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

**Washington,D.C. 20549**

 

**Form 10-QSB**

 

**(Mark one)**

| **ý** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------|
|       |                                                                                   |
|       | **For the quarterly  period ended March 31, 2003**                                     |
|       |                                                                                   |
| **o**      | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT**        |

 

**Commissionfile number0-24886**

 

**ACRODYNECOMMUNICATIONS, INC.**

(Exact name of small business issuer asspecified in its charter)

 

| **Delaware**                                                    |   | **11-3067564**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **10706 Beaver Dam Road  Cockeysville, MD**                     |   | **21030**                             |
| (Address of principal executive offices)                        |   | (Zip Code)                            |
|                                                            |   |                                  |
| Issuer’s telephone number:  **410-568-1629**          |

 

Check whether the issuer (1) has filed all reports required to be filedby Section 13 or 15(d) of the Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

Yes ý  No o

 

State the number of shares outstanding of each of the issuer’s classesof common equity, as of the latest practicable date. As of March 31, 2003 theregistrant had outstanding 28,217,496 shares of common stock, par value $0.01

 

 

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**ACRODYNECOMMUNICATIONS, INC.**

 

INDEX

 
| PART I.  FINANCIAL INFORMATION:             |
|--------------------------------------------------|
|                                             |   |
|                                             | Item 1.  Financial Statements |
|                                             |   |
|                                             | Consolidated  Balance Sheets at March 31, 2003 (unaudited) and December 31, 2002 |
|                                             |   |
|                                             | Consolidated Statements of Operations for  the Three Months Ended March 31, 2003 and 2002 (unaudited) |
|                                             |   |
|                                             | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002  (unaudited) |
|                                             |   |
|                                             | Notes to  Consolidated Financial Statements (unaudited) |
|                                             |   |
|                                             | Item 2.  Management’s Discussion and Analysis of Financial  Condition and Results of Operations |
|                                             |   |
| PART  II.  OTHER INFORMATION, AS APPLICABLE |
|                                             |   |
|                                             | Item  6.  Exhibits and Reports on Form 8-K |
|                                             |   |
| SIGNATURES                                       |

 

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**AcrodyneCommunications, Inc.**

**ConsolidatedBalance Sheets**

 
|                                                                                                                                                                                 |   | **March 31  2003** |      | **December  31,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|-------------------------|--------|
|                                                                                                                                                                                 |   | **(unaudited)**    |      |                    |   |
| **ASSETS**                                                                                                                                                                           |   |               |      |                    |   |
| CURRENT ASSETS:                                                                                                                                                                      |   |               |      |                    |   |
| Cash and cash equivalents                                                                                                                                                            |   | $                  | 983,825   |                    | $      | 312,921 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $189,750 at March 31, 2003 and $38,600 at December 31,  2002                                                         |   | 1,517,774          |      | 2,204,044               |   |
| Inventories, net                                                                                                                                                                     |   | 2,915,259          |      | 3,271,066               |   |
| Prepaid assets and deposits                                                                                                                                                          |   | 358,014            |      | 78,998                  |   |
| Total current assets                                                                                                                                                                 |   | 5,774,872          |      | 5,867,029               |   |
|                                                                                                                                                                                 |   |               |      |                    |   |
| PROPERTY, PLANT, AND EQUIPMENT, net                                                                                                                                             |   | 3,321,272          |      | 3,407,611               |   |
| INTANGIBLE ASSETS:                                                                                                                                                                   |   |               |      |                    |   |
| License agreement, net of accumulated  amortization of $825,000                                                                                                                      |   |               |      | 675,000                 |   |
| Product design documentation, net of  accumulated amortization of $16,875                                                                                                            |   | 658,125            |      |                    |   |
| TOTAL ASSETS                                                                                                                                                                         |   | $                  | 9,754,269 |                    | $      | 9,949,640 |   |
|                                                                                                                                                                                 |   |               |      |                    |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                        |   |               |      |                    |   |
| CURRENT LIABILITIES:                                                                                                                                                                 |   |               |      |                    |   |
| Line of credit — related party                                                                                                                                                  |   | 0                  |      | 5,133,759               |   |
| Subordinated debenture — related party                                                                                                                                          |   | 0                  |      | 2,000,000               |   |
| Current portion of capital lease  obligations                                                                                                                                        |   | 37,410             |      | 625,259                 |   |
| Accounts payable                                                                                                                                                                     |   | 2,478,676          |      | 2,353,444               |   |
| Accrued expenses                                                                                                                                                                     |   | 1,136,969          |      | 2,176,782               |   |
| Customer advances                                                                                                                                                                    |   | 2,552,463          |      | 3,014,996               |   |
|                                                                                                                                                                                 |   |               |      |                    |   |
| Other current liabilities                                                                                                                                                            |   | 248,863            |      | 1,891,878               |   |
| Total current liabilities                                                                                                                                                            |   | 6,454,381          |      | 17,196,118              |   |
| CAPITAL LEASE OBLIGATIONS,  net of  current portion                                                                                                                             |   | 3,692,510          |      | 3,701,038               |   |
| LICENSE FEE PAYABLE — long term                                                                                                                                                 |   | 0                  |      | 675,000                 |   |
| NON-COMPETE LIABILITY                                                                                                                                                                |   | 731,230            |      | 731,231                 |   |
| Total liabilities                                                                                                                                                                    |   | 10,878,121         |      | 22,303,387              |   |
|                                                                                                                                                                                 |   |               |      |                    |   |
| SHAREHOLDERS’ EQUITY:                                                                                                                                                           |   |               |      |                    |   |
| Common stock, par value $.01; 30,000,000  shares authorized; 28,217,496 and 7,409,608 shares issued and  outstanding at March 31, 2003 and December 31, 2002, respectively |   | 282,175            |      | 74,096                  |   |
| Additional paid-in-capital                                                                                                                                                           |   | 32,953,604         |      | 22,071,641              |   |
| Accumulated deficit                                                                                                                                                                  |   | (34,359,631        | )         | (34,499,484             | )      |
| Total shareholders’ equity (deficit)                                                                                                                                            |   | (1,123,852         | )         | (12,353,747             | )      |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                      |   | $                  | 9,754,269 |                    | $      | 9,949,640 |   |

