,842,565 | )                       | $      | (3,064,609 | ) |
| Revenue  recognition adjustments |   |   | 1,125,409              |       | (92,503                 | )      |
| Accrual  adjustments             |   |   | (12,000                | )          | (86,000                 | )      |
|                             |   |   |                   |       |                    |   |
| Impact of  charges on net income |   |   | $                      | (729,156   | )                       | $      | (3,243,112 | ) |
|                                  |        |        |                        |            |                         |        |  |  |  |  |

 

The Company's results for the three andnine month periods ended September 30, 1999 reflect net charges to cost ofsales of ($1,842,565) and ($3,064,609) for the respective periods, which relateto pricing of year-end physical inventories. The Company's third quarteraccounting review in 2000 included a detailed review of the pricing of thephysical inventory taken as of December 31, 1999.  The review necessitated a number of adjustments affecting theprior valuations of physical inventory and cost of sales for interim periodsoffset by the effects of reversing revenues previously recognized. The Companydoes not have sufficient information to identify the amount of the inventoryadjustment specifically related to the interim periods in 1999. Therefore, theinventory valuation adjustments were spread among the quarters of 1999 based onrevenues for the applicable quarter relative to total revenues for the year.

 

The Company has recorded adjustments to net income related to thetiming of revenue recognition for certain sales of $1,125,409 and ($92,503) forthe three and nine 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 firstquarter in the amount of ($740,396) and a second quarter adjustment ($1,200,000)of sales were realized, in the third quarter. The reversal of the aboveadjustments was the primary factor in providing a net positive sales adjustmentof $1,125,409 for the third quarter. The adjustments noted above have beendetermined through a specific review of the related supporting documents and adetermination of the proper reporting period for the recognition of the revenuetransaction.

 

The Company recorded adjustments of ($12,000) and ($86,000) in therespective periods related to certain accruals and expense items, which werenot previously recognized.

 

The impact of the above charges increased net loss by $729,156 or $.11per share for the quarter ended September 30, 1999 and reduced net income by$3,243,112 or $.49 per share for the nine months ended September 30, 1999. Theschedules that follow show the impact on the consolidated financial statementsfrom previously reported results for the three and nine months ended September30, 1999.

 

 
|                                              |   | **September 30, 1999**                             |       |
|---------------------------------------------------|--------|----------------------------------------------------|------------|
|                                              |   |                                               |       |   |   |
| **Acrodyne Communications, Inc. And  Subsidiary** |   | **As Reported in September 30, 1999  Form 10-QSB** |       | **As Restated** |   |
| **ASSETS**                                        |   |                                               |       |   |   |
|                                              |   |                                               |       |   |   |
| CURRENT ASSETS:                                   |   |                                               |       |   |   |
| Cash and cash  equivalents                        |   | $                                                  | 1,800,895  |   | $ | 1,800,895 |   |
| Accounts  receivables, net                        |   | 1,541,246                                          |       | 1,049,709 |   |
| Inventories, net                                  |   | 6,451,495                                          |       | 2,980,479 |   |
| Prepaid expenses  and deposits                    |   | 371,913                                            |       | 307,913 |   |
| Total current  assets                             |   | 10,165,549                                         |       | 6,138,996 |   |
|                                              |   |                                               |       |   |   |
| Property, plant  and equipment, net               |   | 488,539                                            |       | 488,539 |   |
|                                              |   |                                               |       |   |   |
| Non-compete  agreement, net                       |   | 379,572                                            |       | 379,572 |   |
| Goodwill, net                                     |   | 3,938,335                                          |       | 3,938,335 |   |
| TOTAL ASSETS                                      |   | $                                                  | 14,971,995 |   | $ | 10,945,442 |   |
|                                              |   |                                               |       |   |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY        |   |                                               |       |   |   |
| CURRENT  LIABILITIES:                             |   |                                               |       |   |   |
| Accounts payable                                  |   | $                                                  | 1,570,681  |   | 1,570,681 |   |
| Accrued expenses                                  |   | 248,747                                            |       | 248,747 |   |
| Customer  advances                                |   | 2,157,015                                          |       | 2,430,528 |   |
| Borrowings under  Credit Line                     |   | 1,613,404                                          |       | 1,613,404 |   |
| Current portion  capital lease obligations        |   | 87,331                                             |       | 87,331 |   |
| Other current  liabilities                        |   |                                               |       | 201,937 |   |
| Total current  liabilities                        |   | 5,677,178                                          |       | 6,152,628 |   |
|                                              |   |                                               |       |   |   |
| Capital lease  obligations                        |   | 17,050                                             |       | 17,050 |   |
|                                              |   |                                               |       |   |   |
| Non-compete  liability                            |   | 703,712                                            |       | 703,712 |   |
| Total  liabilities                                |   | 6,397,940                                          |       | 6,873,390 |   |
|                                              |   |                                               |       |   |   |
| COMMITMENTS AND  CONTINGENCIES                    |   |                                               |       |   |   |
|                                              |   |                                               |       |   |   |
| SHAREHOLDERS’  EQUITY                        |   | 8,574,055                                          |       | 4,072,052 |   |
| TOTAL LIABILITIES  AND SHAREHOLDERS’ EQUITY  |   | $                                                  | 14,971,995 |   | $ | 10,945,442 |   |

