<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 0R 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 0-27252
AML COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 77-0130894
- ------------------------------- -------------------
(State or Other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1000 Avenida Acaso
Camarillo, California 93012
--------------------- -----
(Address of principal executive offices) (Zip Code)
(805) 388-1345
-------------------------------------
(Issuer's telephone number including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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 ___
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common Stock Outstanding as of October 29, 1999: 6,380,570
Transitional Small Business Disclosure Format: Yes ___ No [X]
Number of pages in this Form 10-Q SB 15
--
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AML COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements (unaudited)
Statements of Operations for the three months and six months ended
September 30, 1999 and September 30, 1998 3
Balance Sheets at September 30, 1999 and March 31, 1999 4
Statements of Cash Flows for the six months ended
September 30, 1999 and September 30, 1998 5
Notes to the Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AML COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------------- ----------------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $2,275,000 $1,590,000 $4,553,000 $4,648,000
Cost of goods sold 1,350,000 1,098,000 2,804,000 2,877,000
----------------- ------------------ ------------------ ------------------
Gross profit 925,000 492,000 1,749,000 1,771,000
Operating expenses:
Selling, general & administrative 671,000 681,000 1,362,000 1,376,000
Research and development 411,000 777,000 793,000 1,289,000
----------------- ------------------ ------------------ ------------------
Operating loss (157,000) (966,000) (406,000) (894,000)
Other income, net (67,000) (112,000) (130,000) (220,000)
----------------- ------------------ ------------------ ------------------
Loss before benefit for (90,000) (854,000) (276,000) (674,000)
Income taxes
Benefit for income taxes - (304,000) - (239,000)
----------------- ------------------ ------------------ ------------------
Net loss $ (90,000) $ (550,000) $ (276,000) $ (435,000)
================= ================== ================== ==================
Basic loss per share $ (0.01) $ (0.09) $ (0.04) $ (0.07)
================= ================== ================== ==================
Basic weighted average number of shares of
common stock outstanding 6,266,000 6,270,000 6,266,000 6,284,000
================= ================== ================== ==================
Diluted loss per share $ (0.01) $ (0.09) $ (0.04) $ (0.07)
================= ================== ================== ==================
Diluted weighted average number of shares of
common stock outstanding 6,266,000 6,270,000 6,266,000 6,284,000
================= ================== ================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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AML COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
----------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 5,697,000 $ 6,597,000
Accounts receivable, net of allowance for doubtful accounts of
$80,000 at September 30, 1999 and $42,000 at March 31, 1999 914,000 427,000
Inventories 2,193,000 1,783,000
Income taxes receivable 534,000 537,000
Other current assets 248,000 118,000
----------------- ----------------
Total current assets 9,586,000 9,462,000
Property and Equipment, at cost: 4,585,000 4,370,000
Less - Accumulated depreciation and amortization (2,642,000) (2,288,000)
----------------- ----------------
1,943,000 2,082,000
Deferred Taxes 288,000 288,000
Other Assets 14,000 114,000
----------------- ----------------
$ 11,831,000 $ 11,946,000
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 673,000 $ 558,000
Current portion of capital lease obligations 73,000 60,000
Accrued expenses:
Accrued payroll and payroll related expenses 358,000 349,000
Accrued commissions 135,000 40,000
Other accrued liabilities 309,000 364,000
----------------- ----------------
Total current liabilities 1,548,000 1,371,000
Capital Lease Obligations, net of current portion 166,000 185,000
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; 6,266,070 shares issued
and outstanding at September 30, 1999 and 6,260,129 shares issued and
outstanding at March 31, 1999 63,000 63,000
Capital in excess of par value 9,368,000 9,365,000
Less treasury stock: 114,500 shares, at cost (223,000) (223,000)
Retained earnings 909,000 1,185,000
----------------- ----------------
10,117,000 10,390,000
----------------- ----------------
$ 11,831,000 $ 11,946,000
================= ================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
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AML COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------------------
September 30, September 30,
1999 1998
------------------ ------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (276,000) $ (435,000)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 354,000 370,000
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable (487,000) 198,000
Inventories (410,000) (50,000)
Income tax receivable 3,000 (114,000)
Other assets (29,000) (95,000)
Increase (decrease) in:
Accounts payable 115,000 (4,000)
Accrued expenses 48,000 (191,000)
Income taxes payable - (195,000)
------------------ ------------------
Net cash used in operating activities (682,000) (516,000)
------------------ ------------------
Cash Flows from Investing Activities:
Purchases of property and equipment (215,000) (434,000)
------------------ ------------------
Net cash used in investing activities (215,000) (434,000)
------------------ ------------------
Cash Flows from Financing Activities:
Treasury stock repurchase - (119,000)
Proceeds from exercise of stock options 3,000 3,000
Principal payments on capital lease obligations (6,000) (10,000)
------------------ ------------------
Net cash provided by (used in) financing activities (3,000) (126,000)
------------------ ------------------
Net decrease in Cash and Cash Equivalents (900,000) (1,076,000)
Cash and Cash Equivalents, beginning of period 6,597,000 8,608,000
------------------ ------------------
Cash and Cash Equivalents, end of period $ 5,697,000 $ 7,532,000
================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 13,000 $ 3,000
================== ==================
Income taxes $ - $ 230,000
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
AML COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
1. Basis of Presentation
AML Communications, Inc. (the "Company") is a designer, manufacturer and
marketer of amplifiers and related products for the global wireless industry.
The company currently focuses on the following sectors of the wireless market:
cellular telephony, wireless local loop, personal communications services, two
way paging, low earth orbit satellite networks, and custom wireless
applications.
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles. However, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted or condensed pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
have been included. The results of operations and cash flows for the three and
six month periods presented are not necessarily indicative of the results of
operations for a full year. These financial statements should be read in
conjunction with the Company's March 31, 1999 audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB.
2. Earnings Per Share
Basic earnings per share is computed by dividing net income or loss by the
weighted average number of shares outstanding for the year. "Diluted" earnings
per share is computed by dividing net income or loss by the total of the
weighted average number of shares outstanding plus, if applicable, the dilutive
effect of outstanding stock options (applying the treasury stock method).
