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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
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[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-27250
AML COMMUNICATIONS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 77-0130894
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 AVENIDA ACASO, CAMARILLO, CALIFORNIA 93012
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(Address of principal executive offices) (Zip Code)
(805) 388-1345
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(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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COMMON STOCK, $.01 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $ 12,786,000.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant on June 12, 1998, was approximately
$12,616,726. The per share stock price for computational purposes was $3.44,
based on the closing sale price per share for the Registrant's common stock on
the NASDAQ National Market on June 12, 1998. This value is not intended to be a
representation as to the value or worth of the Registrant's common stock. The
number of non-affiliates of the Registrant has been calculated by subtracting
the number of shares held by persons affiliated with the Registrant from the
number of outstanding shares. The number of shares of the Registrant's common
stock outstanding on June 12, 1998 was 6,297,414.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
Proxy Statement for the Annual Meeting of Stockholders to be held on August 25,
1998, are incorporated by reference into Items 10, 11 and 12 of Part III of this
Form 10-KSB. The Proxy Statement will be filed within 120 days after the end of
the fiscal year covered by this report.
Transitional Business Disclosure Format (Check One). Yes No X
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This Annual Report on Form 10-KSB contains certain forward-looking statements,
the realization of which may be impacted by certain important factors which are
discussed in "Additional Factors That May Affect Future Results," under Item 6,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
AML Communications, Inc. ("AML" or the "Company") was incorporated in
California in 1986 as Advanced Milliwave Laboratories, Inc. In early 1994, the
Company changed its name to AML Communications, Inc. In December 1995, in
connection with the initial public offering of its common stock, the Company
changed its state of incorporation from California to Delaware. In May 1996,
the Company moved its principal office to 1000 Avenida Acaso, Camarillo,
California 93012.
The Company designs, manufactures and markets amplifiers and related
products for the cellular, Personal Communication Services ("PCS") paging and
other communication markets. Additionally, beginning in 1993, the Company has
offered multicarrier amplifiers to the Wireless Local Loop ("WLL") segment of
the wireless communications industry. Since its inception, AML has also provided
a number of catalog and custom amplifiers to Original Equipment Manufacturers
("OEMs") and other customers in the communications market. AML's wireless
products support a broad range of analog and digital transmission standards and
formats including Advanced Mobile Phone Services ("AMPS"), Total Access
Communication System ("TACS"), Nordic Mobile Telephone ("NMT"), Time Division
Multiple Access ("TDMA"), Code Division Multiple Access ("CDMA"), Global System
for Mobile Communications ("GSM") and Frequency Hopping Multiple Access
("FHMA").
AML's cellular products, introduced in late 1994, were historically marketed
primarily to cellular operators to significantly increase the quality and
quantity of calls processed by new and existing cellular base stations. The
Company's initial success in the cellular market was a result of selling
directly to domestic operators. In the fourth quarter of fiscal 1997 the Company
experienced a significant decrease in its revenue. The primary reasons for the
decline were threefold: 1) OEMs developed improved base stations enabling the
operator to achieve cost effective performance without having to upgrade to an
AML amplifier, 2) macrocell base stations were developed and sold at
substantially lower prices than ever before, thereby slowing the sales of
microcell base stations in this country, and 3) the industry has focused both
financial and human resources on further developing the PCS market.
Consequently, further build-out of the cellular infrastructure has slowed. As a
result, the Company began to focus on diversifying its product and customer base
(primarily international customers and OEMs). Late in fiscal 1997 the Company
entered the satellite communication gateway market by offering a high power
amplifier for data transmission applications in a Low Earth Orbit ("LEO")
satellite communications network.
During fiscal 1998, the Company recorded significant revenue from an OEM in
Brazil and introduced products for the PCS and Two-Way Paging marketplace.
During fiscal 1998 the Company heavily invested in R & D intended for the WLL
market. The Company has realigned its structure to continue strengthening its
marketing effort to OEMs.
INDUSTRY BACKGROUND
The market for wireless communications services has grown substantially
during the past decade as cellular, PCS, paging, wireless telephony, satellite
communication and other new and emerging applications have become increasingly
accessible and affordable to growing numbers of consumers. Among the various
types of wireless services, the subscriber base for cellular communications is
currently the largest, but the higher frequency PCS market is forecasted to
exhibit the most growth.
The Cellular Marketplace. Cellular market growth in North America can be
attributed to decreasing prices, greater access to cellular service and
increased consumer acceptance. Consumers now demand competitive pricing,
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smaller cellular phones, more efficient batteries, greater geographic coverage
and more consistent service. The growth in cellular communications and the
number of subscribers in relation to the limited amount of Radio Frequency
("RF") spectrum assigned to cellular and other wireless services has required
substantial investment by cellular system operators in cellular infrastructure
equipment. This investment enables cellular system operators to expand system
capacity to meet increasing needs and to handle increased traffic with a minimum
of distortion or interference.
A cellular system consists of a number of cells which are networked to form
a cellular system operator's geographic coverage area. Each cell has a base
station which houses the equipment that transmits and receives telephone calls
between the cellular subscriber within the cell and the switching office
connected to the local wireline telephone system. Such base station equipment
includes an antenna and a series of transceivers, power amplifiers and cavity
filters. Large cells, which generally cover a geographic area of up to five
miles in radius, are commonly referred to as "macrocells."
Cellular system operators in densely populated areas are able to expand the
capacity of their existing cellular systems by dividing macrocells into smaller
cells commonly referred to as "microcells." These typically cover one to
three miles in radius. The base stations for microcells are substantially
smaller physically than base stations for macrocells. Microcells provide a
means to increase local capacity and/or coverage. They require less expensive
equipment at each base station, but normally offer lower capacity and smaller
areas of coverage than macrocells. Within the latter half of fiscal 1997, OEMs
developed improved base stations enabling the operator to achieve cost effective
performance without having to upgrade to an AML multicarrier amplifier. During
fiscal 1998 certain operators have shown increased interest in high power
multicarrier amplifiers and the Company has invested in a second generation
multicarrier amplifier design for this market.
The ability of cellular system operators to increase system capacity through
the use of microcells is largely dependent on their ability to broadcast
multiple signals with acceptable levels of interference and distortion. In
cellular systems, the amplifier is generally the greatest source of signal
interference and distortion, particularly with multicarrier high power
amplifiers. Consequently, obtaining amplifiers which can transmit and receive
multiple signals with low distortion or interference from adjacent signals
("high spectral purity") is critical to a cellular system operator's ability
to increase system capacity. Substantial resources and technical expertise are
required to design and manufacture multicarrier power amplifiers with high
spectral purity. To achieve high spectral purity, multicarrier amplifier
systems must have high interference cancellation properties.
The PCS Marketplace. PCS networks operate in a substantially similar manner
as cellular networks, except that PCS networks operate exclusively with
"digital" formats. PCS networks may operate at cellular frequencies but more
typically operate at a higher frequency in the available RF spectrum within the
1800 and 1900 MHz frequency band. Transmissions at the higher frequencies
utilized by PCS networks have shorter transmission waves as compared to cellular
frequency transmissions, which limit distances PCS transmissions can travel
without significant degradation. The PCS market is characterized by a major up
front investment by operators and, as such, is under quick deployment pressure.
The PCS initial deployment, in its quest to obtain swift coverage, is mainly
employing single carrier transmit amplifiers. Multicarrier amplifiers for this
service are yet to be deployed but are anticipated at such time as the service
to end users proliferates and capacity limitations are evident.
Unlike cellular deployment where the proliferation of both mast head receive
amplifiers was limited, the Company believes a significant number of sites are
likely to demand such products. The Company has introduced a series of receive
amplifiers for PCS service.
The Two-Way Paging Marketplace. The continued growth of the paging market
and the introduction of Two-Way Paging have created opportunities for the
Company's mast head low noise amplifiers and associated controllers. Shipments
into the paging operator market commenced in the third quarter of fiscal 1998.
The Wireless Local Loop Marketplace. WLL is considered to be a growth
market. Increasingly, WLL is being adopted in countries that lack land-line
telephone service because it allows faster and more economical deployment of
telephone communication equipment. The Company is committing significant
resources toward the development of low noise and power amplifiers for this
market sector.
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Other Wireless Markets. Satellite communication systems are expected to
provide a cost effective method for global messaging. The LEO satellites are
physically small but require substantial levels of power to maintain effective
communication. Amplifiers are therefore needed to strengthen the signal
emanating from gateways across the globe as they are transmitted to the LEO
satellites. Specialized Mobile Radio ("SMR") and other markets require various
applications of wireless communication signal enhancement by use of an
amplifier. SMR, like cellular/PCS communications, is a two-way service for both
speech and data. The custom communications market consists of small niche
segments within the larger communications market: long-haul radio
communications, land mobile communications, surveillance communications, ground-
to-air communications, microwave communications, broadband communications and
telemetry tracking.
THE AML STRATEGY
Using its proprietary technology and expertise in interference cancellation,
the Company's primary strategy is to increase its focus on amplifier products
required by the infrastructure manufacturers to support mass deployment of
communications systems. A secondary strategy is to apply the accumulated
results of its amplifier and related knowledge and experience to meet the needs
of system operators by offering technologically advanced amplifier based
products that address specific market opportunities. During the third quarter
of fiscal 1998, the Company introduced a second generation multicarrier cellular
amplifier, the M30, which uses Laterally Diffused Metal Oxide Semiconductor
("LDMOS") technology. Shipments of this product commenced in the fourth quarter
of fiscal 1998. During the fourth quarter of fiscal 1998, the second high power
version of the multicarrier cellular amplifier family, the M150, was announced.
Shipments of this product are anticipated to occur in the latter half of fiscal
1999. New products are being offered or have recently been offered to the WLL
marketplace.
Market to System Operators and OEMs. Since 1994, the Company has positioned
itself as a supplier of amplifier products to system operating companies. This
strategy has been based on the Company's belief that operators sometimes source
their own equipment rather than always depend on OEMs for complete systems. The
Company believes that such operators are becoming more sophisticated about
equipment purchases and are more willing to purchase products from providers who
offer innovative solutions to technical problems. Based on the performance
characteristics and functionality of its products, AML believes it will continue
to penetrate the infrastructure equipment market by marketing to the system
operators. Because it does not procure a significant amount of business from the
more traditional distribution channel to market, the OEM, the Company operates
without a substantial backlog. To support increased focus on developing
relationships and marketing to the OEM sector, the Company established an OEM
sales department during fiscal 1998 and allocated R&D resources toward
technology growth to support anticipated OEM product needs. It is believed that
success in the OEM sector will improve the Company's ability to make projections
with greater reliability. However, since the OEM sector has a long gestation
period, the Company believes it has yet to see the results of its marketing
efforts and cannot predict when favorable results, if any, will be realized.