 

 
|                                                             |   | **For the Three Months Ended  September 30, 1999** |      |
|------------------------------------------------------------------|--------|---------------------------------------------------------|-----------|
|                                                             |   |                                                    |      |   |   |
| **Acrodyne Communications, Inc. And  Subsidiary**                |   | **As Reported in  Form 10-QSB**                    |      | **As Restated** |   |
|                                                             |   |                                                    |      |   |   |
| Net sales                                                        |   | $                                                       | 2,327,703 |   | $ | 3,453,112 |   |
| Cost of sales                                                    |   | 2,074,933                                               |      | 3,917,496 |   |
| Gross profit  (loss)                                             |   | 252,770                                                 |      | (464,384 | ) |
|                                                             |   |                                                    |      |   |   |
| Operating  expenses:                                             |   |                                                    |      |   |   |
| Engineering,  research and development                           |   | 220,079                                                 |      | 220,079 |   |
| Selling                                                          |   | 291,555                                                 |      | 291,555 |   |
| Administration                                                   |   | 529,627                                                 |      | 529,627 |   |
| Amortization on  intangible assets                               |   | 57,874                                                  |      | 57,874 |   |
| Total operating  expenses                                        |   | 1,099,135                                               |      | 1,099,135 |   |
| Operating loss                                                   |   | (846,365                                                | )         | (1,563,519 | ) |
|                                                             |   |                                                    |      |   |   |
| Other (expense):                                                 |   |                                                    |      |   |   |
| Interest  expense, net                                           |   | (21,438                                                 | )         | (33,440 | ) |
|                                                             |   |                                                    |      |   |   |
| Net loss before  income taxes                                    |   | (867,803                                                | )         | (1,596,959 | ) |
|                                                             |   |                                                    |      |   |   |
| Income taxes                                                     |   | -                                                       |      | - |   |
|                                                             |   |                                                    |      |   |   |
| Net loss                                                         |   | (867,803                                                | )         | (1,596,959 | ) |
|                                                             |   |                                                    |      |   |   |
| Dividend on 8%  Preferred Stock                                  |   | (14,028                                                 | )         | (14,028 | ) |
|                                                             |   |                                                    |      |   |   |
| Net loss to  common shareholders                                 |   | $                                                       | (881,831  | ) | $ | (1,610,987 | ) |
| Net Loss Per  Common Share -- Basic and Diluted                  |   | $                                                       | (0.13     | ) | $ | (0.24 | ) |
| Weighted Average  Common Shares Outstanding -- Basic and Diluted |   | 6,761,681                                               |      | 6,771,248 |   |

 