 

**See notes toconsolidated financial statements**

 

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**AcrodyneCommunications, Inc.**

**ConsolidatedStatements of Operations    (Unaudited)**

** **
|                                                                 |   | **Three Months  Ended  March 31,** |      |
|----------------------------------------------------------------------|--------|------------------------------------|-----------|
|                                                                 |   | **2003**                           |      | **2002** |   |
|                                                                 |   |                               |      |   |   |
| NET SALES                                                            |   |                               |      |   |   |
| Related party sales, net                                             |   | $                                  | 3,050,899 |   | $ | 3,274,436 |   |
| Other sales, net                                                     |   | 3,029,117                          |      | 2,547,201 |   |
| NET SALES                                                            |   | 6,080,016                          |      | 5,821,637 |   |
| COST OF SALES                                                        |   | 4,464,549                          |      | 4,477,313 |   |
| Gross Profit                                                         |   | 1,615,467                          |      | 1,344,324 |   |
|                                                                 |   |                               |      |   |   |
| OPERATING EXPENSES                                                   |   |                               |      |   |   |
| Engineering                                                          |   | 454,854                            |      | 515,320 |   |
| Selling                                                              |   | 322,766                            |      | 329,707 |   |
| Administration                                                       |   | 572,306                            |      | 278,511 |   |
| Amortization of intangible assets                                    |   | 16,875                             |      | 75,000 |   |
| Total Operating Expenses                                             |   | 1,366,801                          |      | 1,198,538 |   |
| Operating Income                                                     |   | 248,666                            |      | 145,786 |   |
|                                                                 |   |                               |      |   |   |
| OTHER (EXPENSES) INCOME                                              |   |                               |      |   |   |
| Interest Expense, Net                                                |   | (110,022                           | )         | (220,361 | ) |
| Other Income, Net                                                    |   | 1,209                              |      | 156,268 |   |
| Net Income before taxes                                              |   | 139,853                            |      | 81,693 |   |
| INCOME TAXES                                                         |   | 0                                  |      | 0 |   |
| Net Income                                                           |   | 139,853                            |      | 81,693 |   |
|                                                                 |   |                               |      |   |   |
| NET INCOME PER COMMON SHARE — BASIC AND  DILUTED                |   | $                                  | 0.01      |   | $ | 0.01 |   |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING  — BASIC AND DILUTED |   | 26,367,906                         |      | 7,409,608 |   |

 

**See notes toconsolidated financial statements**

 

4

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##### **CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT**

 

**FOR THE THREE MONTHPERIOD ENDED MARCH 31, 2003 (Unaudited)**

 
|                                            |   | **Common  Stock** |   | **Additional  Paid-In** |    | **Accumulated** |   | **Total  Shareholders’** |   |
|-------------------------------------------------|--------|-------------------|--------|-------------------------|---------|-----------------|--------|-------------------------------|--------|
|                                            |   | **Shares**        |   | **Amount**              |    | **Capital**     |   | **Deficit**                   |   | **Deficit** |   |
| BALANCE AT DECEMBER 31, 2002                    |   | 7,409,608         |   | 74,096                  |    | 22,071,641      |   | (34,499,484                   | )      | (12,353,747 | ) |
|                                            |   |              |   |                    |    |            |   |                          |   |   |   |
| Recapitalization                                |   | 20,350,000        |   | 203,500                 |    | 10,674,042      |   |                          |   | 10,877,542 |   |
| Issuance of shares to satisfy lease  obligation |   | 457,888           |   | 4,579                   |    | 207,921         |   |                          |   | 212,500 |   |
|                                            |   |              |   |                    |    |            |   |                          |   |   |   |
| Net Income                                      |   |              |   |                    |    |            |   | 139,853                       |   | 139,853 |   |
|                                            |   |              |   |                    |    |            |   |                          |   |   |   |
| BALANCE AT March 31, 2003                       |   | 28,217,496        |   | $                       | 282,175 |            | $      | 32,953,604                    |   | $ | (34,359,631 | ) | $ | (1,123,852 | ) |
|                                                 |        |                   |        |                         |         |                 |        |                               |        |  |  |  |  |  |  |

 