3. Inventories
Inventories include costs of material, 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>
September 30, March 31,
------------- ---------
1999 1999
---- ----
(Unaudited) (Audited)
<S> <C> <C>
Raw materials $1,357,000 $1,217,000
Work-in-process 502,000 343,000
Finished goods 334,000 223,000
---------- ----------
$2,193,000 $1,783,000
========== ==========
</TABLE>
4. Legal Proceedings
As described in the Company's Form 10-KSB for the fiscal years ended March
31, 1998 and March 31, 1999, two essentially identical, purported securities
class action lawsuits have been filed against the Company and certain of its
current and former officers and directors. 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 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
6
<PAGE>
insider trading at artificially inflated prices. It is management's opinion that
the lawsuit and subsequent claims are without merit. Management intends to
continue to vigorously defend its position
In the action pending in federal court, entitled Sussman v. AML
--------------
Communications, Inc., et al., U.S.D.C. Case No. 98-2010 CAS (Ex) (C.D. Cal.),
- ----------------------------
four lead plaintiffs and co-lead counsel were appointed on June 29, 1998
pursuant to The Private Securities Litigation Reform Act of 1995. On September
3, 1998, plaintiffs filed an amended complaint. The Company responded to the
amended complaint by filing a motion to dismiss the case. A hearing on the
motion to dismiss was held on February 8, 1999. The court took the motion under
submission. On August 2, 1999, in the light of the Ninth Circuit's decision in
In re: Silicon Graphics Litig., 183 F.3d 3970 (9/th/ Cir. 1999), the court
- -------------------------------
ordered plaintiffs to show cause why their amended complaint should not be
dismissed. On September 3, 1999, in response to plaintiffs' motion for a stay of
any determination of the motion to dismiss until after a petition for rehearing
in Silicon Graphics was decided, the court stayed the action against the Company
- ----------------
for 90 days. On October 27, 1999, the Ninth Circuit denied the petition for
rehearing in Silicon Graphics. The parties are required to submit to the court a
----------------
joint status report concerning the status of the petition before November 19,
1999. All discovery is stayed unless and until it is determined that plaintiffs
have stated an actionable claim.
With respect to the action pending in state court, entitled Sussman v. AML
--------------
Communications, Inc., et al., Case No. CIV 179776 (Ventura County), all
- ----------------------------
proceedings have been stayed until the stay of discovery is lifted in the
federal action. Plaintiffs have informed the Company that they intend to file an
amended complaint in the state action once the case proceeds. The Company's
response will be due forty-five (45) days after the filing of the amended
complaint. The Company intends to respond by filing a demurrer, which is the
California equivalent of a motion to dismiss for failure to state a claim.
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.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This quarterly report contains forward-looking statements which involve
risks and uncertainties. The Company's actual future results may differ
materially from the results discussed in the forward-looking statements. When
used in this report, the words "expects" "anticipates" and "estimates" and
similar expressions are intended to identify forward looking statements. Factors
that might cause a difference include, but are not limited to, product demand
and the rate of market acceptance, the effect of economic conditions, the impact
of competitive products and pricing, delays in product development, capacity and
supply constraints or difficulties, general business and economic conditions,
factors set forth in "Additional Factors That May Affect Future Results" and
other risks detailed in the Company's filings with the Securities and Exchange
Commission. AML Communications, Inc., undertakes no obligation to publicly
release any revisions to these forward looking statements to reflect events or
circumstances after the date this report is filed with the Securities and
Exchange Commission or to reflect the occurrence of unanticipated events.
Results of Operations
- ---------------------
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net sales. Net sales for the three months ended September 30, 1999 were
$2.3 million compared to net sales of $1.6 million in the three months ended
September 30, 1998, a 43.1% increase. The increase in net sales is largely
attributable to increased sales of the Company's cellular products, which
contributed $1.0 million, or 45.9% of net sales, for the three months ended
September 30, 1999, compared to $453,000, or 28.5% of net sales, for the three
months ended September 30, 1998. The increase in cellular product sales can be
attributed to increased sales for the Company's M30 product line during the
quarter. Sales of Wireless Local Loop ("WLL") products increased to $376,000, or
16.6% of net sales, during the three months ended September 30, 1999, compared
to $16,000, or 1.0% of net sales, during the three months ended September 30,
1998. WLL sales have increased due to greater shipment levels of the Company's
pre-production WLL products. Sales of PCS/paging products decreased to $659,000,
or 29.0% of net sales, for the three months ended September 30, 1999, compared
to $786,000, or 49.4% of net sales, for the three months ended September 30,
1998. Sales of custom products for the three months ended September 30, 1999 was
$198,000, or 8.7% of net sales, compared to $335,000, or 21.1% of net sales, in
the three months ended September 30, 1998.
Gross profit. Gross profit for the three months ended September 30, 1999
was $925,000 or 40.7% of net sales, compared to $492,000, or 30.9% of net sales,
for the three months ended September 30, 1998. Production costs decreased to
59.3% of net sales, for the three months ended September 30, 1999 compared to
69.1% of net sales for the three months ended September 30, 1998. Gross profit
increased as a result of the effects from cost containment, greater operating
efficiencies and the absorption of reduced overhead fixed costs at increased
shipment levels. Gains in gross profit were reduced by lower average selling
prices and gross margins for the Company's products in the highly competitive
OEM market. The Company expects that this pressure on selling prices for its
current products will continue in fiscal 2000.
Selling, general and administrative costs. Selling, general and
administrative costs for the three months ended September 30, 1999, were
$671,000, or 29.5% of net sales, compared to $681,000, or 42.8% of net sales,
for the three months ended September 30, 1998. While the amounts are comparable
in aggregate, the decrease in cost as a percentage of net sales is attributable
to the reduction in marketing and administrative personnel and its related
expenses, lower professional fees, and lower trade show costs. These cost
reductions were offset by increases for higher commission rates for outside
sales representatives and additional travel costs to promote the Company and its
products. The Company believes continued investment in sales and marketing is
necessary to promote the Company's products due to the intensely competitive
nature of the industry.
8
<PAGE>
Research and development costs. Research and development costs for the
three months ended September 30, 1999 were $411,000, or 18.1% of net sales,
compared to $777,000, or 48.9% of net sales, for the three months ended
September 30, 1998. The decrease is primarily due to reduced labor costs
reflecting the previously announced work force reduction in March 1999, lower
research and development material costs, and lower equipment rental costs. The
Company continues to invest both material and labor in the design and
development of new products for the cellular, PCS, paging, and WLL
communications markets when such products provide the potential for acceptable
margins and return on investment.
Other income, net. Other income for the three months ended September 30,
1999 was $67,000 compared to $112,000 for the three months ended September 30,
1998. The decrease is due mainly to a decrease in interest income as a result of
decreased average invested funds.
Provision/benefit for taxes. For the three months ended September 30,
1999, the Company recorded no benefit for income taxes, compared to a benefit
for income taxes of $304,000, an effective tax rate of approximately 36%, for
the three months ended September 30, 1998. No benefit for income taxes was
recorded since the Company has utilized all carry-back benefits during the 1999
fiscal year. The difference between the rate used and the statutory rate of
approximately 40% is due to research and development tax credits available to
the Company which reduce taxes payable and tax benefits associated with the
exercise of employee stock options.
Net loss. For the reasons set forth above, the Company generated net loss
in the second quarter of fiscal 2000 of $90,000, or 4.0% of net sales, compared
to a net loss of $550,000, or 34.6% of net sales, in the second quarter of
fiscal 1999.