 
|                                                            |   | **For the Nine Months Ended September  30, 1999** |       |
|-----------------------------------------------------------------|--------|---------------------------------------------------|------------|
|                                                            |   |                                              |       |   |   |
| **Acrodyne Communications, Inc. And  Subsidiary**               |   | **As Reported in   Form 10-QSB**                  |       | **As Restated** |   |
|                                                            |   |                                              |       |   |   |
| Net sales                                                       |   | $                                                 | 7,730,399  |   | $ | 7,637,897 |   |
| Cost of sales                                                   |   | 5,600,451                                         |       | 8,665,061 |   |
| Gross profit  (loss)                                            |   | 2,129,948                                         |       | (1,027,164 | ) |
|                                                            |   |                                              |       |   |   |
| Operating  expenses:                                            |   |                                              |       |   |   |
| Engineering,  research and development                          |   | 656,470                                           |       | 656,470 |   |
| Selling                                                         |   | 1,072,525                                         |       | 1,072,525 |   |
| Administration                                                  |   | 1,484,056                                         |       | 1,534,056 |   |
| Amortization on  intangible assets                              |   | 173,622                                           |       | 173,622 |   |
| Total operating  expenses                                       |   | 3,386,673                                         |       | 3,436,673 |   |
|                                                            |   |                                              |       |   |   |
| Operating loss                                                  |   | (1,256,725                                        | )          | (4,463,837 | ) |
|                                                            |   |                                              |       |   |   |
| Other income  (expense):                                        |   |                                              |       |   |   |
| Interest  expense, net                                          |   | (74,203                                           | )          | (110,203 | ) |
|                                                            |   |                                              |       |   |   |
|                                                            |   |                                              |       |   |   |
| Net loss before  income taxes                                   |   | (1,330,928                                        | )          | (4,574,040 | ) |
|                                                            |   |                                              |       |   |   |
| Income taxes                                                    |   | -                                                 |       | - |   |
|                                                            |   |                                              |       |   |   |
| Net loss                                                        |   | (1,330,928                                        | )          | (4,574,040 | ) |
|                                                            |   |                                              |       |   |   |
| Dividend on 8%  Preferred Stock                                 |   | (42,084                                           | )          | (42,084 | ) |
|                                                            |   |                                              |       |   |   |
| Net (loss)  available to common shareholders’              |   | $                                                 | (1,373,012 | ) | $ | (4,616,124 | ) |
| Net income  (loss) Per Common Share - Basic and Diluted         |   | $                                                 | (0.20      | ) | $ | (0.70 | ) |
| Weighted Average  Common Shares Outstanding - Basic and Diluted |   | 6,761,681                                         |       | 6,632,747 |   |
|                                                                 |        |                                                   |            |  |  |  |  |  |  |  |  |

 

As discussed above, the Company recorded significant adjustments in theyears ended December 31, 2000 and 1999, certain of which affect accountbalances applicable to the quarter ended March 31, 2000 and and the three andnine months ended September 30, 1999. However, the Company does not have sufficient information to identifythe specific amounts of the inventory valuation adjustments reflected aboveattributable to these 2000 and 1999 interim periods.  For the three and nine months ended September 30, 2000, theCompany was not able to determine the cost of sales for these 2000 interimperiods.  As such, the Company hasspread the inventory valuation adjustments among the four unaudited quarters ofthe year and determined cost of sales in a manner that provided a negativemargin of 5.0% and 13.4% for each of the first three unaudited quarters of 2000and 1999, respectively.  Accordingly,the Company has concluded that its internal controls for the preparation ofinterim financial information did not provide an adequate basis for itsindependent public accountants to complete reviews of the quarterly data forthe quarters in the nine-month periods ended September 30, 2000 and 1999 inaccordance with standards established by the American Institute of CertifiedPublic Accountants.  As discussed above,the Company believes that portions of the adjustments to inventory and the costof sales that were recorded in the quarters ended September 30, 2000 and 1999may relate to other individual interim periods within 2000 or 1999. The Companyis committing resources to mitigate previously identified controlweaknesses.  A full physical inventorywas completed in August of 2000.  Inaddition, the Company will complete physical inventories on a quarterlybasis.  Management believes that as aresult of these efforts that its processes will continue to improve, althoughthere can be no assurance this will be the case.

 

2. INVENTORIES

 

Inventories comprise:

 
|            |   | **March 31, 2000** |      | **December 31, 1999** |   |
|-----------------|--------|--------------------|-----------|-----------------------|--------|
|            |   |               |      |                  |   |
| Raw materials   |   | $                  | 581,599   |                  | $      | 1,220,965 |   |
| Work in process |   | 355,422            |      | 764,048               |   |
| Finished goods  |   | 678,533            |      | 1,214,536             |   |
|            |   | $                  | 1,615,554 |                  | $      | 3,199,549 |   |

 

3. EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing net income availableto common shareholders by the weighted average number of sharesoutstanding.  Diluted earnings per shareis computed using the weighted average number of shares determined for thebasic computations plus the number of shares of common stock that would beissued assuming all contingently issuable shares having a dilutive effect onearnings per share were outstanding for the period.  Due to the Company's net loss for the periods presented, theincremental shares issuable in connection with convertible stock, stock optionsand warrants are anti-dilutive and accordingly, not considered in thecalculation of earnings per share.