**Theaccompanying notes are an integral part of these consolidated financialstatements.**

 

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**AcrodyneCommunications, Inc.**

**ConsolidatedStatements of Cash Flows    (Unaudited)**

 
|                                                                                         |   | **For the  Three Months Ended** |    |
|----------------------------------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                                         |   | **March 31,  2003**             |    | **March 31,  2002** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |   |                            |    |   |   |
| Net Income                                                                                   |   | $                               | 139,853 |   | $ | 81,693 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |   |                            |    |   |   |
| Depreciation and amortization                                                                |   | 103,214                         |    | 97,266 |   |
|                                                                                         |   |                            |    |   |   |
| Changes in assets and liabilities:                                                           |   |                            |    |   |   |
| Accounts receivable                                                                          |   | 686,270                         |    | (279,626 | ) |
| Inventories                                                                                  |   | 355,807                         |    | 151,481 |   |
| Prepaid assets and deposits                                                                  |   | (279,016                        | )       | (39,264 | ) |
| Accounts payable                                                                             |   | 125,231                         |    | (129,534 | ) |
| Accrued expenses                                                                             |   | (1,040,770                      | )       | (281,907 | ) |
|                                                                                         |   |                            |    |   |   |
| Other current liabilities                                                                    |   | 42,848                          |    | 289,538 |   |
| Customer advances                                                                            |   | (462,533                        | )       | 399,643 |   |
| Net cash provided by (used in) operating  activities                                         |   | (328,138                        | )       | 290,884 |   |
|                                                                                         |   |                            |    |   |   |
| CASH FROM INVESTING ACTIVITIES:                                                              |   |                            |    |   |   |
| Purchase of property, plant, and equipment                                                   |   | —                          |    | (3,229 | ) |
| Net cash used in investing activities                                                        |   | —                          |    | (3,229 | ) |
|                                                                                         |   |                            |    |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |   |                            |    |   |   |
| Proceeds from Recapitalization                                                               |   | 1,000,000                       |    |   |   |
| Net cash provided by financing activities                                                    |   | 1,000,000                       |    |   |   |
|                                                                                         |   |                            |    |   |   |
|                                                                                         |   |                            |    |   |   |
| Net increase in cash and cash equivalents                                                    |   | 670,904                         |    | 287,655 |   |
| Cash and cash equivalents at beginning of  period                                            |   | 312,921                         |    | 17,687 |   |
| Cash and cash equivalents at end of period                                                   |   | $                               | 983,825 |   | $ | 305,342 |   |

 

**See notes toconsolidated financial statements**

 

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**AcrodyneCommunications, Inc.**

**Notes****toConsolidated Financial Statements (unaudited)**

 

**1.             Unaudited Consolidated FinancialStatements**

 

The accompanying consolidated balance sheets of AcrodyneCommunications, Inc. and its subsidiaries (the “Company” or “Acrodyne”) atMarch 31, 2003 and the related consolidated statements of operations and ofcash flows for the three months ended March 31, 2003 and 2002 have beenprepared by management.  In the opinion of management, all adjustments(consisting of normal recurring adjustments only) necessary to present fairlythe financial position at March 31, 2003 and the results of operations and cashflows for the three months ended March 31, 2003 and 2002 have been made.

 

These consolidated financial statements should be read in conjunctionwith the financial statements and notes thereto included in the Company’sAnnual Report on Form 10-KSB for the year ended December 31, 2002 filed withthe Securities and Exchange Commission.  The results of operations forinterim periods are not necessarily indicative of the results to be obtainedfor the entire year.

 

**2.             Inventories**

 

Inventories comprise:

 
|                             |   | **March 31,  2003** |      | **December  31,  2002** |   |
|----------------------------------|--------|---------------------|-----------|-------------------------|--------|
| Raw materials                    |   | $                   | 1,849,303 |                    | $      | 1,841,509 |   |
| Work in process                  |   | 1,217,404           |      | 1,525,484               |   |
| Finished goods                   |   | 5,521               |      |                    |   |
| Total Inventory                  |   | 3,066,707           |      | 3,372,514               |   |
| Allowance for obsolete inventory |   | (151,448            | )         | (101,448                | )      |
|                             |   |                |      |                    |   |
| Inventory, net                   |   | $                   | 2,915,259 |                    | $      | 3,271,066 |   |

 

**3.             Property and Equipment**

 

Property and equipment consist of the following:

 
|                                      |   | **March 31,  2003** |      | **December  31,  2002** |   |
|-------------------------------------------|--------|---------------------|-----------|-------------------------|--------|
| Test equipment                            |   | $                   | 697,395   |                    | $      | 697,395 |   |
| Machinery and equipment                   |   | 53,924              |      | 53,924                  |   |
| Office furniture and equipment            |   | 449,139             |      | 449,139                 |   |
| Building lease /leasehold improvements    |   | 3,784,231           |      | 3,784,231               |   |
| Purchased computer software               |   | 123,239             |      | 123,239                 |   |
|                                      |   | 5,107,928           |      | 5,107,928               |   |
| Accumulated depreciation and amortization |   | (1,786,656          | )         | (1,700,317              | )      |
|                                      |   | $                   | 3,321,272 |                    | $      | 3,407,611 |   |

 

Depreciation and amortization expense for property and equipmentamounted to $86,339 and $97,266 for the three months ended March 31, 2003 and2002, respectively.