Maintain a Technology Leadership Position. The Company believes its
interference cancellation technologies and its receive amplifier expertise are
among the most advanced that are commercially available in the industry, both in
performance and diversity of methodology.
Develop Innovative Proprietary Products. The Company has pursued the
development of amplifier products which are highly innovative. During fiscal
1998, the Company applied engineering resources to the development of products
intended for the WLL infrastructure market and to the introduction of a second
generation multicarrier product. The Company currently has two patent
applications pending.
Provide Comprehensive Customer Support. The Company works closely with its
customers throughout the design process to assist them in refining and
developing their amplifier specifications. Customer support involves problem
evaluation, engineering recommendations and solution implementation. After the
product is delivered, the Company continues to provide technical support to
facilitate system integration, implementation and operation. Through this
process, the Company believes it will develop new product definitions and
implementations to further enhance the strategic position of the Company in the
wireless market.
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TECHNOLOGY
Wireless Transmit Technology. The traditional transmit section of a base
station consists of a series of transceivers, power amplifiers, tunable cavity
filters and a transmit antenna to transmit the signal to the cellular or PCS
telephone user. The power amplifier within the base station receives a
relatively weak signal from the cellular transceiver and boosts the power of the
outgoing cellular signal so that it is broadcast throughout the cell. The RF
power levels necessary to transmit the signal over the required range must be
achieved without distorting the signal. The signal must be amplified and remain
in the assigned RF channel with low distortion and interference with adjacent
channels.
Because cellular and PCS system operators are allocated a specific RF
spectrum band and specified channels, system operators seek to use such bands
and channels more efficiently in order to increase system capacity. To gain
flexibility and increase spectrum efficiency, an operator may choose
"multicarrier amplification," in which all channels are amplified
simultaneously by one amplifier, rather than each channel using a separate
single amplifier. A multicarrier amplifier combines the performance capabilities
of many single carrier amplifiers into one unit, eliminating the need for
numerous single carrier amplifiers and their corresponding tunable cavity
filters. A multicarrier amplifier requires less space than multiple single
amplifiers which reduce the size of a base station.
Multicarrier amplification, particularly at high power levels, generally
results in an increase in the spurious interfering emissions generated by the
amplifier. Reducing or eliminating spurious interfering emissions generated by
high power amplifiers may be accomplished through interference cancellation
techniques involving highly advanced processing circuitry methods. The Company
has developed certain proprietary technology and methods to achieve high
interference cancellation in its amplifiers, technically known as
"feedforward" and "lossless-feedback" implementations.
Cellular system operators are also expanding the capacity of their systems
by transitioning from analog technologies to digital technologies. Cellular
systems based on analog technology are capable of carrying only one call per
channel of RF spectrum. Current analog standards and formats include the AMPS in
North America and the TACS and NMT in Europe. Digital systems allow a given
channel of spectrum to carry multiple calls simultaneously thereby increasing
system capacity. Conversion to digital transmission allows three to eight times
as many voice conversations to occupy the same frequency bands as analog
transmission systems. Current digital standards and formats include TDMA and
CDMA in North America and the GSM and Digital Communication Service at 1800 MHz
("DCS-1800") in Europe. An additional cellular system operating in the SMR
spectrum is in deployment in the United States. This system uses digital
techniques that include FHMA. The Company's products support many analog and
digital standards and formats, including AMPS, TACS, NMT, TDMA, CDMA, GSM and
FHMA. PCS system operators have subscribed to all digital transmission formats
(GSM, TDMA, or CDMA).
Wireless Receive Technology. The receiving section of a base station
commonly uses two antennas to create a more efficient receive antenna pattern
than would be the case with a single antenna. The use of low noise amplifiers
with the base station's antennas increases the performance of a cellular or PCS
system operator's receive system. Low noise amplifiers receive a weak signal
from the antennas and boost the power of the signal with reduced levels of
noise. The Company employs complex circuitry and techniques, including the use
of sensitive Gallium Arsenide ("GaAs") transistors to produce low noise and
very low noise amplifiers.
MARKETS
The market for wireless communications services has grown substantially
during the past decade as cellular, PCS, WLL, SMR and other new and emerging
applications have become increasingly accessible and affordable to growing
numbers of consumers.
Cellular Market. The market for cellular communications is currently the
largest of the wireless services. Cellular system operators have expanded the
capacity of their existing cellular systems by splitting macrocells into smaller
microcells. The Company believes that the relatively small size, high power and
performance characteristics of its microcell multicarrier amplifier product line
has been particularly attractive to cellular system operators when
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purchasing infrastructure equipment for such new cell sites. Although this
market is the largest, its growth rate has declined significantly with the
introduction and deployment of PCS.
PCS / Two-Way Paging Markets. In light of the growth of cellular
communications and recognizing the need for additional competitive wireless
capacity, the Federal Communication Commission auctioned spectrum at 1850 MHz to
1990 MHz. The wireless services occupying these bands are PCS. Installation of
the infrastructure to support PCS domestically in the United States commenced in
1996 and is expected to continue beyond 2000. Unlike cellular, which took over
12 years to reach its present level of infrastructure build-out, PCS build-out
is expected to occur on an accelerated basis. The reasons for this include the
need for PCS to compete effectively with existing cellular coverage and services
plus a desire on the part of many PCS operators to be the first to offer PCS
service in order to capture the highest possible market share.
The Company believes that PCS represents an opportunity for sales to both
system operator and OEM customers. In order to take advantage of this
opportunity the Company has developed a line of mast head receive amplifiers,
repeaters and transmit power amplifiers. During fiscal 1998, the Company's
sales into the PCS sector were lower than anticipated. The Company believes
this is partially due to PCS product packaging by independent manufacturers
who are in direct competition with the Company's products.
Certain domestic paging operators are enhancing their infrastructure to
provide Two-Way Paging features. The Company has developed mast head low noise
amplifiers for Two-Way Paging applications. This is a niche market that
represents a one time infrastructure upgrade.
Wireless Local Loop Market. WLL telephony systems are increasingly being
adopted in developing markets to more quickly implement telephone communication
services. In certain developing countries, such as Indonesia and China,
wireless telephony systems provide an attractive alternative to copper and fiber
optic cable based systems, with the potential to be implemented more quickly and
at lower cost than wireline telephone systems. During fiscal 1998, the Company
dedicated engineering and marketing resources to participate in development
programs in this market with certain infrastructure OEMs.
Satellite Communications and Other Markets. The satellite communications
market is a small niche segment within the larger communications market which
provides across-the-globe mass digital communications. Other markets include:
surveillance communications, ground-to-air communications, microwave
communications, broadband communications and telemetry tracking. The Company
sells custom amplifiers and related products to these segments.
The markets in which the Company and its customers compete are characterized
by rapidly changing technology, evolving industry standards and continuous
improvements in products and services. The Company's future success depends on
its ability to develop in a timely manner new products that compete effectively
on the basis of price and performance and that adequately address customer
requirements. No assurance can be given that the Company's product development
efforts will be successful or that its new products will achieve customer
acceptance.
PRODUCTS
The Company designs and sells multicarrier transmit amplifiers, low noise
receive amplifiers, and related products for the cellular paging and PCS
communication markets, as well as to the WLL and satellite communications
segments of the wireless communications industry. The Company also provides
catalog and custom amplifiers to OEMs and to other customers in the
communications market in general.
Wireless Multicarrier Amplifiers. Utilizing its proprietary technology, the
Company developed a series of multicarrier (microcell) amplifiers for cellular
applications. These first generation AML products feature transmitting power
levels, while at the same time maintaining low levels of spurious output and
distortion. The Company's Microcell 40, Microcell 80 and Microcell 140 products
offer a composite power of 40 Watts, 80 Watts and 140 Watts, respectively.
During fiscal 1998, the Company introduced a second generation LDMOS 30 Watt
multicarrier cellular amplifier. A higher power, modular, AML second generation
product was also announced; however, it is not yet ready for market. These new
products
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demonstrate improved intermodulation suppression and offer efficiency, size and
heat contribution advantages over present industry standards. Additionally, the
Company offers multicarrier amplifiers for WLL and satellite communications
applications.
Multicouplers. The Company developed and delivered a cellular multicoupler
designed to an OEM specification during fiscal 1998. The Company has received
several repeat orders for multicouplers.
Wireless Receive Amplifiers. AML's receive amplifiers are designed primarily
for use by system operators and OEMs in the wireless infrastructure equipment
market. The Company's dual low noise amplifiers in its microcell products
enhance the operation of the receiving section of the base station and allow the
cellular operator to balance its system.
In addition, the Company's Link Balancer receive amplifiers feature low
noise sensitivity and high out-of-band rejection characteristics. The Company
believes that the Link Balancer amplifier improves the ability of unbalanced
macrocells to receive the weaker signals of level 2 power hand held phones more
efficiently and therefore to expand the footprint of such macrocells. The
Company has recently introduced a line of duplexed and non-duplexed PCS masthead
receive amplifiers and a PCS masthead transmit/receive amplifier for PCS 1900
(GSM derived) applications.
The Company believes that average selling prices and gross margins for its
products are declining as system operators and OEMs face pressure to reduce
costs as competition intensifies. To counter these conditions, the Company
believes that it must successfully introduce and sell on a timely basis
innovative new products that incorporate innovative technologies and features
that can be sold at higher average selling prices and gross margins or at
greater volume. There can be no assurance, however, that the Company will be
successful in developing or marketing such products in such a manner.
Custom and Catalog Products. In addition to multicarrier transmit and
receive amplifiers, the Company also produces a variety of communication and
other products that meet the needs of particular markets. These products are
frequently designed and produced to customer specifications relating to noise,
power, frequency or spectral purity. The Company's catalogs list numerous
possible configurations for certain custom products and are used to promote
sales of its custom products to customers with special requirements. In order
to best utilize resources the Company selectively solicits and accepts business
for these traditional AML products. Custom and catalog products include
receiving multicouplers, high dynamic range low noise amplifiers, microwave
amplifiers and telemetry tracking components.