4. RELATED PARTY TRANSACTIONS

 

Sales to Sinclair Broadcast Group, Inc. (Sinclair) amounted to and$1,511,243 for nine  months endedSeptember 30, 2000. There were no sales to Sinclair for the three months endedSeptember 30, 2000. Total sales to Sinclair for the nine months in 2000  represent 30 % of the Company's total sales.The Company has received $6,908,814 in orders from Sinclair through May 18,2001.

 

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 September 30,1999 Sinclair 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, thatSinclair unconditionally and irrevocably guarantee all of the Company’sobligation with respect to the Credit Facility. Under the GuarantyAgreement and as compensation to Sinclair for the guarantee, the Companycommitted to provide Sinclair the following: (1) $200,000 payable in Companycommon stock (based upon the closing price as quoted on September 16, 1999),and (2) on October 1, 2000 and payable each year thereafter until the bank nolonger requires the guarantee from Sinclair, the Company shall pay Sinclair anamount equal to the average of the line of credit outstanding balances as ofthe last day of each of the preceding twelve months (not to be less than$1,700,000) multiplied by 12.5% and payable in the form of Company commonstock. The $200,000 due Sinclair under the terms of the guarantee wascapitalized and was amortized as interest expense over the guarantee period. Ofthe $200,000 related to this guarantee, $150,000 and $50,000 were recorded asinterest expense during 2000 and 1999, respectively.  During the three and nine months ended September 30, 2000, theCompany recorded $50,000 and $150,000, respectively, as interest expense.  No amounts were recorded for the three andnine months ended September 30, 1999. For the year ended December 31, 2000, the Company recorded additionalinterest expense related to the Guarantee Agreement of $235,500. In November2000, Sinclair purchased the credit facility discussed and assumed all rightsof the bank.  Sinclair filed the UCCliens against 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 $1,000,000under the debenture through September 30, 2000 and through May 18, 2001 theCompany had borrowed $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 three 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. NON-COMPETE AGREEMENT AND GOODWILL

 

In connection with the 1994 acquisition of Acrodyne Industries (seeItem 2), the Company recorded goodwill totaling $4,711,274 representing theexcess of purchase price over the fair value of net assets acquired.  Prior to being written off, goodwill wasbeing amortized on a straight-line basis over 30 years.

 

During the third quarter of 2000, the Company determined that as aresult of the combination of regulatory changes, evolving technology, changesdictated by the market place, changes to key management and continued negativeprofit margins for its medium and low power transmitter product line, it wouldexit such product line.  The Companyacquired this product line in 1994 (see item 2).  As a result of this decision, the Company reviewed all of thelong-term assets of its medium and low power product line (principallygoodwill, covenant not-to-compete and property and equipment) forimpairment.  As a result of this review,management concluded that these assets had been permanently impaired and, assuch, recorded a charge to write-off all goodwill and certain other long-termassets in the amount of $4,144,284 during the third quarter of 2000, whichincludes $323,322 related to the non-compete intangible asset and $3,820,962related to goodwill.

 

6. 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 short periodof 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 quarterand third quarters of 2000; there is no change in earnings as the costapproximated the revenue. In accordance with the bulletin, prior yearconsolidated financial statements have not been restated to apply SAB 101retroactively.

 

7. 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.

 

8. 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 the lawsuit.  On June 26, 2001, the Court (i) found thesettlement to be fair, reasonable, and adequate and in the best interests ofthe parties; (ii) settled, released, discharged and dismissed with prejudicethe 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 the warrantsissued.

 

9. 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.

 

**ITEM 2.**

 

**MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL 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 the manufactureand sale of TV transmitters, LPTV transmitters and TV translators, which areproduced to customer specification.  Theacquisition was consummated on October 24, 1994 with proceeds obtained from apublic offering of our common stock.

 

BASIS OF 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.

 

OPERATIONS AND BUSINESS RISK

 

Due to the nature of our business, we are subject to various risksincluding, but not limited to, technological and market acceptance of ourproduct, capital availability, dependence on management and other risks. Wehave been in the process of developing a new transmitter product line(“Quantum”).  Related to this process,we entered into a license agreement with Sinclair Broadcast Group, Inc.(“Sinclair”) in March 2000 (see Note. 4). We shipped the first of our Quantum transmitters in March 2001.  To date, most of the orders for our Quantumproduct are from Sinclair, 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 $2,905,477in 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 34.6% of our common stock and has warrants to purchase 8,644,225additional shares, which represented a 60.4% ownership interest on a fullydiluted basis. For the quarters ended September 30, 2000 and 1999 Sinclairowned 34.6% and 33% of the issued common stock assuming no exercise ofwarrants.