 

**4.             Earnings Per Share**

 

Basic earnings per share is computed by dividing the net earningsavailable to common shareholders by the weighted average number of sharesoutstanding during the period.  Diluted earnings per share is computedusing the weighed average number of shares determined for the basiccomputations plus the number of 

 

7

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shares of common stock that would be issued assuming all contingentlyissuable shares having a dilutive effect on earnings per share were outstandingfor the period.

 

The following table sets forth the computation of basic and dilutedearnings per share:

 
|                                                                     |   | **Three  months ended** |    |
|--------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                     |   | **March 31,  2003**     |    | **March 31,  2002** |   |
| Numerator                                                                |   |                    |    |   |   |
| Net income                                                               |   | $                       | 139,857 |   | $ | 81,693 |   |
|                                                                     |   |                    |    |   |   |
| Denominator                                                              |   |                    |    |   |   |
| Denominator for basic income per share —  weighted average shares   |   | 26,367,906              |    | 7,409,608 |   |
|                                                                     |   |                    |    |   |   |
| Dilutive effect of options and warrants                                  |   | —                  |    | — |   |
| Denominator for diluted income per share —  weighted average shares |   | 26,367,906              |    | 7,409,608 |   |
|                                                                     |   |                    |    |   |   |
| Basic income per share                                                   |   | $                       | 0.01    |   | $ | 0.01 |   |
|                                                                     |   |                    |    |   |   |
| Diluted income per share                                                 |   | $                       | 0.01    |   | $ | 0.01 |   |

 

Exercise prices of outstanding options and warrants to purchase sharesof the Company stock are in excess of the market price and are excluded fromthe computation of diluted income per share.

 

**5.             Related Party Transactions**

 

Sales made to Sinclair Broadcast Group, Inc., our majority shareholder,during the three months ended March 31, 2003 and 2002 totaled $ 3,050,899 and$3,274,436, respectively.  The Company sells products to Sinclair at whatmanagement believes to be prices approximating fair market value.  Thefollowing amounts are included in the consolidated balance sheets in connectionwith trade transactions with Sinclair:

 

|              |   | **March 31  2003** |    | **December  31  2002** |   |
|-------------------|--------|--------------------|---------|------------------------|--------|
| Receivables       |   | $                  | 701,498 |                   | $      | 1,081,028 |   |
| Customer advances |   | 1,117,447          |    | 1,864,123              |   |
|                   |        |                    |         |                        |        |  |  |

 

In addition, included in the current portion of capital leaseobligation and other current liabilities at December 31, 2002 are $1,541,970 ofamounts payable to Sinclair that were deferred under the capital lease andlicense fee obligations.

 

In December 2002 our stockholders approved a recapitalization planwhereby technology owned by Sinclair was transferred to Acrodyne, warrants andoptions owned by Sinclair and debt owed to Sinclair, were forgiven or cancelledin exchange for our stock.  This transaction was completed in January2003.  Sinclair agreed to:

a)    Forgiveall indebtedness, payables, accrued and unpaid interest under the outstandingdebenture and Lines of Credit amounting to about $9,877,542;

b)             Assign all intellectual property rightsrelating to the License agreement;

c)              Invest an additional $1,000,000;

d)             Terminate all Sinclair owned warrants;

 

8

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e)              Amend the Guaranty and Lease CompensationAgreement, dated September 16, 1999.  Amended terms require the paymentsin 2002 through 2005 to be made in cash with subsequent years paid in cash orstock at our discretion, and

f)     In exchange for the itemsdescribed above, 20,350,000 shares of the Company’s common stock were issued

 

The effect of recapitalization on outstanding warrants and options isas follows:

The following warrants (excluding employeeand director stock options) were outstanding at March 31, 2003 and December 31,2002:

 
| **March 31,2003** |   | **December  31,2002** |   | **Exercise  Price** |   | **Expiration  Date** |   |
|-------------------|--------|-----------------------|--------|---------------------|--------|----------------------|--------|
|              |   |                  |   |                |   |                 |   |
| 525,000           |   | 525,000               |   | 3.00                |   | September 4, 2005    |   |
|              |   |                  |   |                |   |                 |   |
|              |   | 1,925,000             | (a)    | 3.00                |   | January 26, 2006     |   |
|              |   | 719,225               | (a)    | 3.00                |   | January 26, 2006     |   |
|              |   | 6,000,000             | (a)    | 3.00-6.00           |   | January 26, 2006     |   |
|              |   |                  |   |                |   |                 |   |
| 1,600,000         |   | 1,600,000             |   | 1.00                |   | July 26, 2006        |   |
| 2,125,000         |   | 10,769,225            |   |                |   |                 |   |

 

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(a) Exchanged for common stock in recapitalization

 

**6.             Summary of Significant AccountingPolicies**

 

The following summarizes accounting policies employed by the Company inpreparation of its consolidated financial statements:

 

In August 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards  (SFAS) 143, “Accounting forAsset Retirement Obligations”.  This Statement addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs. SFAS 143 requires an enterprise to record the fair value of an asset retirementobligation as a liability in the period in which it incurs a legal obligationassociated with the retirement of a tangible long-lived asset.  SFAS 143also requires the enterprise to record the contra to the initial obligation asan increase to the carrying amount of the related long-lived asset (i.e., theassociated asset retirement costs) and to depreciate that cost over theremaining useful life of the asset.  The liability is adjusted at the endof each period to reflect the passage of time (i.e., accretion expense) andchanges in the estimated future cash flows underlying the initial fair valuemeasurement.  Enterprises are required to adopt SFAS 143 for fiscal yearsbeginning after June 15, 2002.  The Company adopted this standard as ofJanuary 1, 2003.  The provisions of SFAS143 did not have a material impact on the financial condition or results ofoperations of the Company.