Six Months Ended September 30, 1999 Compared to Six Months Ended September 30,
1998
Net sales. Net sales for the six months ended September 30, 1999 were $4.5
million compared to net sales of $4.6 million in the six months ended September
30, 1998, a 2.1% decrease. The decrease in net sales is largely attributable to
a decrease in sales of the Company's PCS/paging products, which contributed
$748,000, or 16.4% of net sales, for the six months ended September 30, 1999,
compared to $1.6 million or 35.5% of net sales, for the six months ended
September 30, 1998. The decrease in the PCS/paging product sales can be
attributed to the Company fulfilling a large contract to a single customer
during the first quarter of fiscal 1999. Sales of cellular products increased to
$3.0 million, or 66.1% of net sales, for the six months ended September 30,
1999, compared to $2.1 million, or 46.7% of net sales, for the six months ended
September 30, 1998. The increase in cellular sales is due to greater focus on
sales of existing cellular products during the investigation and development of
new products for cellular and other product segments. Sales of WLL products
increased to $480,000, or 10.5% of net sales, during the six months ended
September 30, 1999, compared to $236,000, or 5.0% of net sales, during the six
months ended September 30, 1998. The increase in WLL sales is due to increased
shipment levels of the Company's product. Sales of custom products contributed
$315,000, or 7.0% of net sales for the six months ended September 30, compared
to $593,000, or 12.8% of net sales, in the six months ended September 30, 1998.
Gross profit. Gross profit for the six months ended September 30, 1999 was
$1.7 million or 38.4% of net sales, compared to $1.8 million, or 38.1% of net
sales, for the six months ended September 30, 1998. Production costs decreased
to $2.8 million, or 61.6% of net sales for the six months ended September 30,
1999 compared to $2.9 million, or 61.9% of net sales, for the six months ended
September 30, 1998. Gross profit was comparable as a result of gains from
productivity efficiencies offset by lower average selling prices and gross
margins for the Company's products in the highly competitive OEM market. The
Company expects that this pressure on selling prices for its current products
will continue in fiscal 2000.
Selling, general and administrative costs. Selling, general and
administrative costs for the six months ended September 30, 1999, were $1.4
million, or 29.9% of net sales, compared to $1.4 million, or 29.6% of net sales,
for the six months ended September 30, 1998. The difference is primarily due to
the reduction in marketing and administrative personnel and its related expenses
and lower professional fees. These cost reductions were offset by increases due
primarily to higher commission rates for outside sales representatives and
additional travel costs to promote the Company and its products. The Company
believes continued investment in sales and marketing is necessary to promote the
Company's products due to the intensely competitive nature of the industry.
9
<PAGE>
Research and development costs. Research and development costs for the six
months ended September 30, 1999 were $793,000, or 17.4% of net sales, compared
to $1.3 million, or 27.7% of net sales, for the six months ended September 30,
1998. The decrease is primarily due to reduced labor costs reflecting the
previously announced work force reduction in March 1999, lower research and
development material costs, and lower equipment rental costs. The Company
continues to invest both material and labor in the design and development of new
products for the cellular, PCS, paging, and WLL communications markets when such
products provide the potential for acceptable margins and return on investment.
Other income, net. Other income for the six months ended September 30,
1999 was $130,000 compared to $220,000 for the three months ended September 30,
1998. The decrease is due mainly to a decrease in interest income as a result of
decreased average invested funds.
Provision/benefit for taxes. For the six months ended September 30, 1999,
the Company recorded no benefit for income taxes, compared to a benefit for
income taxes of $239,000, an effective tax rate of approximately 36%, for the
six months ended September 30, 1998. No benefit for income taxes was recorded
since the Company has utilized all carry-back benefits during the 1999 fiscal
year. The difference between the rate used and the statutory rate of
approximately 40% is due to research and development tax credits available to
the Company which reduce taxes payable and tax benefits associated with the
exercise of employee stock options.
Net loss. For the reasons set forth above, the Company generated net loss
in the six months ended September 30, 1999 of $276,000, or 6.1% of net sales,
compared to a net loss of $435,000, or 9.4% of net sales, for the six months
ended September 30, 1999.
Liquidity and Capital Resources
- -------------------------------
Historically, the Company has 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 net proceeds of the initial public offering
have also been used to maintain inventory and working capital balances.
On August 10, 1998, the Company announced that its board of directors
authorized a stock buyback program of up to 400,000 shares of the Company's
outstanding common stock. Shares repurchased pursuant to the buyback will be
purchased from time to time in the open market or in negotiated transactions and
will be held for issuance in connection with the future exercise of employee
stock options. The Company repurchased 114,500 shares at an aggregate cost of
$224,000 during fiscal 1999. The Company did not repurchase any additional
shares during the first six months of fiscal 2000.
In October 1999, the Company entered into a new revolving bank line of
credit. The agreement is comprised of two separate credit facilities. The
initial facility is a $1,500,000 revolving line of credit, which bears interest
at the bank's reference rate (prime rate) 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 100% of the purchase price of equipment used in the
Company's business. The second facility bears an interest rate at the bank's
reference rate plus 1.50%. Both facilities are secured by substantially all of
the Company's assets and expire on October 26, 2000.
At September 30, 1999 the Company had $5.7 million in cash and cash
equivalents. The Company's operating activities used cash of approximately
$683,000 for the six months ended September 30, 1999 primarily as a result of a
loss from operations, an increase in receivables and an increase in inventories.
The Company's capital expenditures of $215,000 for the six months ended
September 30, 1999 were primarily for manufacturing test equipment, information
system improvements and leasehold improvements.
10
<PAGE>
The Company believes that the net proceeds from the initial public offering
and the cash provided by operations 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.
Year 2000 Compliance Issue
- --------------------------
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 date field to define the applicable year. Such
computer programs which utilize 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 the Year 2000 Issue in certain of its computer
software applications and is in the process of upgrading or replacing such
applications with software which, according to representations from the software
providers, recognize two digit date fields "00" as the year 2000. The Company
plans to test all such applications that have been represented by software
providers to be year 2000 compliant. The Company has completed its assessment of
internal information technology systems that will be affected by the Year 2000
Issue. The affected information technology systems have been upgraded or
replaced to be year 2000 compliant during October 1999. The cost of upgrading or
replacing such applications has not had a material effect on the operations of
the Company and has been and will continue to be funded through operating cash
flows.
The Company has contacted its key customers, suppliers, and other third
parties with whom the Company exchanges electronic information to determine the
impact, if any, the Year 2000 Issue may have on their information technology
systems, which in turn, would have an impact on the Company. The Company has
reviewed the initial responses from its key customers, suppliers, and other
third parties and assessed any potential impact to the Company. There can be no
assurance that such customers, suppliers or third parties will not suffer
business disruptions due to the Year 2000 Issue. Such failures could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Because the Company has upgraded or replaced the computer software
applications which run most of its information technology systems (which
software has been represented by the software providers not to be affected by
the Year 2000 Issue) the Company has not developed Year 2000 specific
contingency plans. The Company intends to develop such plans if it identifies a
business function at risk. The Company does not currently anticipate that the
Year 2000 Issue will have a material effect on its business, results of
operations, or financial condition.
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), our ability to timely develop and produce commercially
viable products at competitive prices, the ability of our products to operate
and be compatible with various OEM base station equipment, our ability to
produce products which meet the quality standards of both existing and potential
new customers, our ability to accurately anticipate customer demand, our ability
to manage expense levels, the availability and cost of components, our ability
to finance our activities and maintain our financial liquidity and worldwide
economic and political conditions.