 

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 18, 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%.  In addition, Sinclair verbally committed to purchase all UHFtransmitter requirements from us.  As ofNovember 8, 2001, no formal recapitalization plan has been executed.

 

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 four lawsuitswere consolidated into a single lawsuit. A description of this lawsuit and its proposed settlement is containedin Part I, Item 3.  Legal Proceedings ofthe 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.

 

**RESULTS OF OPERATIONS**

 

Within the following discussion, unless otherwise stated, “ quarter”and “ nine-month period” refer to the third quarter of fiscal 2000 and the ninemonths ended September 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 nine-month periods ended September 30, 2000 and 1999:

 
|                   |   | **Three  Months Ended September 30,** |       | **Nine  Months Ended September, 30** |   |
|------------------------|--------|---------------------------------------|------------|--------------------------------------|--------|
|                   |   | **2000**                              |       | **1999**                             |   | **2000** |   | **1999** |   |
|                   |   |                                  |       |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Sales              |   | $                                     | 1,805,406  |                                 | 100    | % | $ | 3,453,112 |   | 100 | % | $ | 4,983,671 |   | 100 | % | $ | 7,637,897 |   | 100 | % |
| Cost of Sales          |   | 3,121,580                             |       | 173                                  | %      | 3,917,496 |   | 113 | % | 6,588,565 |   | 132 | % | 8,665,061 |   | 113 | % |
| Gross Loss             |   | (1,316,174                            | )          | (73                                  | )%     | (464,384 | ) | (13 | )% | (1,604,894 | ) | (32 | )% | (1,027,164 | ) | (13 | )% |
| Operating Expenses     |   | 5,926,844                             |       | 328                                  | %      | 1,099,135 |   | (32 | )% | 8,610,725 |   | 173 | % | 3,436,673 |   | 45 | % |
| Operating  (Loss) |   | (7,243,018                            | )          | (401                                 | )%     | (1,563,519 | ) | (45 | )% | (10,215,619 | ) | (205 | )% | (4,463,837 | ) | (58 | )% |
| Interest expense, net  |   | 113,045                               |       | 6                                    | %      | 33,440 |   | 1 | % | 355,371 |   | 7 | % | 110,203 |   | 1 | % |
| Net loss               |   | $                                     | (7,356,063 | )                                    | (407   | )% | $ | (1,596,959 | ) | (46 | )% | $ | (10,570,990 | ) | (212 | )% | $ | (4,574,040 | ) | (59 | )% |

 

Sales decreased by $1,647,706 or 48% for the quarter and $2,654,226 or35% for the nine-month period. We had been concentrating on addressing fieldtechnical problems and customer support levels, which adversely affected ourability to generate new sales. In addition, we raised our price structure anddiscontinued several low profit products to achieve positive margins on ourthen current product line. We also believe that broadcasters had postponed anysignificant transmission equipment expenditures pending a clearer plan for theemergence of digital television and related transition. We also believe thedelay in purchases is due to a desire by broadcasters to increase transmissionpower, which requires authorization from the FCC.

 

Cost of sales for the quarter included a charge of $1,200,000 forobsolete inventory associated with the discontinuance of the production of ourtraditional product line. The combination of decreased revenues and charges tocost of sales resulted in a negative gross profit of 73% for the quartercompared to a negative 13% for the prior year. For the nine-month period thenegative margin was 32% compared to 13% for the prior year.

 

The increase in operating expenses for the quarter is due, primarily,to the write off of goodwill, the write off of “non-compete” asset, amortization of a licensing agreement with Sinclair(Note 4), increase in the reserve for bad debts, and costs incurred in theconnection with the review of internal controls and restatement of financialresults.

 

In connection with the 1994 acquisition of Acrodyne Industries, we hadrecorded goodwill totaling $4,711,274 representing the excess of purchase priceover the fair value of net assets acquired, which were being amortized over 30years.  During the third quarter 2000,we concluded that we would discontinue our traditional product line as a resultof regulatory changes, evolving technology, changes dictated by themarketplace, changes to key management and continued negative profit marginsfor our traditional product line. Consequently, we determined that our goodwill was permanently impairedand, as such, wrote off the remaining balance of goodwill of $3,820,962 duringthe quarter.