 

In April 2002, the FASB issued SFAS 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections”.  SFAS 145 eliminatesextraordinary accounting treatment for reporting gain or loss on debtextinguishment, and amends other existing authoritative pronouncements to makevarious technical corrections, clarify meanings, or describe theirapplicability under changed conditions. The provisions of SFAS 145 relatedto the rescission of FASB Statement No. 4 are applicable in fiscalyears beginning after May 15, 2002, the provisions related to FASBStatement No. 13 are effective for transactions occurring afterMay 15, 2002, and all other provisions are effective for financialstatements issued on or after May 15, 2002; however, early application 

 

9

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is encouraged. Debt extinguishments reported as extraordinary itemsprior to scheduled or early adoption of SFAS 145 would be reclassified inmost cases following adoption. Adopting SFAS 145 on January 1, 2003 didnot have a material effect on the Company’s financial position, results ofoperations, or cash flows.

 

In June 2002, the FASB issued SFAS 146, “Accounting for CostsAssociated with Exit or Disposal Activities”. SFAS 146 requires recordingcosts associated with exit or disposal activities at their fair values when aliability has been incurred. Under previous guidance, certain exit costs wereaccrued upon management’s commitment to an exit plan, which is generally beforean actual liability has been incurred. The requirements of SFAS 146 areeffective prospectively for exit or disposal activities initiated afterDecember 31, 2002; however, early application is encouraged. Adoption ofSFAS 146 on January 1, 2003 did not have a material effect on the Company’sfinancial position, results of operations, or cash flows.

 

In November 2002, the FASB issued FASB Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45requires that upon issuance of a guarantee, a guarantor must recognize aliability for the fair value of an obligation assumed under a guarantee.FIN 45 also requires additional disclosures by a guarantor in its interimand annual financial statements about the obligations associated withguarantees issued. The recognition provisions of FIN 45 are effective forany guarantees issued or modified after December 31, 2002. The disclosurerequirements are effective for financial statements of interim or annualperiods ended after December 15, 2002. FIN 45 was adopted on January 1, 2003 and did not have a material effecton the Company’s financial position, results of operations, or cash flows.

 

In December 2002, the FASB issued SFAS 148, “Accounting forStock-Based Compensation — Transition and Disclosure”. SFAS 148amends SFAS 123 “Accounting for Stock-Based Compensation,” to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  Inaddition, SFAS 148 amends the disclosure requirements of SFAS 123 torequire prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the method used on reported results. SFAS 148 is effective forfiscal years beginning after December 15, 2002. The expanded annualdisclosure requirements and the transition provisions are effective for fiscal yearsended after December 15, 2002.   Theinterim disclosure provisions are effective for financial reports containingfinancial statements for interim periods beginning after December 15,2002. SFAS 148 was adopted on January 1, 2003 and did not have a materialeffect on the Company’s financial position, results of operations, or cashflows.

 

**7.             Non-Compete Agreement**

 

In connection with the acquisition of Acrodyne Industries, the Companyentered into a non-compete agreement with the selling shareholder. Inconsideration for this agreement not to compete, the Company is obligated tomake annual payments to the selling shareholder of $65,000 annually and pay forcertain benefits for the remainder of his life. The Company recorded theactuarial present value of the estimated payments of $750,000 related to thisagreement as an asset and established a corresponding liability at the date ofacquisition. The Company has not made any payments to the selling shareholderduring the last two years and is in the process of renegotiating theagreement.  Currently, the impact oncash flow and financial position resulting from renegotiating the agreement isindeterminable.

 

**8.             Intangible Assets**

 

Prior to the recapitalization with Sinclair, we utilized theirintellectual properties for Quantum transmitters by a license agreement thatwas amortized over a five year period. Design documentation for the product was acquired from Sinclair as partof the recapitalization.  We anticipatethe useful life of this property to be ten years.

 

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**9.             Pro Forma Information Related ToStock-Based Compensation**

 

As permitted under SFAS No. 123, *Accounting for Stock-Based Compensation*,we measure compensation expense for our stock-based employee compensation plansusing the intrinsic value method prescribed by Accounting Principles BoardOpinion No. 25, *Accounting for Stock Issued to Employees*, and provides proforma disclosures of net income and earnings per share as if the fairvalue-based method prescribed by SFAS No. 123 had been applied in measuringcompensation expense.

 

Had compensation cost for our grants for stock-based compensation plansbeen determined consistent with SFAS No. 123, our net income on a pro-formabasis would be the same as reported on our consolidated statement of operationsof the three month periods ended March 31, 2003 and 2002.