Product Warranties. The Company typically warrants its products against
defects in materials and workmanship for a period of one year from the date of
shipment. To date, the Company has not experienced a material level of warranty
claims.
CUSTOMERS, SALES AND MARKETING
Customers. The Company markets its products into the USA and overseas
markets. During fiscal 1998 the Company made substantial shipments into Brazil.
The Company also directed product marketing activities toward Russia, Canada and
certain Western European countries. See --"International Sales" below.
Historically, the Company has derived a substantial percentage of its net
sales from single customers during certain fiscal periods and until fiscal 1995,
the Company derived substantially all of its net sales from its custom
communication products. However, the Company has become less dependent on
custom products as the percentage of its net sales derived from sales of
cellular and wireless telephony products has increased. Set forth below is
information pertaining to the Company in its markets.
. Cellular and Wireless Telephony. Beginning in late fiscal 1995, the
Company shifted its marketing efforts from custom communication products to
cellular system applications. As a result, sales to the cellular industry
accounted for approximately 71.8% of net sales in fiscal 1997 and 74.1% of
net sales in fiscal 1998. Major customers for the Company's cellular
products included AGC Optosystems (as representative for NEC Brazil), AT&T
Wireless, PageMart Wireless, Cellular One and Bell Atlantic Nynex.
Management believes
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the sales of cellular products will account for a smaller percentage of
overall sales in the foreseeable future. Net sales of wireless telephony
products accounted for approximately 9.8% of net sales in fiscal 1997, and
2.8% of net sales in fiscal 1998. To date, Interdigital Communications
Corporation is the primary customer for the Company's wireless telephony
products.
. PCS/Two-Way Paging. During fiscal 1997, the Company introduced a
new line of products for the PCS/Two-Way Paging marketplace. Customers for
the Company's PCS/Two-Way Paging products included PageMart Wireless. Sales
of these products accounted for approximately 3.9% of net sales in fiscal
1997 and 7.7% of net sales in fiscal 1998.
. Custom Communications and Other. Historically, the Company has
derived a substantial portion of its net sales from sales of its custom
products. Sales of these products accounted for 14.5% and 15.4% of net
sales for fiscal 1997 and 1998, respectively. During fiscal 1997 and 1998,
no custom product customer accounted for more than 5% of net sales.
International Sales. Sales of products outside the United States represented
approximately 5.3% and 42.4% of net sales during fiscal 1997 and 1998,
respectively. The Company believes that cellular and PCS/Two-Way Paging growth
worldwide is expanding at similar or greater growth rates as in the United
States, and the Company is actively pursuing international customers.
Approximately 95.8% of international sales, or 40.6% of total sales in 1998 were
to a single customer in Brazil. No assurance can be made concerning future
orders from this customer.
Sales and Marketing. The Company employs a direct sales approach focused on
providing its wireless industry customers with specific application solutions to
satisfy their transmit and receive amplification needs. Sales of the Company's
products require close technical liaison with the customers' engineers and
frequent travel to customers' sites. The Company markets its products overseas
with the assistance of independent sales representatives in various parts of the
world. The Company has 10 independent sales representatives in the United
States, one sales representative in Brazil and sales representatives in Korea,
Venezuela, Israel and Europe. The Company continuously evaluates whether to
establish direct sales forces or to utilize independent representatives in a
particular region or for a given potential customer depending upon the scope
of potential sales opportunities. The Company's direct sales staff provides
sales direction and support to its international sales representatives. Sales
outside of the United States are denominated in U.S. dollars in order to reduce
the risks associated with the fluctuations of foreign currency exchange rates.
Sales outside the United States involve a number of inherent risks, including
reduced protection for intellectual property rights in some countries, the
impact of recessionary environments in economies outside the United States,
generally longer receivable collection periods, unexpected changes in regulatory
requirements, tariffs and other trade barriers. In addition, because
substantially all of the Company's foreign sales are denominated in U.S.
dollars, increases in the value of the dollar relative to the local currency
would increase the price of the Company's products in foreign markets and make
the Company's products relatively more expensive and less price competitive than
competitors' products that are priced in local currencies. There can be no
assurance that these factors will not have a material adverse effect on the
Company's future international sales and, consequently, on the Company's
business, financial condition and results of operations.
The Company's executive officers are involved in all aspects of the
Company's relationship with its major system operator and OEM customers. In
addition, as of March 31, 1998 the Company employed a direct sales staff of five
employees.
COMPETITION
The wireless communication equipment industry is highly competitive and the
cellular and PCS communications market is dominated by a small number of large
OEMs, such as Ericsson, Lucent, Nokia, NEC and Northern Telecom, which provide
complete infrastructure systems to system operators. In addressing the needs of
the system operators, the Company competes on the basis of product
functionality, quality and reliability, technical performance, time-to-market
and delivery capability. The Company believes that overall it competes
favorably with respect to the foregoing elements.
Merchant amplifier manufacturers, such as Powerwave Technologies, Inc.,
Spectrian Corporation and Microwave Power Devices, Inc., have developed products
which are directly competitive with the Company's products. These products are
supplied to OEMs for incorporation into their systems and in some cases also to
the system operators. This competition may adversely impact the Company.
The OEM market, which the Company hopes to penetrate further, is also very
competitive. A substantial portion of the present worldwide production of
amplifiers is dominated by a small number of wireless infrastructure OEMs who
sell these amplifiers as component parts of their wireless systems. There are no
assurances that the Company's efforts to further penetrate the OEM market will
be successful.
The Company experiences significant price competition and expects price
competition in the sale of amplifiers to increase. No assurance can be given
that the Company's competitors will not develop new technologies or enhancements
to existing products or introduce new products that will offer superior price or
performance features. The Company expects its competitors to offer new and
existing products at prices necessary to gain or retain market share. Several
of the Company's competitors have substantial financial resources, which may
enable them to withstand sustained price competition or a downturn in the
pricing of their products in the future. Substantially all of
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the Company's competitors have, and potential future competitors could have,
substantially greater technical, marketing, distribution and other resources
than the Company and have, or could have, greater name recognition and market
acceptance of their products and technologies.
RESEARCH AND DEVELOPMENT
The Company's Research and Development ("R & D") efforts are driven by the
short term demands of the market and potential future applications which have
developed as a result of the Company's relationships with wireless communication
system operators. The R&D activity is mainly focused in the wireless market
and, to a lesser extent, the market for custom products. R&D expenditures in
fiscal 1997 and 1998 were approximately $1,510,000 and $1,962,000, respectively.
Wireless Products. The Company engages in R&D programs focused on the design
of new products for the cellular, PCS, WLL, satellite and other markets,
improvement of existing product performance, cost reductions and improvements in
the manufacturability of existing products.
The Company uses a CAD environment employing networked workstations to model
and test new circuits. This design environment, together with the Company's
experience in interference cancellation technology and modular product
architecture, allows the Company to rapidly define, develop and deliver new and
enhanced products and subsystems sought by its customers.
Custom Products. The Company's R&D efforts with respect to custom products
focus primarily on developing new configurations of amplifiers and related
circuits. In addition, the Company intends to continue its R&D efforts for
certain custom low noise receive amplifiers and low noise automatic gain control
amplifiers for other portions of the wireless communication market.
PATENTS, PROPRIETARY TECHNOLOGY AND OTHER INTELLECTUAL PROPERTY
The Company's ability to successfully compete in a global market and achieve
future revenue growth will depend, in part, on its ability to protect its
proprietary technology and operate without infringing the rights of others. The
Company protects some of its intellectual property by seeking patent protection
on inventions resulting from ongoing research and development, and by
maintaining other knowledge as industrial trade secrets. The Company has been
issued three United States patents, and has two United States patents pending.
There can be no assurance that the Company's pending patent applications will be
allowed or issued, or that issued or pending patents will not be challenged
by competitors. The Company has applied for Federal trademark protection for the
marks Repeat-A-Cell(TM) and Power Top(TM) and owns Federal registration of the
mark Link Balancer(R).
Notwithstanding the Company's active pursuit of patent protection, the
Company believes that the success of the business depends on the collective
value of its patents, trade secrets, employee expertise, specifications,
technical processes, and cost effective implementation of its technology. The
Company has a policy of entering into confidentiality and non-disclosure
agreements with its employees and limiting access to and distribution of its
proprietary technology. Although there are no pending technology lawsuits
against the Company, or unresolved notices that the Company is infringing the
intellectual property rights of others, there can be no assurance that
litigation or infringement claims will not occur in the future.
GOVERNMENT REGULATION
Radio frequency transmissions and emissions, and certain equipment used in
connection therewith, are regulated in the United States, Canada and
internationally. Regulatory approvals often must be obtained by the Company in
connection with the manufacture and sale of its products, and by the Company's
customers to operate the Company's products. There can be no assurance that the
FCC, International Telecommunications Union ("ITU"), European
9
<PAGE>
Telecommunications Standard Institute ("ETSI"), or other organizations charged
with regulating the requirements of RF equipment, will not adopt more stringent
regulations for the communications industry. If such regulations are adopted,
the Company, the OEMs and the wireless system operators may be required to alter
the manner in which radio signals are transmitted or otherwise to alter the
equipment transmitting such signals, which could materially and adversely affect
the Company's products and markets. The enactment by federal, state, local or
international governments of new laws or regulations, or a change in the
interpretation of existing laws or regulations, could affect the market for the
Company's products. Recent deregulation of international communications
industries, along with recent RF spectrum allocations made by the FCC, have
increased the potential demand for the Company's products by providing users of
those products with opportunities to establish new wireless personal
communications services. However, there can be no assurance that the trend
toward deregulation and current regulatory developments favorable to the
promotion of new and expanded personal communications services will continue or
that other future regulatory changes will have a positive impact on the Company.
The increasing demand for wireless communications has exerted pressure on
regulatory bodies worldwide to adopt new standards for such products, generally
following extensive investigation of and deliberation over competing
technologies. The delays inherent in this governmental approval process may
cause the cancellation, postponement or rescheduling of the installation of
communications systems by the Company's customers.