We believe that, to the extent that foreign sales are recognized, we may
face increased risk associated with political and economic instability,
compliance with foreign regulatory rules governing export requirements, tariffs
and other trade barriers, differences in intellectual property protections,
longer accounts receivable cycles, currency fluctuations and general trade
restrictions. If any of these risks materialize, they could have a material
adverse effect on our business, results of operations and financial condition.
We have identified potential new customers serving new markets in developing
countries. Our WLL products offer a viable alternative to the construction of a
11
<PAGE>
wireline infrastructure in such areas. However, to the extent that our customers
delay development or deployment of WLL communications networks and/or technology
continues to evolve, we may experience a material adverse effect on our
business, results of operations and financial condition.
We have evaluated the credit exposure associated with conducting business
with foreign customers and have concluded that such risk is acceptable.
Nevertheless, any significant change in the economy or a deterioration in United
States trade relations or the economic or political stability of foreign markets
could have a material adverse effect on our business, results of operations and
financial condition.
Sales to foreign customers are invoiced in U.S. dollars. Accordingly, we
currently do not engage in foreign currency hedging transactions. However, as we
expand further into foreign markets, greater risk associated with general
business, political and economic conditions in those markets, may be
experienced. At such time, we may seek to lessen our exposure through currency
hedging transactions. No assurance can be made that a currency hedging strategy
would be successful in avoiding currency exchange related losses. In addition,
should the relative value of the U.S. dollar in comparison to foreign currencies
increase, the resulting increase in the price of the Company's products to
foreign customers could result in decreased sales which could have a material
adverse impact on our business, results of operations and financial condition.
We experience significant price competition and expect price competition in
the sale of our products to remain intense. No assurance can be given that our
competitors will not develop new technologies or enhancements to existing
products or introduce new products that will offer superior price or performance
features. We expect our competitors to offer new and existing products at prices
necessary to gain or retain market share. Several of our 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 our competitors have, and potential future competitors
could have, substantially greater technical, marketing, distribution and other
resources than we do and have, or could have, greater name recognition and
market acceptance of their products and technologies.
We receive periodic order forecasts from our major customers who have no
obligation to purchase the forecasted amounts. Nevertheless, we maintain
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 our major customers purchase less than the forecasted
amounts, we will have higher levels of inventory than otherwise needed,
increasing the risk of obsolescence and we will have increased levels of
production staff to support such forecasted orders. Such higher levels of
inventory and increased employee levels could reduce our liquidity and could
have a material adverse effect on our business, results of operations and
financial condition.
The markets in which we and our customers compete are characterized by
rapidly changing technology, evolving industry standards and communications
protocols and continuous improvements in products and services. Our future
success depends on our ability to enhance our 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.
We believe that to remain competitive in the future we will need to continue to
develop new products, which will require the investment of significant financial
resources in new product development. In the event our newly developed products
are not timely developed or do not gain market acceptance, our business, results
of operations and financial condition could be materially adversely affected.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As described in the Company's Form 10-KSB for the fiscal years ended March
31, 1998 and March 31, 1999, two essentially identical, purported securities
class action lawsuits have been filed against the Company and certain of its
current and former officers and directors. 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 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. It is management's opinion that the lawsuit and subsequent claims are
without merit. Management intends to continue to vigorously defend its position.
In the action pending in federal court, entitled Sussman v. AML
--------------
Communications, Inc., et al., U.S.D.C. Case No. 98-2010 CAS (Ex) (C.D. Cal.),
- -----------------------------
four lead plaintiffs and co-lead counsel were appointed on June 29, 1998
pursuant to The Private Securities Litigation Reform Act of 1995. On September
3, 1998, plaintiffs filed an amended complaint. The Company responded to the
amended complaint by filing a motion to dismiss the case. A hearing on the
motion to dismiss was held on February 8, 1999. The court took the motion under
submission. On August 2, 1999, in the light of the Ninth Circuit's decision in
In re: Silicon Graphics Litig., 183 F.3d 3970 (9th Cir. 1999), the court ordered
- -------------------------------
plaintiffs to show cause why their amended complaint should not be dismissed. On
September 3, 1999, in response to plaintiffs' motion for a stay of any
determination of the motion to dismiss until after a petition for rehearing in
Silicon Graphics was decided, the court stayed the action against the Company
- ----------------
for 90 days. On October 27, 1999, the Ninth Circuit denied the petition for
rehearing in Silicon Graphics. The parties are required to submit to the court a
----------------
joint status report concerning the status of the petition before November 19,
1999. All discovery is stayed unless and until it is determined that plaintiffs
have stated an actionable claim.
With respect to the action pending in state court, entitled Sussman v. AML
--------------
Communications, Inc., et al., Case No. CIV 179776 (Ventura County), all
- ----------------------------
proceedings have been stayed until the stay of discovery is lifted in the
federal action. Plaintiffs have informed the Company that they intend to file an
amended complaint in the state action once the case proceeds. The Company's
response will be due forty-five (45) days after the filing of the amended
complaint. The Company intends to respond by filing a demurrer, which is the
California equivalent of a motion to dismiss for failure to state a claim.
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
The Annual Meeting of Stockholders was held on September 22, 1999. The
following matters were submitted to a vote of the Company's stockholders:
Proposal No. 1 - Election of two (2) Class I Directors
To elect Scott T. Behan and Richard W. Flatow as directors for terms to
expire in 2002. Messrs. Behan and Flatow were directors immediately prior to the
vote and were re-elected as a result of the following vote:
<TABLE>
<CAPTION>
Votes For Votes Against Votes Withheld
--------- ------------- --------------
<S> <C> <C> <C>
Scott T. Behan 4,990,867 26,457 31,452
Richard W. Flatow 4,990,867 26,457 31,452
</TABLE>
Jacob Inbar, Kirk A. Waldron, David A. Derby and Gerald M. Starek continue to
serve as directors.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.23 Loan and Security Agreement dated October 26, 1999 between the
Company and Silicon Valley Bank.
10.24 Intellectual Property Security Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no current Reports on Form 8-K during the
quarter ended September 30, 1999.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AML Communications, Inc.
Date: November 2, 1999 /s/ David A. Swoish
-------------------------
David A. Swoish
Chief Accounting Officer and
Controller
(Principal Accounting Officer)
15
<PAGE>
LOAN AND SECURITY AGREEMENT
<PAGE>
This LOAN AND SECURITY AGREEMENT (this "Agreement") dated October 26,
1999, between SILICON VALLEY BANK ("Bank") and AML COMMUNICATIONS, INC.
("Borrower"), provides the terms on which Bank will lend to Borrower and
Borrower will repay Bank. The parties agree as follows:
1. ACCOUNTING AND OTHER TERMS
--------------------------
Accounting terms not defined in this Agreement will be construed following
GAAP. Calculations and determinations must be made following GAAP. The term
"financial statements" includes the notes and schedules. The terms "including"
and "includes" always mean "including (or includes) without limitation" in this
or any Loan Document. Capitalized terms in this Agreement shall have the
meanings set forth in Section 13.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Credit Extensions. Borrower will pay Bank the unpaid principal amount of
-----------------
all Credit Extensions and interest on the unpaid principal amount of the Credit
Extensions.