 

**10.          Commitments and Contingencies**

Lawsuits and claims are filed against us from time to time in theordinary course of business.  Theseactions are in various preliminary stages, and no judgements or decisions havebeen rendered by hearing boards or courts. Management, after reviewing developments to date with legal counsel, isof the opinion that the outcome of such matters will not have a material adverseeffect on our consolidated financial position, consolidated results ofoperations or consolidated cash flows.

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERARTION**S

 

**OVERVIEW**

 

The business of Acrodyne Communications, Inc. is conducted through oursole operating subsidiary, Acrodyne Industries, Inc.

 

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**RESULTS OF OPERATIONS**

 

**AcrodyneCommunications, Inc.**

**ConsolidatedStatements of Operations     (Unaudited)**

 
|                              |   | **Three Months  Ended  March 31,** |      |
|-----------------------------------|--------|------------------------------------|-----------|
|                              |   | **2003**                           |      | **2002** |   |
|                              |   |                               |      |   |   |
| NET SALES                         |   |                               |      |   |   |
| Related party sales, net          |   | $                                  | 3,050,899 |   | $ | 3,274,436 |   |
| Other sales, net                  |   | 3,029,117                          |      | 2,547,201 |   |
| NET SALES                         |   | 6,080,016                          |      | 5,821,637 |   |
| COST OF SALES                     |   | 4,464,549                          |      | 4,477,313 |   |
| Gross Profit                      |   | 1,615,467                          |      | 1,344,324 |   |
|                              |   |                               |      |   |   |
| OPERATING EXPENSES                |   |                               |      |   |   |
| Engineering                       |   | 454,854                            |      | 515,320 |   |
| Selling                           |   | 322,766                            |      | 329,707 |   |
| Administration                    |   | 572,306                            |      | 278,511 |   |
| Amortization of intangible assets |   | 16,875                             |      | 75,000 |   |
| Total Operating Expenses          |   | 1,366,801                          |      | 1,198,538 |   |
| Operating Income                  |   | 248,670                            |      | 145,786 |   |
|                              |   |                               |      |   |   |
| OTHER (EXPENSES) INCOME           |   |                               |      |   |   |
| Interest Expense, Net             |   | (110,022                           | )         | (220,361 | ) |
| Other Income, Net                 |   | 1,209                              |      | 156,268 |   |
| Net Income before taxes           |   | 139,853                            |      | 81,693 |   |
|                                   |        |                                    |           |  |  |  |  |

 

Our results of operations are reflective of the changes anduncertainties that exist in the television broadcasting sector in response tothe FCC’s regulations surrounding digital television. The FCC’s digital mandateallows low power digital transmission currently and requires high power digitaltransmission by as early as 2006. Sinclair Broadcast Group (Sinclair) iscurrently our largest customer and their DTV strategy has been to purchaseprimarily high power transmitters that they will operate at low power untilthey are required by the FCC to operate them at high power. Other televisioncompanies have responded to the FCC mandate by purchasing low powertransmitters to meet the current requirement and we believe that thesecompanies will need to replace these low power transmitters with high powerequipment as early as 2006. However, we believe that a significant amount ofuncertainty exists in the broadcasting sector concerning the actual timing ofthe high power requirement and that many companies believe that therequirements will be delayed. Additionally, we believe that the slump inadvertising revenues in recent years and continued economic uncertainties contributed to the decision by many broadcasting companies to opt for thetemporary low power solution.

 

Net income of $139,853 for three months ended March 31, 2003 increased71.2% over net income of $81,693 for the comparable period in 2002.  Ournet income increased as a result of increased gross margin and decreasedselling expenses offset by increased administrative expenses.

 

Our net sales reflect our strategy of addressing the industry trendsdescribed above as we have experienced increases in the sales of both highpower and low power equipment. Net sales for the three month period ended March31, 2003 were $6,080,016 as compared to $5,821,637 in for the three monthperiod ended March 31, 2002, a 4.4% increase. The increase is attributable to$2,286,270 sales of Rhode and Schwartz 

 

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solid state transmitters that were not available for our sales in thethree month period ended March 31, 2002. Sales during the three month period ended March 31, 2003 of Quantumtransmitters of $2,577,463 declined $2,856,643 from the three month periodended March 31, 2002.  All Quantumtransmitters were sold to Sinclair during the three month period ended March31, 2003.  Sales to Sinclair resultedfrom their commitment to complete their conversion to digital television during2003. Sinclair’s demand for our Quantum products will decrease significantly inthe second half of 2003 as they complete their digital conversion.

 

 

All Quantum transmitters produced during the first quarter of 2003 weresold to Sinclair.  Going forward, oursales group’s focus is on selling Quantum transmitters to companies that arenot affiliated with Sinclair. We believe these sales will be significant duringthe next few years since other television companies have delayed theirpurchases of high power transmitters in recent years because of liquidityconcerns resulting from an overall weak advertising climate, which began toimprove during 2002. We believe that there will be a continued demand forAnalog equipment as more broadcasters are required to continue broadcasting anAnalog signal until at least 2006. We are addressing this demand by targetingtelevision stations with antiquated Analog equipment for replacement with acost savings/future growth, marketing plan. Our plan immediately improves ourcustomer’s cash flow now by providing improved energy efficiency and protectstheir future cash flow by allowing the conversion of their new AnalogTransmitter to a Digital Transmitter when needed with minimal cost.