EMPLOYEES
As of March 31, 1998, the Company had 101 full-time employees, including 22
in R & D; 59 in manufacturing, production engineering and quality assurance; 9
in administration; and 11 in sales, marketing, order entry and customer support.
The Company believes that the success of its business depends, in part, on its
ability to attract and retain qualified personnel, particularly qualified
scientific, technical and key management personnel. Company employees are not
governed by collective bargaining agreements. The Company believes its
relationships with its employees are good.
ENVIRONMENTAL REGULATIONS
The Company is subject to federal, state and local governmental regulations
relating to the storage, discharge, handling, emission, generation, manufacture
and disposal of toxic or other hazardous substances used to manufacture the
Company's products. The Company believes that it is currently in compliance in
all material respects with such regulations. Failure to comply with current or
future regulations could result in the imposition of substantial fines on the
Company, suspension of production, alteration of its manufacturing processes,
cessation of operations or other actions which could materially and adversely
affect the Company's business, financial condition and results of operations.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's administrative, engineering and manufacturing facilities are
located in a 25,000 square foot leased building in Camarillo, California. The
Company's lease for this space expires in April 2003. The Company believes that
its current facilities provide adequate expansion capabilities.
ITEM 3. LEGAL PROCEEDINGS
The Company may be subject, from time to time, to various legal proceedings
relating to claims arising out of its operations in the ordinary course of its
business. Two purported class action lawsuits have been filed against the
Company and certain of its current and former officers and directors. The first
lawsuit, entitled Ronny Sussman v. AML Communications, Inc., et al., Case No.
-------------------------------------------------
CIV 179776, was filed on March 19, 1998 in the Superior Court for the State of
California (Ventura County) (the "State Action"). The second lawsuit, entitled
Ronny Sussman v. AML Communications, Inc., et al., Case No. 98-2010 CAS (Ex)
- -------------------------------------------------
(C.D. Cal.), was filed on March 20, 1998 in the federal district court in Los
Angeles, California (the "Federal Action"). The individual defendants named in
both of the actions are Jacob Inbar (the Company's President, Chief Executive
Officer and Chairman of the Board of Directors), Tiberiu Mazilu (the Company's
Vice President of Custom Products and a member of the Board of Directors), Edwin
J. McAvoy (the Company's Vice President of Sales and Marketing and a member of
the Board of Directors), Scott T.
10
<PAGE>
Behan (the Company's Vice President of New Product Development) and William E.
Sheridan III (the Company's former Chief Financial Officer). While the Federal
Action asserts claims under the federal securities laws and the State Action
asserts claims under California's securities laws, the complaints are otherwise
essentially identical. The complaints allege that during the purported class
period of April 10, 1996 to March 25, 1997, defendants made overly optimistic
estimates regarding the Company's anticipated financial performance for fiscal
years 1997 and 1998, and overly optimistic statements regarding the Company's
ability to develop and to sell new products for the PCS market, all allegedly in
order to profit from insider trading at artificially inflated prices.
In the State Action, the Company filed a motion to dismiss or stay all
proceedings pending the resolution of the Federal Action, and alternatively
moved for a protective order governing discovery in the State Action. On June
8, 1998, the Court granted the defendants' motion to stay all discovery in the
State Action unless and until the stay of discovery is lifted in the Federal
Action. However, defendants still have to respond to the State Action complaint
and anticipate filing a demurrer, which is the California equivalent of a motion
to dismiss for failure to state a claim, on or before July 23, 1998.
In the Federal Action, pursuant to the Private Securities Litigation Reform
Act of 1995, plaintiff's motion for the appointment of lead plaintiff and lead
counsel is scheduled to be heard on June 29, 1998. The Company's response to
the complaint is due 45 days following the appointment of lead plaintiff and
lead counsel. The Company anticipates filing a motion to dismiss the claim.
The Company denies the material allegations in the complaints and intends to
defend the actions vigorously. An adverse determination could have a material
adverse effect upon the Company.
The Company and its legal counsel are currently evaluating the claims. At
this stage, it is not possible to predict the outcome or determine a range of
possible losses, if any. The Company, its directors and officers deny the
material allegations in the complaints and intend to defend the actions
vigorously. An adverse determination could have a material adverse effect upon
the Company's financial position or results of operations. During the year
ended March 31, 1998, the Company recorded $150,000 as costs related to these
lawsuits.
The Company currently is not party to any other legal proceedings, the
adverse outcome of which, individually or in the aggregate, management believes
would have a material adverse effect on the business, financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the NASDAQ National Market under the
symbol "AMLJ." The table below sets forth the high and low sales prices for the
Company's common stock on the NASDAQ National Market for the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK
HIGH Low
---- ----
<S> <C> <C>
Fiscal year ended March 31, 1997
First quarter........................................ $22.17 $10.59
Second quarter....................................... $20.50 $10.25
Third quarter........................................ $17.00 $12.50
Fourth quarter....................................... $14.00 $ 3.50
Fiscal year ended March 31, 1998
First quarter........................................ $ 4.88 $ 2.69
Second quarter....................................... $ 9.13 $ 2.81
Third quarter........................................ $11.13 $ 3.88
Fourth quarter....................................... $ 6.63 $ 4.31
</TABLE>
At June 12, 1998 there were approximately 62 holders of record of the Company's
common stock.
The Company has not paid cash dividends and does not anticipate paying cash
dividends in the foreseeable future. The Company expects to utilize future
earnings to finance future growth. The actual amount of any dividends paid
would be subject to the discretion of the Board of Directors of the Company and
would depend on the Company's operations, financial and business requirements,
compliance with bank covenants and other factors.
12
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes the Company's results of operations both in
dollars and as a percentage of net sales for the fiscal years ended March 31,
1997 and 1998.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) YEAR ENDED MARCH 31,
-------------------------------------------------------
1997 1998
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Net sales................................. $14,091 100.0% $12,786 100.0%
Cost of goods sold........................ 6,892 48.9 7,111 55.6
------- ----- ------- -----
Gross profit.............................. 7,199 51.1 5,675 44.4
Operating expenses:
Selling, general and
administrative.......................... 2,534 18.0 2,848 22.3
Research and
development............................. 1,510 10.7 1,962 15.3
Legal expense related to stockholder's
lawsuits................................ - - 150 1.2
------- ----- ------- -----
Operating income.......................... 3,155 22.4 715 5.6
Other income, net......................... (208) (1.5) (353) (2.8)
------- ----- ------- -----
Income before provision for taxes......... 3,363 23.9 1,068 8.4
Provision for taxes....................... 1,237 8.8 382 3.0
------- ----- ------- -----
Net income................................ $ 2,126 15.1% $ 686 5.4%
======= ===== ======= =====
</TABLE>
The table below sets forth information with respect to the Company's net
sales derived from customers in the Company's markets during the periods
indicated.
NET SALES BY MARKET CATEGORY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
MARKETS 1997 1998
------- -------------------- -------------------------
<S> <C> <C> <C> <C>
Cellular and Wireless Telephony........................... $11,500 81.6% $ 9,832 76.9%
PCS/Two-Way Paging........................................ 550 3.9 982 7.7
Custom and Other.......................................... 2,041 14.5 1,972 15.4
------- ----- ------- -----
Total Net Sales......................................... $14,091 100.0% $12,786 100.0%
======= ===== ======= =====
</TABLE>
FISCAL YEARS ENDED MARCH 31, 1998 AND 1997
Net sales. Net sales for fiscal 1998 were $12.8 million compared to $14.1
million in fiscal 1997, a 9.3% decrease. The decrease in sales is attributable
to lower unit prices and decreased volume due to increased competition. Cellular
products contributed $9.5 million, or 74.1% of net sales in fiscal 1998 compared
to $10.1 million, or 71.8% of sales in fiscal 1997. Sales of WLL products
declined to $359,000, or 2.8% of net sales in fiscal 1998 from $1.4 million, or
9.8% of net sales in fiscal 1997. The Company believes that the difference in
unit sales of WLL products is primarily the result of slower than expected
customer development of foreign service areas, which in
13
<PAGE>
turn has caused postponement of expected purchases from the Company. Sales of
PCS/Two-Way Paging products totaled $982,000, or 7.7% of net sales in fiscal
1998, compared to $551,000, or 3.9% of net sales in fiscal 1997. Custom and
other sales were $2.0 million, or 15.4% of net sales in fiscal 1998 compared to
$2.0 million, or 14.5% of net sales in 1997. Sales of custom and other products
is expected to decline as a result of management's continued effort to focus its
attention and resources on other wireless application opportunities and reduce
its sales and marketing efforts in the custom and other sales segment of its
business.
Sales of products outside the United States represented approximately 5.3%
and 42.4% of net sales during fiscal 1997 and 1998, respectively. Approximately
95.8% of international sales, or 40.6% of total sales in 1998 were to a single
customer in Brazil. No assurance can be made concerning future orders from this
customer.
Gross profit. Gross profit for fiscal 1998 was $5.7 million, or 44.4% of net
sales, compared to $7.2 million, or 51.1% of net sales, in fiscal 1997. The
decrease is a result of lower average selling prices and gross margins for the
Company's products resulting primarily from the highly competitive OEM market,
intense competition among suppliers of equipment to service providers and
pressures on cellular service providers from their customers to reduce costs.
The Company expects that this pressure on selling prices will continue in fiscal
1999. Additionally, the Company made an extensive effort and incurred
significant costs throughout fiscal 1998 to improve its manufacturing
infrastructure in preparation for potential high volume orders.
Selling, general and administrative costs. Selling, general and
administrative costs for fiscal 1998 were $2.8 million, or 22.3% of net sales,
compared to $2.5 million, or 18.0% of net sales, for fiscal 1997. Both the
absolute dollar and percentage differences related principally to additional
marketing and administrative headcount and its related expenses, increased
travel expense associated with marketing products, increased outside consultant
expenses and enhanced information systems. The Company believes continued
investment in marketing and administration is necessary to compete profitably in
the intensely competitive industry.
Research and development costs. R & D costs for fiscal 1998 were $2.0
million, or 15.3% of net sales, compared to $1.5 million, or 10.7% of net sales,
for the corresponding period in fiscal 1997. The increase was due primarily to
increased labor and benefits costs and depreciation expense on increased levels
of capital equipment. The Company's R & D effort in fiscal 1998 resulted in the
introduction of new cellular, wireless and PCS/Two-Way Paging products.