2.1.1 Revolving Advances.
------------------
(a) Bank will make Advances not exceeding (i) the Committed Revolving
Line or the Borrowing Base, whichever is less. Amounts borrowed under this
Section may be repaid and reborrowed during the term of this Agreement.
(b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit B. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to that reliance.
(c) The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances are immediately payable.
2.1.2 [Reserved]
2.1.3 [Reserved]
2.1.4 [Reserved]
2.1.5 Equipment Advances.
------------------
(a) Through October 26, 2000 (the "Equipment Availability End Date"), Bank
will make advances ("Equipment Advance" and, collectively, "Equipment Advances")
not exceeding the Committed Equipment Line. The Equipment Advances may only be
used to purchase Equipment and may not exceed 100% of the equipment invoice for
the equipment approved from time to time by Bank, excluding taxes, shipping,
warranty charges, freight discounts and installation expense.
<PAGE>
Software may constitute up to 20% of an Equipment Advance. Each Equipment
Advance must be for minimum of $50,000.
(b) Interest accrues from the date of each Equipment Advance at the rate in
Section 2.3(a) and is payable monthly until the Equipment Availability End Date
occurs. Equipment Advances outstanding on the Equipment Availability End Date
are payable in 36 equal monthly installments of principal, plus accrued
interest, beginning on the first day of each month following the Equipment
Availability End Date and ending on October 1, 2003 the (Equipment Loan Maturity
Date). Equipment Advances when repaid may not be reborrowed.
(c) To obtain an Equipment Advance, Borrower must notify Bank (the notice
is irrevocable) by facsimile no later than 3:00 p.m. Pacific time 1 Business Day
before the day on which the Equipment Advance is to be made. The notice in the
form of Exhibit B (Payment/Advance Form) must be signed by a Responsible Officer
or designee and include a copy of the invoice for the Equipment being financed.
2.1.6 [Reserved]
2.1.7 [Reserved]
2.2 Overadvances. If Borrower's Obligations under Section 2.1.1 exceed the
------------
lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base,
Borrower must immediately pay in cash to Bank the excess.
2.3 Interest Rate; Payments.
-----------------------
(a) Interest Rate. Advances accrue interest on the outstanding principal
balance at a per annum rate 0.50 percentage points above the Prime Rate;
provided, however, that Equipment Advances shall accrue interest from the date
of each Equipment Advance at a per annum rate 1.50 percentage points above the
Prime Rate. After an Event of Default, Obligations accrue interest at 5 percent
above the rate effective immediately before the Event of Default. The interest
rate increases or decreases when the Prime Rate changes. Interest is computed on
a 360 day year for the actual number of days elapsed.
(b) Payments. Interest is payable on the first day of each month. Bank may
debit any of Borrower's deposit accounts including Account Number [___________]
for principal and interest payments or any amounts Borrower owes Bank. Bank will
notify Borrower when it debits Borrower's accounts. These debits are not a
set-off. Payments received after 12:00 noon Pacific time are considered received
at the opening of business on the next Business Day. When a payment is due on a
day that is not a Business Day, the payment is due the next Business Day and
additional fees or interest accrue.
2.4 Fees. Borrower will pay to Bank:
----
(a) Facility Fee. A fully earned, non-refundable facility fee of $10,000
due on the Closing Date; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees
and expenses incurred through and after the Closing Date when due.
(c) Unused Line Fee. An Unused Line Fee, in addition to all interest and
other fees payable hereunder. The amount of the Unused Line Fee shall be 0.50%
per annum multiplied by an amount equal to the Committed Revolving Line plus
Committed Equipment Line minus the
2
<PAGE>
average daily balance of the outstanding Credit Extensions. The Unused Line Fee
shall be computed and paid quarterly, in arrears, and shall be due on the last
day of each fiscal quarter.
3. CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Credit Extension. Bank's obligation to make
------------------------------------------------
the initial Credit Extension is subject to the condition precedent that it
receive the agreements, documents and fees it requires, including, without
limitation, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
articles, bylaws, incumbency and resolutions authorizing the execution and
delivery of this Agreement;
(c) financing statements (Forms UCC-1);
(d) insurance certificate;
(e) payment of the fees and Bank Expenses then due;
(f) [Reserved];
(g) Certificate of Foreign Qualification with respect to the Borrower
(if applicable);
(h) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate; and
(i) an audit of Borrower's Accounts, as referred in Section 6.2
hereof, shall have been completed, with satisfactory results to Bank, in its
sole discretion, prior to the initial Credit Extension;
3.2 Conditions Precedent to all Credit Extensions. Bank's obligations to make
---------------------------------------------
each Credit Extension, including the initial Credit Extension, is subject to the
following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 5 must be materially true
on the date of the Payment/Advance Form and on the effective date of each Credit
Extension and no Event of Default may have occurred and be continuing, or result
from the Credit Extension. Each Credit Extension is Borrower's representation
and warranty on that date that the representations and warranties in Section 5
remain true.
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 Grant of Security Interest. Borrower grants Bank a continuing security
--------------------------
interest in all presently existing and later acquired Collateral to secure all
Obligations and performance of each of Borrower's duties under the Loan
Documents. Except for Permitted Liens, any security interest will be a first
priority security interest in the Collateral. Bank may place a "hold" on any
deposit account pledged as Collateral. If the Agreement is terminated, Bank's
lien and security interest in the Collateral will continue until Borrower fully
satisfies its Obligations.
3
<PAGE>
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 Due Organization and Authorization. Borrower and each Subsidiary is duly
----------------------------------
existing and in good standing in its state of formation and qualified and
licensed to do business in, and in good standing in, any state in which the
conduct of its business or its ownership of property requires that it be
qualified.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formations documents, nor
constitute an event of default under any material agreement by which Borrower
is bound. Borrower is not in default under any agreement to which or by which it
is bound in which the default could cause a Material Adverse Change.
5.2 Collateral. Borrower has good title to the Collateral, free of Liens except
----------
Permitted Liens. The Eligible Accounts are bona fide, existing obligations, and
the service or property has been performed or delivered to the account debtor
or its agent for immediate shipment to and unconditional acceptance by the
account debtor. Borrower has no notice of any actual or imminent Insolvency
Proceeding of any account debtor whose accounts are an Eligible Account in any
Borrowing Base Certificate. All Inventory is in all material respects of good
and marketable quality, free from material defects. Borrower is the sole
owner of the Intellectual Property, except for non-exclusive licenses granted
to its customers in the ordinary course of business. Each Patent is valid and
enforceable and no part of the Intellectual Property has been judged invalid or
unenforceable, in whole or in part, and no claim has been made that any part of
the Intellectual Property violates the rights of any third party.
5.3 Litigation. Except as shown in the Schedule, there are no actions or
----------
proceedings pending or, to Borrower's knowledge, threatened by or against
Borrower or any Subsidiary in which an adverse decision could cause a Material
Adverse Change.