 

Our sales of Rohde and Schwarz solid state transmitters were $1,873,000during the three month period ended March 31,2003.  We did not sell this product in the three month period endedMarch 31, 2002.  These sales resultedfrom an increased demand for low power transmitters by television companiesthat needed to begin transmitting a digital signal in response to new FCCregulations. We believe that our sales of these low power Rohde and Schwarzproducts will remain steady during the next year as television companiescomplete their low power solution but that sales of this product willsignificantly decrease in future years as these companies ultimately switch tothe high power transmission requirement.  Our strategy in future yearswill be to sell our high power Quantum transmitter to these companies asdescribed above.

 

Cost of sales declined from $4,477,313 in the first quarter of 2002 to$4,464,547 for the three month period ended March 31, 2003. Increased salescombined with decreased cost of sales generated gross margin of $1,615,469 forthe three month period ended March 31, 2003 compared to $1,344,324 for the sameperiod in 2002.  An increase of 20.1%over the same period last year.  Grossmargin on sales increased to 26.6% for the first quarter 2003 as compared to23.1% for same period in 2002 primarily as a result of reducing the cost ofsales charge for warranty reserve from 5% of sales in 2002 to 1.5% of sales in2003.  Management’s review of claimhistory indicated accruing a lesser percentage of sales was adequate to providefor future warranty claims. Such adjustment was based on claim history andengineering analysis of products under warranty.  Strong gross margins probably will not continue for the remainderof the year due to increased sales volume of products we purchase from Rhodeand Schwarz that have a lower gross margin than those products that we manufactureand increases competitive pressures. However, we believe that our gross margins will increase in future yearsas television companies address their high power transmission requirements asdescribed above.

 

Engineering expense decreased from $515,320 for the three month periodended March 31,2002 to $454,853 for the comparable period in 2003.  Reduced payroll and related expenses,consulting fees, and travel contributed to the overall reduction.

 

Administrative expenses increased $293,794 to $572,305 for the threemonth period ended March 31, 2003 compared to $278,511 for the three monthperiod ended March 31, 2002.  Theincrease is attributable to increasing bad debt expense by $145,000 as a resultof necessary additions to the allowance for doubtful accounts; bonus accrual of$50,000 was added in this year’s period; insurance premiums also increased andthe executive vice president’s salary was not in the 2002 first quarterresults.

 

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We expect our interest expense to remain low in future periods as aresult of our re-capitalization which eliminated most of our debt. In the nearterm, we expect future interest expense to consist entirely of interest expenseassociated with our capital lease.

 

Amortization of the license agreement with Sinclair ceased at December31, 2002 when the terms of the recapitalization plan cancelled the licenseagreement.

 

Design documentation for the Quantum transmitters were transferred fromSinclair to Acrodyne  as part of therecapitalization.  We anticipate theuseful life of this intellectual property to be ten years.  Therefore the annual amortization of theintangible asset is $67,500 or $16,875 for a three month period.

 

No federal or state income tax associated with the 2003 or 2002 incomewas recorded due to the magnitude of our tax loss carry forward. We believethat all the available benefits probably will not be fully realized.

 

**RECAPITALIZATION PLAN**

 

In December 2002 our stockholders approved a recapitalization planwhereby technology owned by Sinclair was transferred to Acrodyne, warrants andoptions owned by Sinclair and debt owed to Sinclair, was forgiven in exchangefor our stock.  This transaction wascompleted in January 2003. Effective January 1, 2003, and in exchange for20,350,000 shares of our common stock, Sinclair agreed to:

 

a)     Forgiveall indebtedness, payables, accrued and unpaid interest under the outstandingdebenture and Lines of Credit amounting to about $9,877,542;

b)    Assignall intellectual property rights relating to the License agreement;

c)     Investan additional $1,000,000;

d)    Terminateall Sinclair owned warrants and

e)     Amendthe Guaranty and Lease Compensation Agreement, dated September 16,1999.  Amended terms require thepayments in 2002 through 2005 to be made in cash with subsequent years paid incash or stock at our discretion.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

To alleviate the immediate concern as to whether or not we couldcontinue to operate as a going concern we negotiated a recapitalization planwith Sinclair that provided the necessary financial resources and debt reliefto continue normal operations.

 

As a result of positive operations during the first quarter and therecapitalization, the excess of current liabilities over current assets was$679,509 as compared to $11,329,089 at December 31, 2002.

 

Operating capital required to fund normal operation is provided bycustomer progress payments on sales orders, vendor terms on purchased materialsand gross margin of products and services sold.  We may require additional capital to fund our expansion into thedigital television market and any additional operating losses, should theyoccur.  There can be no assurance thatwe will be able to obtain the necessary capital to fund operating needs andfinance any required investment needs or to generate sufficient revenue toachieve and sustain positive cash flow.