 

**In connection with the acquisitionof Acrodyne Industries, we entered into a non-compete agreement with theselling shareholder.  The intangibleasset recorded was being amortized over a ten-year period.  Because of the combination of changes notedin the preceding paragraph, we concluded that the asset had ceased to provideany future value to our operations and, consequently, wrote off the remainingbalance of $323,322 during the quarter.**

** **

**We recorded an increase to theallowance for doubtful accounts of $136,990 for the quarter ended September 30,2000.**

 

**During March 2000, we entered intoa 10-year license agreement with Sinclair, for the exclusive right tomanufacture and sell certain Sinclair designed transmitter lines.  Under terms of the license agreement, wewill pay Sinclair an annual royalty of $300,000 for five years, and 1% ofrelated sales thereafter.  EffectiveApril 1, 2000, we have been recognizing an annual amortization expense of$300,000 in recognition of our liability to Sinclair, which is recognizedpro-rata in the accompanying statements.**

 

**The remainder of the difference innet losses over the corresponding 1999 quarter is due to incurring one-timelegal and accounting costs associated with the financial review noted above andour efforts toward restatement of the various periods’ financial results.**

** **

**The largest component attributingto the increase in net interest expense is due to a $50,000 charge related toSinclair’s guarantee of our line of credit and the lease of our new facilitiesin Phoenixville, PA, with the remainder of the increase due to increasedborrowing levels over the corresponding quarter in 1999.**

 

#### **LIQUIDITY AND CAPITALRESOURCES**

 

We had financed ouractivities primarily from internally generated funds, customer advances, use ofour credit facility and sales of equity securities and more recently throughinvestments and funding by Sinclair. For the nine-month period our workingcapital decreased to ($8,139,999) as compared to  ($1,976,388) at December 31, 1999, mainly due to increasedcustomer advances of $3,106,726, which is a liability for cash paymentsreceived on orders and an increase in borrowings under the Sinclair debentureof $1,000,000. Net cash used in operating activities was ($1,470,210) for thecurrent nine-month period as compared to $(2,044,431) a year ago. The current nine-monthperiod benefited from an increase in customer advances of $3,106,726 comparedto $1,856,363 in the 1999 period.

 

Accounts receivable atthe end of the quarter were $454,873 net of a reserve for bad debts of$556,990.  The gross decrease from December31, 1999 reflects lower sales volume of the nine--month period. As mentionedpreviously $136,990 increase to the bad debt reserve was recorded during thequarter and $496,990 for the nine-month period.

 

Cash flow from financing activities decreased significantly from theprior nine-month period. During the current nine month-period net financingactivities generated $630,524 vs. $3,020,573 in the comparable period lastyear.  In the prior year period Sinclairinvested $4,300,000 in return for 1,431,333 shares of our stock and warrants,this financing source was offset by the retirement of our Series A preferredstock in the net amount 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 by 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” above for additional information concerning futureliquidity.

 

**Forward Looking Statements**

 

Certain informationcontained in this report including, without limitation, information appearing underItem 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 ofindebtedness and our ability to refinance our substantial debt and contractualobligations,•               Our ability to makeinterest and principal payments on debt and other contractual obligations,•               Our ability to improveoperating performance,•               The outcomes of pendinglawsuits involving our financial reporting and other matters,•               Our ability to manufactureand sell the new Quantum Transmission product line in a timely manner,•               Regulatory changesgoverning transmission platforms,•               General economic andmarketplace conditions,•               Interest ratefluctuations, access to capital, and•               Our ability to develop,implement and maintain reliable and adequate internal accounting systems andcontrols.

 

Part II   OTHER INFORMATION

 

** 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 to purchase1,600,000 shares of the Company’s common stock at an exercise price of $1.00per share. The warrants will expire after five years. The Company also hasagreed 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.

 

 

 

Item 2.    CHANGES IN SECURITIESAND USE OF PROCEEDS

                Not applicable

 

Item 3.    DEFAULTS UPON SENIORSECURITIES

                Not applicable

 

Item 4.    SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS

                No matters weresubmitted to a vote of the security holders during the quarter ended March 31,2000

 

Item 5.    OTHER INFORMATION

                Not applicable

 

Item 6.     EXHIBITS AND REPORTS ON FORM 8-K

 

(b)           8-K filed on April 17, 2001 -Financial results for second and third quarters 2000 and restated results for1998, 1999 and first quarter 2000; preliminary settlement of stockholders classaction litigation and related financial matters.  Incorporated herein by reference.

 

8-K filed on April 17,2001 – consolidated balancesheets, related consolidated statements of operations, shareholders equity, andcash flows for the two years ended December 31, 2000 and 1999.

 

8-K filed on May 10, 2001– The position of Vice President and Chief Financial Officer was eliminated asof 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