Legal expense related to stockholders' lawsuits. On March 19, 1998, the
Company and certain of its current and former officers and directors were named
as defendants in two purported class action lawsuits. In consultation with the
Company's attorneys, management estimated that costs after potential insurance
reimbursement associated with defending the Company would not exceed $150,000.
Accordingly, the Company recorded a reserve against earnings to cover this
exposure.
Other income, net. Other income for fiscal 1998 increased to $353,000
compared to $208,000 for fiscal 1997. The increase was due to interest income
generated from cash invested. The cash balances are a function of the net
proceeds from the Company's public offering in December 1995 and from positive
cash flow generated as a result of earnings offset by capital expenditures and
changes in working capital.
Provision for taxes. Provision for taxes for fiscal 1998 was approximately
35.8% of pretax income, less than the approximate statutory rate of 40%, due
mainly to R & D credits and tax benefits associated with the exercise of
employee stock options.
Net income. For the reasons set forth above, the Company generated a net
income in fiscal 1998 of $686,000, or 5.4% of net sales compared to $2.1
million, or 15.1% of net sales in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company financed its operations primarily from internally
generated funds and, to a lesser extent, loans from stockholders and capital
lease obligations. In December 1995, the Company completed its initial public
offering of 1,725,000 shares of common stock (including the exercise of the
underwriters' over allotment option), raising net proceeds of approximately $7.7
million. Of such net proceeds, $425,000 was used to repay loans from certain
stockholders and the remainder has been used to expand manufacturing capability
through the leasing and outfitting of substantially larger facilities, the
acquisition of equipment sufficient to produce higher product quantities and the
employment and training of additional employees capable of expanding production
and sales. The
14
<PAGE>
net proceeds of the initial public offering are also being used to maintain
increased inventory and working capital balances to support higher operating
levels.
In September 1997 the Company renegotiated its existing revolving bank line
of credit. The amended agreement is comprised of two separate credit facilities.
The initial facility is a $1,250,000 revolving line of credit, which bears
interest at the bank's reference rate (8.5% at March 31, 1998) plus 0.50%. The
second facility is a $500,000 non-revolving line of credit with term repayment
options which may be used to finance up to 80% of the purchase price of
equipment used in the Company's business. Repayment of borrowings under this
facility are in 47 equal monthly installments starting on October 1, 1998, with
interest at the bank's reference rate plus .75%. Both facilities are secured by
substantially all of the Company's assets and expire on September 1, 1998. As of
March 31, 1998, there were no borrowings outstanding under either facility. The
Company was in compliance with the terms and covenants of the loan agreement as
of March 31, 1998.
At March 31, 1998 the Company had $8.6 million in cash and cash equivalents.
The Company's operating activities provided cash of approximately $4.6 million
in fiscal 1998 primarily as a result of income from operations and the
liquidation of marketable securities. The Company's capital expenditures of
$783,000 for fiscal 1998 were primarily for manufacturing test equipment,
information system improvements and leasehold improvements.
The Company believes that the net proceeds from the initial public offering,
together with cash provided by operations and available under the bank line of
credit, will be sufficient to finance the Company for at least the next 12
months. Inflation has not had a significant effect to date on the Company's
results of operations.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Future operating results may be impacted by a number of factors that could
cause actual results to differ materially from those stated herein, which
reflect management's current expectations. These factors include industry
specific factors (including the reliance upon continued growth of the wireless
communications market, significant competition in the communications
infrastructure equipment industry characterized by rapid technological change,
new product development, product obsolescence, and significant price erosion
over the life of a product), the Company's ability to timely develop and produce
commercially viable products at competitive prices, the ability of the Company's
products to operate and be compatible with various OEM base station equipment,
the Company's ability to produce products which meet the quality standards of
both existing and potential new customers, the Company's ability to accurately
anticipate customer demand, the Company's ability to manage expense levels, the
availability and cost of components, the Company's ability to finance its
activities and maintain its financial liquidity and worldwide economic and
political conditions.
The Company experiences significant price competition and expects price
competition in the sale of its products to increase. No assurance can be given
that the Company's competitors will not develop new technologies or enhancements
to existing products or introduce new products that will offer superior price or
performance features. The Company expects its competitors to offer new and
existing products at prices necessary to gain or retain market share. Several
of the Company's competitors have substantial financial resources, which may
enable them to withstand sustained price competition or a downturn in the
pricing of their products, in the future. Substantially all of the Company's
competitors have, and potential future competitors could have, substantially
greater technical, marketing, distribution and other resources than the Company
and have, or could have, greater name recognition and market acceptance of their
products and technologies.
Sales of products outside the United States represented approximately 5.3%
and 42.4% of net sales during fiscal 1997 and 1998, respectively. The Company is
actively pursuing international customers, although no assurances can be given
as to the degree of success of the Company's strategic plan. These sales involve
a number of inherent risks, including imposition of government controls,
currency exchange fluctuations, potential insolvency of international
distributors and representatives or customers, reduced protection for
intellectual property rights in some countries, the impact of recessionary
environments in economies outside the United States, political instability and
generally longer receivable collection periods, as well as tariffs and other
trade barriers. In addition, because substantially all of the Company's foreign
sales are denominated in U.S. dollars, increases in the value of the dollar
relative to the local currency would increase the price of the Company's
products in foreign markets and make the Company's products relatively more
expensive and less price competitive than competitors' products that are priced
in local currencies. There can be no assurance that these factors will not have
a material adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition and results of
operations.
The Company currently sells a majority of its product into the operator
distribution channel to market. As a result, the Company receives periodic
order forecasts from its major customers who have no obligation to purchase the
forecasted amounts. Nonetheless, the Company maintains significant work in
process and raw materials inventory as well as increased levels of technical
production staff to meet order forecasts and/or management's projections. To
the extent its major customers purchase less than the forecasted amounts, the
Company will have higher levels of inventory than otherwise needed, increasing
the risk of obsolescence and the Company will have increased levels of
production staff to support such forecasted orders. Such higher levels of
inventory and increased employee levels
15
<PAGE>
could reduce the Company's liquidity and could have a material adverse effect on
the Company's business, results of operation and financial condition.
The markets in which the Company and its customers compete are characterized
by rapidly changing technology, evolving industry standards and communications
protocols and continuous improvements in products and services. The Company's
future success depends on its ability to enhance its current products and to
develop and introduce in a timely manner new products that keep pace with
technological developments, industry standards and communications protocols,
compete effectively on the basis of price, performance and quality, adequately
address OEM customer and end-user customer requirements and achieve market
acceptance. The Company believes that to remain competitive in the future it
will need to continue to develop new products, which will require the investment
of significant financial resources in new product development. In this regard,
in anticipation of the deployment of PCS, the Company is developing a line of
amplifiers for PCS networks. The Company has developed several WLL products and
has still more in development. The Company also is developing a second
generation cellular multicarrier amplifier and anticipates other cellular
product introductions in fiscal 1999, specifically the M150 unit. The M150
product, introduced in concept at the CTIA trade show in February 1998, is
planned to be available for sale in the latter part of fiscal 1999. There can be
no assurance that the development of the M150 will be successfully concluded,
that type acceptance will be granted by the Federal Communications Commission,
that the product will address the needs of customers for functionality and
reliability and that a successful market introduction program will be carried
out. There can be no assurance that the Company will manufacture such products
at competitive prices in sufficient volumes. In the event the Company's PCS-
based products are not timely developed or do not gain market acceptance, the
Company's business, results of operations and financial condition could be
materially adversely affected.
The Company uses computer software programs purchased from various
independent vendors who may have written their programs using a two digit date
field rather than a four digit field to define the applicable year. Such
computer programs utilizing a two digit date field may recognize a date using
"00" as the year 1900 rather than the year 2000 (the "Year 2000 Issue"). The
Year 2000 Issue could potentially result in a system failure or in
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices or engage in other
similar normal business activities. The Company has identified Year 2000 Issues
in certain software applications and is in the process of upgrading or replacing
such applications with software which recognizes dates beyond December 31, 1999,
thus addressing a substantial portion of the Year 2000 Issue that may impact the
Company. The cost of this project, as it relates to the Year 2000 Issue, is not
expected to have a material effect on the operations of the Company and will be
funded through operating cash flows.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Report of Independent Public Accountants................................................................. 18
Balance Sheet as of March 31, 1998....................................................................... 19
Statements of Income for each of the two years ended March 31, 1998......................................
20
Statements of Stockholders' Equity for each of the two years ended March 31, 1998........................
21
Statements of Cash Flows for each of the two years ended March 31, 1998..................................
22
Notes to Financial Statements............................................................................ 23
</TABLE>
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AML Communications, Inc.:
We have audited the accompanying balance sheet of AML Communications, Inc.
(a Delaware corporation) as of March 31, 1998, and the related statements of
income, stockholders' equity and cash flows for each of the two years ended
March 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AML Communications, Inc. as
of March 31, 1998, and the results of its operations and its cash flows for each
of the two years ended March 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Los Angeles, California
May 5, 1998
18
<PAGE>
AML COMMUNICATIONS, INC.