5.4 No Material Adverse Change in Financial Statements. All consolidated
--------------------------------------------------
financial statements for Borrower and any Subsidiary delivered to Bank
fairly present in all material respects Borrower's consolidated financial
condition and Borrower's consolidated results of operations. There has not
been any material deterioration in Borrower's consolidated financial
condition since the date of the most recent financial statements submitted
to Bank.
5.5 Solvency. The fair salable value of Borrower's assets (including goodwill
--------
minus disposition costs) exceeds the fair value of its liabilities; the Borrower
is not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as
they mature.
5.6 Regulatory Compliance. Borrower is not an "investment company" or a
---------------------
company "controlled" by an "investment company" under the Investment Company
Act. Borrower is not engaged as one of its important activities in extending
credit for margin stock (under Regulations T and U of the Federal Reserve
Board of Governors). Borrower has complied with the Federal Fair Labour
Standards Act. Borrower has not violated any laws, ordinances or rules, the
violation of which could cause a Material Adverse Change. None of Borrower's
or any Subsidiary's properties or assets has been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous
substance other than legally. Borrower and each Subsidiary has timely filed
all required tax returns and paid, or made adequate provision to pay, all
material taxes. Borrower and each Subsidiary has obtained all consents,
approvals and authorizations of, made all declarations or
4
<PAGE>
filings with, and given all notices to, all government authorities that are
necessary to continue its business as currently conducted.
5.7 Subsidiaries. Borrower does not own any stock, partnership interest or
------------
other equity securities except for Permitted Investments.
5.8 Full Disclosure. No representation, warranty or other statement of Borrower
---------------
in any certificate or written statement given to Bank contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained in the certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS
---------------------
Borrower will do all of the following:
6.1 Government Compliance. Borrower will maintain its and all Subsidiaries'
---------------------
corporate existence and good standing in its jurisdiction of incorporation and
maintain qualification in each jurisdiction in which the failure to so qualify
could have a material adverse effect on Borrower's business or operations.
Borrower will comply, and have each Subsidiary comply, with all laws, ordinances
and regulations to which it is subject, noncompliance with which could have a
material adverse effect on Borrower's business or operations or cause a Material
Adverse Change.
6.2 Financial Statements, Reports, Certificates.
-------------------------------------------
(a) Borrower will deliver to Bank: (i) as soon as available, but no later
than 30 days after the last day of each month, a company prepared consolidated
balance sheet and income statement covering Borrower's consolidated operations
during the period, in a form acceptable to Bank and certified by a Responsible
Officer; provided, however, that with respect to the last month of each fiscal
-------- -------
quarter, the time within which Borrower shall provide the foregoing financial
information shall be governed by subclause (iii) hereof: (ii) [Reserved]; (iii)
within 5 days of filing, copies of all statements, reports and notices made
available to Borrower's security holders or to any holders of Subordinated Debt
and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and
Exchange Commission, including without limitation audited annual consolidated
financial statements prepared under GAAP, consistently applied, together with an
unqualified opinion on the financial statements from an independent certified
public accounting firm acceptable to Bank; (iv) a prompt report of any legal
actions pending or threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary of $100,000 or more;
(v) prompt notice of any material change in the composition of the Intellectual
Property, including any subsequent ownership right of Borrower in or to any
Copyright, Patent or Trademark not shown in any intellectual property security
agreement between Borrower and Bank or knowledge of an event that materially
adversely affects the value of the Intellectual Property; and (vi) budgets,
sales projections, operating plans or other financial information Bank requests.
(b) Within 20 days after the last day of each month, Borrower will deliver
to Bank a Borrowing Base Certificate signed by a Responsible Officer in the
form of Exhibit C, with aged listings of accounts receivable and accounts
payable.
(c) Within 30 days after the last day of each month, Borrower will deliver
to Bank with the monthly financial statements a Compliance Certificate signed by
a Responsible Officer in the form of Exhibit D.
5
<PAGE>
(d) Bank has the right to audit Borrower's Accounts at Borrower's
expense, but the audits will be conducted no more often than once every 6 months
unless an Event of Default has occurred and is continuing.
6.3 Inventory; Returns. Borrower will keep all Inventory in good and
------------------
marketable condition, free from material defects. Returns and allowances between
Borrower and its account debtors will follow Borrower's customary practices as
they exist at the Closing Date. Borrower must promptly notify Bank of all
returns, recoveries, disputes and claims that involve more than $50,000.
6.4 Taxes. Borrower will make, and cause each Subsidiary to make, timely
-----
payment of all material federal, state, and local taxes or assessments and will
deliver to Bank, on demand, appropriate certificates attesting to the payment.
6.5 Insurance. Borrower will keep its business and the Collateral insured for
---------
risks and in amounts, as Bank requests. Insurance policies will be in a form,
with companies, and in amounts that are satisfactory to Bank. All property
policies will have a lender's loss payable endorsement showing Bank as a loss
payee and all liability policies will show the Bank as an additional insured and
provide that the insurer must give Bank at least 20 days notice before canceling
its policy. At Bank's request, Borrower will deliver certified copies of
policies and evidence of all premium payments. Proceeds payable under any policy
will, at Bank's option, be payable to Bank on account of the Obligations.
6.6 Primary Accounts. Borrower will maintain its primary depository and
----------------
operating accounts with Bank.
6.7 Financial Covenants.
Borrower will maintain as of the last day of each month, unless otherwise
noted:
(a) Quick Ratio. A ratio of Quick Assets to Current Liabilities of at
least 2.0 to 1.0.
(b) Loss. Borrower may suffer a loss of up to $500,000 for any fiscal
quarter ending after the date hereof provided that Borrower may suffer an
--------
aggregate loss of up to $1,500,000 for any fiscal year ending after the date
hereof.
In addition to the foregoing, after the Equipment Availability End Date,
Borrower shall also maintain either of the following:
(c) Debt Service Coverage. Debt Service Coverage of at least 1.75 to
1.0, tested quarterly; or
(d) Liquidity Coverage. A ratio of unrestricted cash (and equivalents)
plus the lesser of the Committed Revolving Line or the Borrowing Base, whichever
is less to the aggregate Equipment Advances then outstanding of not less than
2.5 to 1.0, tested quarterly.
6.8 Registration of Intellectual Property Rights. Borrower will register with
--------------------------------------------
the United States Copyright Office (i) any software material to the business of
Borrower it has, develops or acquires, including those in Exhibit A to the
Intellectual Property Security Agreement, within 30 days of the Closing Date,
and additional software rights developed or acquired, including significant
revisions, additions or improvements to the software or revisions, additions or
improvements which significantly improve the functionality of the software,
after the Closing Date before the sale or licensing to any third party of the
software or any product based on or containing any software. Borrower will
promptly notify Bank upon Borrower's filing of any
6
<PAGE>
application or registration of any Intellectual Property rights with the United
States Patent and Trademark Office and Borrower will execute and deliver any and
all instruments and documents as Bank may require to evidence or perfect Bank's
security interest in such application or registration.
Borrower will: (i) protect, defend and maintain the validity and
enforceability of the Intellectual Property; (ii) promptly advise Bank in
writing of material infringements of the Intellectual Property; and (iii) not
allow any Intellectual Property to be abandoned, forfeited or dedicated to the
public without Bank's written consent.