 

At this time we do not have a line of credit in place with eitherSinclair or a bank.  There are noguarantees that we would be able to obtain such a facility.  Since we do not have any significant unusedsources of liquidity or an operating line of credit, we must rely on internallygenerated cash flow to fund future operations. Accordingly, our only source of cash to finance our operations in thefuture is from the sales of transmitters.

 

We do not plan on committing to any material capital expendituresduring the remainder of year 2003.

 

**Forward LookingStatements**

 

Certain statements contained in this report that do not relate to historicalinformation are “forward looking statements” within the meaning of the UnitedStates Private Securities Litigation Reform Act of 1995 and thus areprospective.  Such forward-looking statements are subject to risks,uncertainties and other factors which could cause actual results to differmaterially from future results expressed, projected or implied by suchforward-looking statements.  Such factors include, but are not limited to,economic, competitive, and broadcast industry conditions.  These factorsare discussed in greater detail in the Company’s filings with the United StatesSecurities regulators.  The Company disclaims any responsibility to updateany such forward-looking statements.

•                  Regulatorychanges governing transmission platforms

•                  General economicand marketplace conditions

•                  Interest ratefluctuations and access to capital

•                  Our ability todevelop, implement and maintain reliable and adequate internal accountingsystems and controls

 

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**Item 3. - Controlsand Procedures**

 

The Certifications required in accordance with Rule 13a-14 of theSecurities Exchange Act of 1934 follow the Signatures section of this AnnualReport.  This Controls and Procedures section of the Annual Report should beread in conjunction with the Certifications for a more complete understandingof the topics presented.

 

At the conclusion of the audit of the consolidated financial statementsof the Company for the year ended December 31, 2002, the Audit Committee met todiscuss the results to the audit and to discuss various matters with GrantThornton LLP, the Company’s independent accountants.  We received a letterfrom our independent accountants citing material weakness associated withinadequate supervision of the accounting personnel and deficient record-keepingpractices.  In response to this matter on April 17, 2003 the AuditCommittee and Management relieved the Executive Vice President and ChiefFinancial Officer of their duties and on April 18, 2003 hired an individual toaddress all of the concerns presented by the independent accountants. Theindividual will also assess all internal controls, policies and procedures andensure that all material deficiencies cited are properly addressed.

 

ACRODYNE COMMUNICATIONS, INC.

PART II. OTHERINFORMATION

 

**Item 6****.** –**Exhibitsand Reports on  Form 8-K**

 

**a)****              Exhibits**

 

99.1   Certification pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley act of 2002, executed by the CEO.

99.2   Certification pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley act of 2002, executed by the CFO.

 

**b)****              Reportson Form 8-K**

April 17,2003    Mr. John Strzelecki, Executive Vice President ofAcrodyne Communications, Inc. resigned.

April 17,2003    Mr. Robert E. Woodruff, Jr, Chief Financial Officerof Acrodyne Communications, Inc. was terminated.

April 18,2003    Mr. Richard W. Murray hired as Principal FinancialOfficer.

 

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 theundersigned thereunto duly authorized.

 
|                      | Acrodyne Communications, Inc.                                                                          |   |
|---------------------------|--------------------------------------------------------------------------------------------------------|--------|
|                      | (Registrant)                                                                                           |   |
|                      |                                                                                                   |   |
| Date:  June 26, 2003 | By   /s/ Nathaniel S. Ostroff                                                                |   |
|                      | Nathaniel S. Ostroff, Chairman of the Board of Directors  and President  (Principal Executive Officer) |
|                      |                                                                                                   |
|                      | By   /s/ Richard W. Murray                                                                   |   |
|                      | Richard W. Murray, Chief Financial Officer                                                             |
|                           |                                                                                                        |        |  |  |  |

 

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I, Nathaniel S. Ostroff,certify that:

 

1.     Ihave reviewed this quarterly report on Form 10-QSB/A of AcrodyneCommunications, Inc. (registrant);

 

2.     Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.     Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof , and for, the periods presented in this quarterly report;

 

4.     Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

A)   designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

B)    evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (theEvaluation Date); and

 

C)    presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.     The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

A)   allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

B)    anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.     The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls, subsequent to the date ofour most recent evaluation, including any corrective actions with regard tosignificant deficiencies in material weakness.

 

 
| Date: | June 26, 2003 |
|-------|---------------|

 

 

 
| Signature: | /s/  Nathaniel S. Ostroff                                                         |
|------------|-----------------------------------------------------------------------------------|
|       | Chairman of  the Board of Directors  and President  (Principal Executive Officer) |

 

 

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I, Richard W. Murray, certifythat:

 

1.     Ihave reviewed this quarterly report on Form 10-QSB/A of AcrodyneCommunications, Inc. (registrant);

 

2.     Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.     Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof , and for, the periods presented in this quarterly report;

 

4.     Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

A)           designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

B)            evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (theEvaluation Date); and

 

C)            presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.     The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

A)           allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

B)            anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.     The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls, subsequent to the date ofour most recent evaluation, including any corrective actions with regard tosignificant deficiencies in material weakness.

 

 
| Date: | June 26, 2003 |
|-------|---------------|

 

 

 
| Signature: | /s/ Richard W. Murray    |
|------------|--------------------------|
|       | Chief  Financial Officer |

 

 

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