BALANCE SHEET
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
ASSETS
- ------
<S> <C>
Current Assets:
Cash and cash equivalents................................................. $ 8,608,000
Accounts receivable, net of allowance for doubtful accounts of $61,000.... 1,628,000
Inventories............................................................... 2,726,000
Other current assets...................................................... 152,000
-----------
Total current assets................................................... 13,114,000
Property and Equipment, at cost............................................. 3,658,000
Less--Accumulated depreciation and amortization........................... (1,562,000)
-----------
2,096,000
Deferred Taxes.............................................................. 349,000
Other Assets................................................................ 120,000
-----------
$15,679,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable.......................................................... $ 766,000
Current portion of capital lease obligations............................. 19,000
Accrued expenses:
Accrued payroll and payroll related expenses..................... 465,000
Accrued commissions.............................................. 93,000
Other accrued expenses........................................... 395,000
Income taxes payable...................................................... 195,000
-----------
Total current liabilities........................................... 1,933,000
Capital Lease Obligations, net of current portion........................... 38,000
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value:
1,000,000 shares authorized; no shares issued or
outstanding............................................................ --
Common stock, $.01 par value:
15,000,000 shares authorized;
6,291,930 shares issued and outstanding................................ 63,000
Capital in excess of par value............................................ 9,331,000
Retained earnings......................................................... 4,314,000
-----------
Total stockholders' equity........................................... 13,708,000
-----------
$15,679,000
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
19
<PAGE>
AML COMMUNICATIONS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------
MARCH 31, MARCH 31,
1997 1998
------------- ------------
<S> <C> <C>
Net Sales............................................. $14,091,000 $12,786,000
Cost of Goods Sold.................................... 6,892,000 7,111,000
----------- -----------
Gross profit..................................... 7,199,000 5,675,000
Operating Expenses:
Selling, general and administrative................. 2,534,000 2,848,000
Research and development............................ 1,510,000 1,962,000
Legal expense related to stockholders' lawsuits..... -- 150,000
----------- -----------
4,044,000 4,960,000
----------- -----------
Operating income................................. 3,155,000 715,000
Other (Income) Expense:
Interest income..................................... (224,000) (366,000)
Interest expense.................................... 28,000 16,000
Other............................................... (12,000) (3,000)
----------- -----------
(208,000) (353,000)
----------- -----------
Income before provision
for income taxes............................... 3,363,000 1,068,000
Provision for Income Taxes............................ 1,237,000 382,000
----------- -----------
Net income....................................... $ 2,126,000 $ 686,000
=========== ===========
Basic Earnings Per Common Share....................... $ 0.36 $ 0.11
=========== ===========
Basic Weighted Average Number of Shares of
Common Stock Outstanding............................. 5,913,000 6,213,000
=========== ===========
Diluted Earnings Per Common Share.................... $ 0.34 $ 0.11
=========== ===========
Diluted Weighted Average Number of Shares of
Common Stock Outstanding............................. 6,295,000 6,332,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
AML COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
------------ EXCESS OF RETAINED
STOCK AMOUNT PAR VALUE EARNINGS TOTAL
----- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1996......................... 5,641,450 $57,000 $7,850,000 $1,502,000 $ 9,409,000
Exercise of stock options..................... 440,740 4,000 345,000 -- 349,000
Tax benefit from exercise of stock options.... -- -- 853,000 -- 853,000
Net income.................................... -- -- -- 2,126,000 2,126,000
--------- ------- ---------- ---------- -----------
Balance, March 31, 1997......................... 6,082,190 61,000 9,048,000 3,628,000 12,737,000
Exercise of stock options..................... 209,740 2,000 86,000 -- 88,000
Tax benefit from exercise of stock options.... -- -- 197,000 -- 197,000
Net income.................................... -- -- -- 686,000 686,000
--------- ------- ---------- ---------- -----------
Balance, March 31, 1998......................... 6,291,930 $63,000 $9,331,000 $4,314,000 $13,708,000
========= ======= ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
AML COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
MARCH 31, MARCH 31,
1997 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income.............................................. $ 2,126,000 $ 686,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 499,000 650,000
Provision for losses on accounts receivable.......... 13,000 --
Changes in assets and liabilities:
Decrease (increase) in:
Marketable securities.......................... (3,259,000) 3,259,000
Accounts receivable............................ (374,000) 282,000
Inventories.................................... (657,000) (765,000)
Deferred tax asset............................. (225,000) (17,000)
Other assets................................... (228,000) 80,000
Increase (decrease) in:
Accounts payable............................... 257,000 (91,000)
Accrued expenses............................... 155,000 350,000
Income taxes payable........................... 387,000 148,000
----------- ----------
Net cash provided by (used in)
operating activities.......................... (1,306,000) 4,582,000
----------- ----------
Cash Flows from Investing Activities:
Proceeds from disposition of facility held for sale..... 1,300,000 --
Purchases of property and equipment..................... (1,513,000) (783,000)
----------- ----------
Net cash used in investing activities.......... (213,000) (783,000)
----------- ----------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options................. 349,000 88,000
Principal payments on notes payable to
stockholders and capital lease obligations............ (376,000) (45,000)
----------- ----------
Net cash provided by (used in)
financing activities.......................... (27,000) 43,000
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents...... (1,546,000) 3,842,000
Cash and Cash Equivalents, beginning of year.............. 6,312,000 4,766,000
----------- ----------
Cash and Cash Equivalents, end of year.................... $ 4,766,000 $8,608,000
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................... $ 28,000 $ 16,000
=========== ==========
Income taxes....................................... $ 1,075,000 $ 59,000
=========== ==========
Non-cash transactions:
Tax benefit related to exercise of employee
stock options................................... $ 853,000 $ 197,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
AML COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
1. LINE OF BUSINESS
AML Communications, Inc. (the "Company") designs and manufactures multi-
carrier amplifiers, masthead amplifiers, and related products for the cellular,
personal communication services ("PCS"), paging and other communication markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Concentration of Cash
The Company considers all liquid investments with an original maturity of
three months or less to be cash equivalents. As of March 31, 1998, the Company
had cash and cash equivalent balances totaling $8,515,000 in financial
institutions which were in excess of federally insured amounts.
Credit Risk
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally does not require collateral on accounts receivable,
hence the accounts receivable are unsecured and the Company is at risk to the
extent such amounts become uncollectable. As of March 31, 1998, three customers
comprised 55.6%, 13.5% and 10.6% of accounts receivable, respectively.
During fiscal 1997, the Company had sales to four customers which
represented 23%, 13%, 12% and 11% of net sales, respectively. During fiscal
1998, the Company had sales to two customers which represented 40.6% and 11.8%
of net sales, respectively.
The Company's customers are comprised primarily of cellular service
providers and original equipment manufacturers ("OEMs"). Customers are located
primarily throughout the United States. However, the Company also had sales to
customers in South America, Western Europe, Canada, Israel and Korea. During the
fiscal years ended March 31, 1997 and March 31, 1998, international sales were
$743,000, or 5.3% of net sales and $5.4 million, or 42.4% of net sales
respectively. In fiscal year 1998, 95.8% of international sales were to a single
customer in Brazil.
Industry Risk
The wireless communications equipment industry is highly competitive and is
characterized by rapid technology change, new product development, product
obsolescence, evolving industry standards and substantial price erosion over the
life of a product. The Company continues to be subject to such risk.
23
<PAGE>
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment.
The following is a detail of net sales by category of market for each of the two
years indicated:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
---------------------------------------------------------
MARKETS 1997 1998
------- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Cellular and Wireless Telephony........................... $11,500,000 81.6% $ 9,832,000 76.9%
PCS/Two-Way Paging........................................ 550,000 3.9 982,000 7.7
Custom and Other.......................................... 2,041,000 14.5 1,972,000 15.4
----------- ----- ----------- -----
Total Net Sales......................................... $14,091,000 100.0% $12,786,000 100.0%
=========== ===== =========== =====
</TABLE>
Inventories
Inventories include costs of materials, labor and manufacturing overhead and
are stated at the lower of cost (first-in, first-out) or market, and consist of
the following:
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
Raw materials............. $1,719,000
Work in process........... 592,000
Finished goods............ 415,000
----------
$2,726,000
==========
</TABLE>
Depreciation and Amortization
Property and equipment are being depreciated and amortized on the straight-
line basis over the following estimated useful lives:
Machinery and equipment................. 3 to 5 years
Furniture and fixtures.................. 5 years
Leasehold improvements.................. Life of lease
The Company capitalizes expenditures that materially increase asset lives
and charges ordinary repairs and maintenance to operations as incurred. When
assets are sold or otherwise disposed of, the cost and related depreciation or
amortization are removed from the accounts and any resulting gain or loss is
included in other income (expense) in the accompanying statements of operations.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
Machinery and equipment........................ $2,967,000
Furniture and fixtures......................... 127,000
Leasehold improvements......................... 564,000
----------
$3,658,000
==========
</TABLE>
Warranty and Customer Support
The Company typically warrants its products against defects in materials and
workmanship for a period of one year from the date of shipment. A provision for
estimated future warranty and customer support is recorded when products are
shipped. To date, warranty and customer support costs have not been material.
24
<PAGE>
Earnings Per Share
Earnings per share calculations are in accordance with SFAS No. 128,
"Earnings per Share" (SFAS 128). Accordingly, "basic" earnings per share is
computed by dividing net income by the weighted average number of shares
outstanding for the year. "Diluted" earnings per share is computed by dividing
net income by the total of the weighted average number of shares outstanding
plus the dilutive effect of outstanding stock options (applying the treasury
stock method). All earnings per share amounts for 1997 have been restated to
reflect the adoption of SFAS No. 128.
A reconciliation of the basic weighted average number of shares outstanding
and the diluted weighted average number of shares outstanding for each of the
two years ended March 31, 1998 follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------
1997 1998
------------ ------------
<S> <C> <C>
Weighted average number of common shares outstanding - Basic............ 5,913,000 6,213,000
Dilutive effect of outstanding stock options............................ 382,000 119,000
--------- ---------
Weighted average number of common shares outstanding - Diluted.......... 6,295,000 6,332,000
========= =========
</TABLE>
Use of Estimate in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accounting for Stock Option Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation ("SFAS 123"), sets forth accounting and reporting standards
for stock based employee compensation plans. As allowed by SFAS 123, the Company
continues to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and complies with
the pro forma disclosure requirements of the new standard. Adoption of SFAS 123
has not affected the Company's results of operations or financial position.
New Authoritative Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
establishes new standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. These
new standards require that all items recognized as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS 130 is effective for fiscal
years beginning after December 15, 1997. The adoption of SFAS 130 will not
impact the Company's financial statements.
In June 1997, the FASB issued Statement 131, Disclosures About Segments of
an Enterprise and Related Information ("SFAS 131"). SFAS 131 changes the way
public companies report segment information in annual financial statements and
also requires those companies to report selected segment information in interim
financial reports. SFAS 131 is effective for periods beginning after December
15, 1997. The adoption of SFAS 131 will not have a material impact on the
Company's financial statements.
25
<PAGE>
3. DEBT AND LEASE COMMITMENTS
Bank Line of Credit
In September 1997, the Company renegotiated its existing revolving bank line
of credit. The amended agreement is comprised of two separate credit
facilities. The initial facility is a $1,250,000 revolving line of credit,
which bears interest at the bank's reference rate (8.5% at March 31, 1998) plus
0.50%. The second facility is a $500,000 non-revolving line of credit with term
repayment options which may be used to finance up to 80% of the purchase price
of equipment used in the Company's business. Repayment of borrowings under this
facility are in 47 equal monthly installments starting on October 1, 1998, with
interest at the bank's reference rate plus .75%. Both facilities are secured by
substantially all of the Company's assets and expire on September 1, 1998. As
of March 31, 1998, there were no borrowings outstanding under either facility.