6.9 Further Assurances. Borrower will execute any further instruments and take
------------------
further action as Bank requests to perfect or continue Bank's security interest
in the Collateral or to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
------------------
Borrower will not do any of the following without the Bank's written
consent, which will not be unreasonably withheld:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of
------------
(collectively a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than a Transfer (i) of Inventory
in the ordinary course of business; (ii) of non-exclusive licenses and similar
arrangements for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business; or (iii) of worn-out or obsolete Equipment.
7.2 Changes in Business, Ownership, Management or Business Locations.
----------------------------------------------------------------
Engage in or permit any of its Subsidiaries to engage in any business other
than the businesses currently engaged in by Borrower or have a change in its
ownership or management. Borrower will not, without at least 30 days prior
written notice to Bank, relocate its principal executive office or add any new
offices or business locations.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its
-----------------------
Subsidiaries to merge or consolidate, with any other Person, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person except where (i) such transactions
do not in the aggregate exceed result in a decrease of more than 25% of Tangible
Net Worth and (ii) no Event of Default has occurred and is continuing or would
exist after giving effect to the transactions. A Subsidiary may merge or
consolidate into another Subsidiary or into Borrower.
7.4 Indebtedness. Create, incur, assume, or be liable for any Indebtedness, or
------------
permit any Subsidiary to do so, other than Permitted Indebtedness.
7.5 Encumbrance. Create, incur, or allow any Lien on any of its property, or
-----------
assign or convey any right to receive income, including the sale of any
Accounts, or permit any of its Subsidiaries to do so, except for Permitted
Liens, or permit Bank's first priority security interest in the Collateral to
change.
7.6 Investments; Distributions. (i) Directly or indirectly acquire or own any
--------------------------
Person, or make any Investment in any Person, other than Permitted Investments,
or permit any of its Subsidiaries to do so; or (ii) pay any dividends or make
any distribution or payment or redeem, retire or purchase any capital stock.
7.7 Transactions with Affiliates. Directly or indirectly enter or permit any
----------------------------
material transaction with any Affiliate, except transactions that are in the
ordinary course of Borrower's
7
<PAGE>
business, on terms less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person.
7.8 Subordinated Debt. Make or permit any payment on any Subordinated Debt,
-----------------
except under the terms of the Subordinated Debt, or amend any provision in any
document relating to the Subordinated Debt, without Bank's prior written
consent.
7.9 Compliance. Undertake as one of its important activities extending credit
----------
to purchase or carry margin stock, or use the proceeds of any Advance for that
purpose; fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail
to comply with the Federal Fair Labor Standards Act or violate any other law or
regulation, if the violation could have a material adverse effect on Borrower's
business or operations or cause a Material Adverse Charge, or permit any of its
Subsidiaries to do so.
8. EVENTS OF DEFAULT
-----------------
Any one of the following is an Event of Default:
8.1 Payment Default. Borrower fails to pay any of the Obligations within 3 days
---------------
after their due date. During the additional period the failure to cure the
default is not an Event of Default (but no Credit Extensions will be made during
the cure period);
8.2 Covenant Default. Borrower does not perform any obligation in Section 6 or
----------------
violates any covenant in Article 7 or does not perform or observe any other
material term, condition or covenant in this Agreement, any Loan Documents, or
in any agreement between Borrower and Bank and as to any default under a term,
condition or covenant that can be cured, has not cured the default within 10
days after it occurs, or if the default cannot be cured within 10 days or cannot
be cured after Borrower's attempts in the 10 day period, and the default may be
cured within a reasonable time, then Borrower has an additional time, (of not
more than 30 days) to attempt to cure the default. During the additional period
the failure to cure the default is not an Event of Default (but no Credit
Extensions will be made during the cure period);
8.3 Material Adverse Change.
-----------------------
(i) A material impairment in the perfection or priority of Bank's security
interest in the Collateral or in the value of such Collateral which is not
covered by adequate insurance occurs; or (ii) Bank determines, based upon
information available to it and in its reasonable judgment, that there is a
reasonable likelihood that Borrower will fail to comply with one or more of the
financial covenants in Section 6 during the next succeeding financial reporting
period;
8.4 Attachment. (i) Any material portion of Borrower's assets is attached,
----------
seized, levied on, or comes into possession of a trustee or receiver and the
attachment, seizure or levy is not removed in 10 days; (ii) Borrower is
enjoined, restrained, or prevented by court order from conducting a material
part of its business; (iii) a judgment or other claim becomes a Lien on a
material portion of Borrower's assets; or (iv) a notice of lien, levy, or
assessment is filed against of Borrower's assets by government agency and not
paid within 10 days after Borrower receives notice. These are not Events of
Default if stayed or if a bond is posted pending contest by Borrower (but no
Credit Extensions will be made during the cure period);
8.5 Insolvency. (i) Borrower becomes insolvent; (ii) Borrower begins an
----------
Insolvency Proceeding; or (iii) an Insolvency Proceeding is begun against
Borrower and not dismissed or stayed within 30 days (but no Credit Extensions
will be made before any Insolvency Proceeding is dismissed);
8
<PAGE>
8.6 Other Agreements. If there is a default in any agreement between Borrower
-----------------
and a third party that gives the third party the right to accelerate any
Indebtedness exceeding $100,000 or that could cause a Material Adverse Change;
8.7 Judgments. If a money judgment or judgments in the aggregate of at least
---------
$50,000 is rendered against the Borrower and is unsatisfied and unstayed for 10
days (but no Credit Extensions will be made before the judgment is stayed or
satisfied);
8.8 Misrepresentations. If Borrower or any Person acting for Borrower makes any
------------------
material misrepresentation or material misstatement now or later in any warranty
or representation in this Agreement or in any communication delivered to Bank or
to induce Bank to enter this Agreement or any Loan Document; or
8.9 Guaranty. [Reserved]
--------
9. BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 Rights and Remedies. When an Event of Default occurs and continues Bank
-------------------
may, without notice or demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an Event of
Default described in Section 8.5 occurs all Obligations are immediately due and
payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit under
this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors for
amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or reasonable
to protect its security interest in the Collateral. Borrower will assemble the
Collateral if Bank requests and make it available as Bank designates. Bank may
enter premises where the Collateral is located, take and maintain possession of
any part of the Collateral, and pay, purchase, contest, or compromise any Lien
which appears to be prior or superior to its security interest and pay all
expenses incurred. Borrower grants Bank a license to enter and occupy any of its
premises, without charge, to exercise any of Bank's rights or remedies;
(e) Apply to the Obligations any (i) balances and deposits of Borrower it
holds, or (ii) any amount held by Bank owing to or for the credit or the account
of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral. Bank is granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower's labels, Patents, Copyrights, Mask Works, rights of use of any name,
trade secrets, trade names, Trademarks, service marks, and advertising matter,
or any similar property as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section, Borrower's
rights under all licenses and all franchise agreements inure to Bank's benefit;
and
(g) Dispose of the Collateral according to the Code.