The Company was in compliance with the terms and covenants of the loan agreement
as of March 31, 1998.
Capital and Operating Lease Obligations
Included in property and equipment is approximately $93,000 of equipment
which is leased under a noncancellable lease accounted for as a capital lease
which expires on November 30, 2000. The Company leases its office space,
manufacturing facility and certain equipment under long-term operating leases
expiring at various dates through April 2003. Total rent expense under these
operating leases was approximately $148,000 and $172,000 during the years ended
March 31, 1997 and 1998, respectively.
Total minimum lease payments under the above leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Total
--------------- -------------- ---------------
Year ending March 31,
<S> <C> <C> <C>
1999............................................... $ 23,000 $173,000 $196,000
2000............................................... 23,000 160,000 183,000
2001............................................... 17,000 153,000 170,000
2002............................................... -- 153,000 153,000
2003............................................... -- 153,000 153,000
Thereafter......................................... -- 13,000 13,000
-------- -------- --------
63,000 $805,000 $868,000
======== ========
Less--Amount representing interest (8.9% )............ (6,000)
--------
Present value of minimum lease payments............... 57,000
Less--Current portion................................. (19,000)
--------
$ 38,000
========
</TABLE>
4. Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109). Under SFAS 109, deferred
income tax assets or liabilities are computed based on the temporary difference
between the financial statement and income tax bases of assets and liabilities
using the currently enacted marginal income tax rate. Deferred income tax
expenses or credits are based on the changes in the deferred income tax assets
or liabilities from period to period.
26
<PAGE>
The provision for income taxes for each of the years ended March 31, 1997
and 1998 consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
MARCH 31, 1997 MARCH 31, 1998
-------------------- -------------------
<S> <C> <C>
Current:
Federal................................. $1,243,000 $339,000
State................................... 219,000 60,000
---------- --------
1,462,000 399,000
---------- --------
Deferred.................................. (225,000) (17,000)
---------- --------
Provision for income taxes................ $1,237,000 $382,000
========== ========
</TABLE>
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for years ended March 31, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1998
--------------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ------- --------
<S> <C> <C> <C> <C>
Income tax at statutory federal rate...... $1,143,000 34% $363,000 34%
State income taxes, net of federal
income tax tax effect................... 202,000 6 64,000 6
Effect of permanent differences........... (57,000) (2) 7,000 1
Research and development credit........... (38,000) (1) (67,000) (6)
Other..................................... (13,000) - 15,000 1
---------- ------ -------- -------
$1,237,000 37% $382,000 36%
========== ====== ======== =======
</TABLE>
Under SFAS 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods and for
loss carry forwards. A valuation allowance is recognized if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the deferred tax asset will not be realized.
A detail of the Company's deferred tax asset as of March 31, 1998 follows:
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
Inventory reserves...................................... $ 220,000
Allowance for doubtful accounts......................... 17,000
Accrued vacation........................................ 43,000
Accrued bonus........................................... 100,000
Accrued warranty and customer support................... 9,000
Other................................................... 97,000
Depreciation............................................ ( 48,000)
---------
438,000
Valuation allowance..................................... ( 89,000)
---------
$ 349,000
=========
</TABLE>
27
<PAGE>
5. Stockholders' Equity
Stock Option Plan
The Company's Stock Incentive Plan provides for the granting of non-
qualified and incentive stock options to purchase up to 1,096,586 shares of
common stock for periods not to exceed 10 years. Options typically vest 25%
after one year from the date of grant with remaining options vesting at a rate
of 25% per year thereafter. Options may be granted to employees, officers,
directors and consultants. Activity under this plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at March 31, 1996................................................ 867,243 $ .96
Granted...................................................................... 74,577 15.43
Exercised.................................................................... (440,740) .81
Canceled..................................................................... (70,753) 1.64
--------
Outstanding at March 31, 1997................................................ 430,327 3.50
Granted...................................................................... 214,838 5.02
Exercised.................................................................... (209,740) .42
Canceled..................................................................... (92,043) 10.80
--------
Outstanding at March 31, 1998................................................ 343,382 $ 4.39
========
</TABLE>
The weighted average fair value for options granted during the year was
$11.65 and $4.51 for fiscal 1997 and 1998, respectively.
The number of common stock options available for grant as of each fiscal
year were 225,518 for 1997 and 114,861 for 1998.
Options outstanding at March 31, 1998 and related weighted average price and
life information is as follows:
<TABLE>
<CAPTION>
WEIGHTED TOTAL
TOTAL AVERAGE WEIGHTED WEIGHTED
RANGE OF OPTIONS REMAINING LIFE AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.41 - $ 0.52 85,439 .4 $ 0.41 71,550 $ 0.41
$0.60 - $ 0.82 15,992 1.2 $ 0.73 -- --
$3.56 - $ 4.88 94,238 3.0 $ 3.98 4,169 $ 3.56
$5.44 - $ 8.06 127,713 5.4 $ 6.17 11,250 $ 6.67
$12.33 - $15.75 20,000 7.1 $14.90 5,000 $14.90
--------------- ------- --- ------ ------ ------
$ 0.41 - $15.75 343,382 3.4 $ 4.39 91,969 $ 2.11
</TABLE>
As permitted by SFAS 123, the Company continues to apply the accounting
rules of APB 25 governing the recognition of compensation expense from its Stock
Incentive Plan. Such accounting rules measure compensation expense on the first
date at which both the number of shares and the exercise price are known. Under
the Company's plan, this would typically be the grant date. To the extent that
the exercise price equals or exceeds the
28
<PAGE>
market value of the stock on the grant date, no expense is recognized. As
options are generally granted at exercise prices not less than the fair market
value on the date of grant, no compensation expense is recognized under this
accounting treatment in the accompanying statements of operations.
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
1997 1998
---- ----
Expected life (years).............. 10 10
Dividend yield.................... -- --
The interest rate range is 5.47% - 6.82% and the range for volatility is
98.9% - 102.9%. The estimated stock-based compensation cost calculated using the
assumptions indicated totaled $224,000 and $439,000 in fiscal 1997 and 1998,
respectively. This would result in a pro forma net income resulting from the
increased compensation cost of $1,992,000, or $.32 per diluted share, and pro
forma net income of $423,000, or $.07 per diluted share, in fiscal 1997 and
1998, respectively. The effect of stock-based compensation on net income for
fiscal 1997 and 1998 may not be representative of the effect on pro forma net
income in future years because compensation expense related to grants made prior
to fiscal 1997 is not considered.
Warrants
In connection with the initial public offering in December 1995, the Company
sold the underwriters five-year warrants to purchase an aggregate of 150,000
shares of the Company's common stock at $6.40 per common share. As of March 31,
1998, all 150,000 warrants are outstanding and currently exercisable.
6. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) employee retirement plan (the
"Plan"). Under the terms of the Plan, eligible employees, as defined, may
contribute from 1% to 16% of their pre-tax earnings to the Plan. At its
discretion, the Company may match the employees' contribution up to 6%. The
Company made no matching contribution for the years ended March 31, 1997 and
1998. However, for the years ended March 31, 1997 and 1998 the Board authorized
$73,000 and $82,000 in discretionary contributions, respectively.
7. LEGAL PROCEEDINGS
The Company may be subject, from time to time, to various legal proceedings
relating to claims arising out of its operations in the ordinary course of its
business. Two purported class action lawsuits have been filed against the
Company and certain of its current and former officers and directors. The first
lawsuit, entitled Ronny Sussman v. AML Communications, Inc., et al., Case No.
-------------------------------------------------
CIV 179776, was filed on March 19, 1998 in the Superior Court for the State of
California (Ventura County) (the "State Action"). The second lawsuit, entitled
Ronny Sussman v. AML Communications, Inc., et al., Case No. 98-2010 CAS (Ex)
- -------------------------------------------------
(C.D. Cal.), was filed on March 20, 1998 in the federal district court in Los
Angeles, California (the "Federal Action"). The individual defendants named in
both of the actions are Jacob Inbar (the Company's President, Chief Executive
Officer and Chairman of the Board of Directors), Tiberiu Mazilu (the Company's
Vice President of Custom Products and a member of the Board of Directors), Edwin
J. McAvoy (the Company's Vice President of Sales and Marketing and a member of
the Board of Directors), Scott T. Behan (the Company's Vice President of New
Product Development) and William E. Sheridan III (the Company's former Chief
Financial Officer). While the Federal Action asserts claims under the federal
securities laws and the State Action asserts claims under California's
securities laws, the complaints are otherwise essentially identical. The
complaints allege that during the purported class period of April 10, 1996 to
March 25, 1997, defendants made overly optimistic estimates regarding the
Company's anticipated financial performance for fiscal years 1997 and 1998, and
overly optimistic statements regarding the Company's ability to develop and to
sell new products for the PCS market, all allegedly in order to profit from
insider trading at artificially inflated prices.
In the State Action, the Company filed a motion to dismiss or stay all
proceedings pending the resolution of the Federal Action, and alternatively
moved for a protective order governing discovery in the State Action. On June
8,
29
<PAGE>
1998, the Court granted the defendants' motion to stay all discovery in the
State Action unless and until the stay of discovery is lifted in the Federal
Action. However, defendants still have to respond to the State Action complaint
and anticipate filing a demurrer, which is the California equivalent of a motion
to dismiss for failure to state a claim, on or before July 23, 1998.
In the Federal Action, pursuant to the Private Securities Litigation Reform
Act of 1995, plaintiff's motion for the appointment of lead plaintiff and lead
counsel is scheduled to be heard on June 29, 1998. The Company's response to
the complaint is due 45 days following the appointment of lead plaintiff and
lead counsel. The Company anticipates filing a motion to dismiss the claim.
The Company denies the material allegations in the complaints and intends to
defend the actions vigorously. An adverse determination could have a material
adverse effect upon the Company.
The Company and its legal counsel are currently evaluating the claims. At
this stage, it is not possible to predict the outcome or determine a range of
possible losses, if any. The Company, its directors and officers deny the
material allegations in the complaints and intend to defend the actions
vigorously. An adverse determination could have a material adverse effect upon
the Company's financial position or results of operations. During the year
ended March 31, 1998, the Company recorded $150,000 as costs related to these
lawsuits.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
30
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors consists of five directors divided into three classes
serving staggered three-year terms. The following table sets forth certain
information with respect to the executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION TERM EXPIRES
- ---- --- -------- ------------
<S> <C> <C> <C>
Jacob Inbar 49 President, Chief Executive Officer and Chairman
of the Board 1998
Tiberiu Mazilu, Ph.D. 52 Vice President, Custom Products and Director 2000
Edwin J. McAvoy 54 Vice President, Sales and Marketing and Director 1999
Scott T. Behan 36 Vice President, New Product Development --
Daniel L. Gerlach 37 Vice President, Engineering --
Kirk A. Waldron 35 Vice President, Finance, Chief Financial Officer, and
Chief Operating Officer --
David A. Derby 57 Director 2000
Richard W. Flatow 57 Director 1999
</TABLE>
All officers are appointed by and serve at the discretion of the Board of
Directors. There are no family relationships among any directors or officers of
the Company.
JACOB INBAR is a co-founder of the Company and has served as its President,
Chief Executive Officer and as a Director since its incorporation in November
1986. Mr. Inbar has served as the Company's Chairman of the Board since
September 1995. Mr. Inbar holds a B.S. in Electrical Engineering from Ben Gurion
University, Israel and an M.B.A. from California Lutheran University.
TIBERIU MAZILU, PH.D. is a co-founder of the Company and has served as its
Vice President, Custom Products and as a Director since January 1987. Dr.
Mazilu served as the Company's Chairman of the Board from January 1987 until
September 1995. Dr. Mazilu holds a Ph.D. in Electrical Engineering, with a
specialty in electromagnetics, from the University of California, Los Angeles.
EDWIN J. MCAVOY is a co-founder of the Company and has served as its Vice
President, Sales and Marketing and as a Director since its incorporation in
November 1986. Mr. McAvoy holds a B.S. degree in Applied Engineering from
Technical College, Grimsby, England.
SCOTT T. BEHAN has been with the Company since 1987, and since February 1996
has served as Vice President, New Product Development. Mr. Behan also served as
Vice President, Engineering from November 1994 to February 1996. Mr. Behan is a
member of the Board of Directors Interactive Buyers Network International, Ltd.
("IBNL"). IBNL operates a business-to-business electronic commerce network. Mr.
Behan holds a B.S. in Electrical Engineering from Worcester Polytechnic
Institute.
DANIEL L. GERLACH has been with the Company since November 1994 and has
served as Vice President of Engineering since January 1996. Prior to joining the
company, Mr. Gerlach served as Senior Engineer, advanced programs from 1985 to
1994 for American Nucleonics Co., a microwave and RF component and system level
design and analysis firm. Mr. Gerlach holds a B.S. in Electrical Engineering
from California State University, Northridge.
KIRK A. WALDRON, a Certified Public Accountant, has served as the Company's
Vice President, Finance and Chief Financial Officer since December 1996 and as
Chief Operating Officer since February 1998. Prior to joining the Company, Mr.
Waldron was Chief Financial Officer of Dynamotion/ATI Corp., a publicly held
manufacturer of precision drilling equipment, from 1994 to 1996, and Controller
for Acme Holdings, Inc., a privately held equipment rental company, from 1991
to 1994. Mr. Waldron holds a B.S. in Business Administration with an emphasis in
Accounting, from the University of Southern California.
31
<PAGE>
DAVID A. DERBY has been a Director of the Company since December 1995, and
has been President, Chief Executive Officer and a director of Datron Systems
Incorporated, a manufacturer of radio and satellite communication systems and
products, since May 1982. In April 1998 Mr. Derby was elected Chairman of the
Board of Datron Systems Incorporated.
RICHARD W. FLATOW has been a Director of the Company since December 1995 and
has been the President of RWF Enterprises, a management consulting firm, since
1994. From 1993 to 1994, Mr. Flatow was President and Chief Executive Officer
of Futurekids, Inc., a franchiser of computer training for children. From 1991
to 1993, Mr. Flatow was a Managing Partner and Senior Consultant for Hankin &
Co., a middle-market management consulting firm.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Act"), requires directors, certain officers of the Company and persons holding
more than 10% of the Company's Common Stock to file reports concerning their
ownership of Common Stock by dates established under the Act and also requires
that the Company disclose in this annual report on Form 10-KSB any non-
compliance with those requirements during the fiscal year ended March 31, 1998.
Based solely upon a review of reports delivered to the Company for fiscal 1998,
all Section 16(a) filing requirements were satisfied.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the
information under the captions "Executive Compensation" and "Election of
Directors" in the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders to be held on August 25, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND MANAGEMENT
Information required by this item is incorporated by reference to the
information under the caption "Principal Stockholders" in the Company's
definitive proxy statement for the 1998 Annual Meeting of the Stockholders to be
held on August 25, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
32
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) The following are attached as Exhibits to this Form 10-KSB:
3.1 Articles of Incorporation*
3.2 Bylaws*
10.1 AML Communications, Inc. Stock Incentive Plan*
10.2 Form of Incentive Stock Option Agreement*
10.3 Form of Non-employee Director Incentive Stock Option Agreement*
10.4 Incentive Stock Option Agreement, dated August 1, 1994, between the
Company and Jacob Inbar.*+
10.5 Stock Option Agreement, dated December 15, 1995, between the Company and
David A. Derby.+
10.6 Stock Option Agreement, dated August 28, 1996, between the Company and
David A. Derby.+
10.7 Stock Option Agreement, dated December 15, 1995, between the Company and
Richard W. Flatow.+
10.8 Stock Option Agreement, dated August 28, 1996, between the Company and
Richard W. Flatow.+
10.9 Incentive Stock Option Agreement, dated April 28, 1997, between the
Company and Daniel L. Gerlach.+
10.10 Incentive Stock Option Agreement, dated April 28, 1997, between the
Company and Kirk A. Waldron.+
10.11 Form of Indemnity Agreement*
10.12 Standard offer, Agreement and Escrow Instructions for Purchase of Real
Estate dated January 30, 1996, between the Company and Parr-Bohn
Properties, Ltd. II, a California Limited Partnership**
10.13 Lease, dated March 11, 1996, between the Company and Parr-Bohn
Properties, Ltd. II, a California Limited Partnership***
10.14 Business Loan Agreement dated August 2, 1996, between the Company and
Bank of America National Trust and Savings Association ****
10.15 Security Agreement dated August 2, 1996, between the Company and Bank of
America National Trust and Savings Association****
10.16 Amendment No. 1 dated September 2, 1997 to Business Loan Agreement dated
August 2, 1996 between the Company and Bank of America National Trust
and Savings Association*****
23.1 Consent of Arthur Andersen, LLP
27 Financial Data Schedule
* Previously filed with the Securities and Exchange Commission as an exhibit
to the Registration Statement on Form SB-2 No. 33-99102-LA and
incorporated herein by reference
** Previously filed with the Securities and Exchange Commission as an exhibit
to Current Report on Form 8-K of the Company, as filed with the Securities
and Exchange Commission on March 13, 1996, and incorporated herein by
reference
*** Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Form 10-KSB for fiscal year ended March 31, 1996 and
incorporated herein by reference
**** Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Form 10-Q for the quarter ended September 30, 1996
***** Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Form 10-QSB for the quarter ended September 30, 1997
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-KSB
(b) The Company did not file any current reports on Form 8-K during the last
quarter of the fiscal year ended March 31, 1998.
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AML Communications, Inc.
By: /s/ Jacob Inbar Dated: June 25, 1998
---------------------------- ----------------
Jacob Inbar
President, Chief Executive Officer
and Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------- ----------------------------- -------------
<S> <C> <C>
/s/ Jacob Inbar President, Chief Executive June 25, 1998
- ------------------------------- Officer, Chairman of the -------------
Jacob Inbar Board (Principal Executive
Officer)
/s/ Kirk A. Waldron Vice President, Finance, June 25, 1998
- ------------------------------- Chief Financial Officer, and -------------
Kirk A. Waldron Chief Operating Officer
(Principal Accounting
Officer)
/s/ Tiberiu Mazilu Director June 25, 1998
- ------------------------------- -------------
Tiberiu Mazilu, Ph.D.
/s/ Edwin J. McAvoy Director June 25, 1998
- ------------------------------- -------------
Edwin J. McAvoy
/s/ David A. Derby Director June 25, 1998
- ------------------------------- -------------
David A. Derby
/s/ Richard W. Flatow Director June 25, 1998
- ------------------------------- -------------
Richard W. Flatow
</TABLE>
34
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-KSB into the Company's previously filed
Registration Statement File No. 333-1520.
ARTHUR ANDERSEN LLP
Los Angeles, California
June 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1998
<PERIOD-START> APR-01-1996 APR-01-1997
<PERIOD-END> MAR-31-1997 MAR-31-1998
<CASH> 0 8,608,000
<SECURITIES> 0 0
<RECEIVABLES> 0 1,628,000
<ALLOWANCES> 0 0
<INVENTORY> 0 2,726,000
<CURRENT-ASSETS> 0 13,114,000
<PP&E> 0 3,658,000
<DEPRECIATION> 0 1,562,000
<TOTAL-ASSETS> 0 15,679,000
<CURRENT-LIABILITIES> 0 1,933,000
<BONDS> 0 0
0 0
0 0
<COMMON> 0 63,000
<OTHER-SE> 0 13,645,000
<TOTAL-LIABILITY-AND-EQUITY> 0 15,679,000
<SALES> 14,091,000 12,786,000
<TOTAL-REVENUES> 14,091,000 12,786,000
<CGS> 6,892,000 7,111,000
<TOTAL-COSTS> 6,892,000 7,111,000
<OTHER-EXPENSES> 4,044,000 4,960,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (208,000) (353,000)
<INCOME-PRETAX> 3,363,000 1,068,000
<INCOME-TAX> 1,237,000 382,000
<INCOME-CONTINUING> 2,126,000 686,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,126,000 686,000
<EPS-PRIMARY> 0.36 0.11
<EPS-DILUTED> 0.34 0.11
</TABLE>