9.2 Power of Attorney. When an Event of Default occurs and continues, Borrower
-----------------
9
<PAGE>
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name
on any checks or other forms of payment or security; (ii) sign Borrower's name
on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly
with account debtors, for amounts and on terms Bank determines reasonable; and
(v) transfer the Collateral into the name of Bank or a third party as the Code
permits. Bank may exercise the power of attorney to sign Borrower's name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred. Bank's
appointment as Borrower's attorney in fact, and all of Bank's rights and powers,
coupled with an interest, are irrevocable until all Obligations have been fully
repaid and performed and Bank's obligation to provide Credit Extensions
terminates.
9.3 Accounts Collection. When an Event of Default occurs and continues, Bank
-------------------
may notify any Person owing Borrower money of Bank's security interest in the
funds and verify the amount of the Account. Borrower must collect all payments
in trust for Bank and, if requested by Bank, immediately deliver the payments to
Bank in the form received from the account debtor, with proper endorsements for
deposit.
9.4 Bank Expenses. If Borrower fails to pay any amount or furnish any required
-------------
proof of payment to third persons Bank may make all or part of the payment or
obtain insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.
9.5 Bank's Liability for Collateral. If Bank complies with reasonable banking
-------------------------------
practices, it is not liable or responsible for: (a) the safekeeping of the
Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the
value of the Collateral; or (d) any act or default of any carrier, warehouseman,
bailee, or other person. Borrower bears all risk of loss, damage or destruction
of the Collateral.
9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement,
-------------------
the Loan Documents, and all other agreements are cumulative. Bank has all rights
and remedies provided under the Code, by law, or in equity. Bank's exercise of
one right or remedy is not an election, and Bank's waiver of any Event of
Default is not a continuing waiver. Bank's delay is not a waiver, election, or
acquiescence. No waiver is effective unless signed by Bank and then is only
effective for the specific instance and purpose for which it was given.
9.7 Demand Waiver. Borrower waives demand, notice of default or dishonor,
-------------
notice of payment and nonpayment, notice of any default, nonpayment at maturity,
release, compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guaranties held by Bank on which Borrower is
liable.
10. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: AML Communications, Inc.
10
<PAGE>
1000 Avenida Acaso
Camarillo, CA 93012
Attention: ___________
FAX: _________________
If to Bank: Silicon Valley Bank
340 N. Westlake Blvd., Suite 150
Westlake Village, CA 91362
Attn: Karl R. Brier
FAX: (805) 496-7015
11. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
------------------------------------------
California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of
the State and Federal courts in Santa Clara County, California. BORROWER AND
BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY
CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER
CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS
AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
12. GENERAL PROVISIONS
------------------
12.1 Successors and Assigns. This Agreement binds and is for the benefit of the
----------------------
successors and permitted assigns of each party. Borrower may not assign this
Agreement or any rights or Obligations under it without Bank's prior written
consent which may be granted or withheld in Bank's discretion. Bank has the
right, without the consent of or notice to Borrower, to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits under this Agreement, the Loan Documents
or any related agreement.
12.2 Indemnification. Borrower will indemnify, defend and hold harmless Bank
---------------
and its officers, employees and agents against: (a) all obligations, demands,
claims, and liabilities asserted by any other party in connection with the
transactions contemplated by the Loan Documents; and (b) all losses or Bank
Expenses incurred, or paid by Bank from, following, or consequential to
transactions between Bank and Borrower (including reasonable attorneys' fees and
expenses), except for losses caused by Bank's gross negligence or willful
misconduct.
12.3 Time of Essence. Time is of the essence for the performance of all
---------------
Obligations in this Agreement.
12.4 Severability of Provision. Each provision of this Agreement is severable
-------------------------
from every other provision in determining the enforceability of any provision.
12.5 Amendments in Writing, Integration. All amendments to this Agreement must
----------------------------------
be in writing signed by both Bank and Borrower. This Agreement and the Loan
Documents represent the entire agreement about this subject matter, and
supersedes prior or contemporaneous negotiations or agreements. All prior or
contemporaneous agreements, understandings, representations, warranties, and
negotiations between the parties about the subject matter of this
11
<PAGE>
Agreement and the Loan Documents merge into this Agreement and the Loan
Documents.
12.6 Counterparts. This Agreement may be executed in any number of counterparts
------------
and by different parties on separate counterparts, each of which, when executed
and delivered, are an original, and all taken together, are one Agreement.
12.7 Survival. All covenants, representations and warranties made in this
--------
Agreement continue in full force while any Obligations remain outstanding. The
obligations of Borrower in Section 12.2 to indemnify Bank will survive until all
statutes of limitations for actions that may be brought against Bank have run.
12.8 Confidentiality. In handling any confidential information, Bank will
---------------
exercise the same degree of care that it exercises for its own proprietary
information, but disclosure of information may be made: (i) to Bank's
subsidiaries or affiliates in connection with their present or prospective
business relations with Borrower; (ii) to prospective transferees or purchasers
of any interest in the Loans; (iii) as required by law, regulation, subpoena, or
other order, (iv) as required in connection with Bank's examination or audit;
and (v) as Bank considers appropriate in exercising remedies under this
Agreement. Confidential information does not include information that either:
(a) is in the public domain or in Bank's possession when disclosed to Bank, or
becomes part of the public domain after disclosure to Bank; or (b) is disclosed
to Bank by a third party, if Bank does not know that the third party is
prohibited from disclosing the information.
12.9 Attorneys' Fees, Costs and Expenses. In any action or proceeding between
-----------------------------------
Borrower and Bank arising out of the Loan Documents, the prevailing party will
be entitled to recover its reasonable attorneys' fees and other costs and
expenses incurred, in addition to any other relief to which it may be entitled,
whether or not a lawsuit is filed.
13. DEFINITIONS
-----------
13.1 Definitions.
-----------
"Accounts" are all existing and later arising accounts, contracts rights,
and other obligations owned Borrower in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" is a loan advance (or advances) under the Committed
Revolving Line.
"Affiliate" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"Bank Expenses" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"Borrower's Books" are all Borrower's books and records including ledgers,
records regarding Borrower's assets or liabilities, the Collateral, business
operations or financial condition and all computer programs or discs or any
equipment containing the information.
12
<PAGE>
"Borrowing Base" is 80% of Eligible Accounts as determined by Bank from
Borrower's most recent Borrowing Base Certificate.
"Business Day" is any day that is not a Saturday, Sunday or a day on which
the Bank is closed.
"Capitalized Product Development Costs" are all costs associated with the
development of Borrower's product, including, but not limited to software, that
are not recorded as an expense and have been classified as an asset account.
"Closing Date" is the date of this Agreement.
"Code" is the California Uniform Commercial Code.
"Collateral" is the property described on Exhibit A.
---------
"Committed Equipment Line" is a Credit Extension of up to $500,000.
"Committed Revolving Line" is a Credit Extension of up to $1,500,000.
"Contingent Obligation" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.
"Copyrights" are all copyright rights, applications or registrations and
like protections in each work or authorship or derivative work, whether
published or not (whether or not it is a trade secret) now or later existing,
created, acquired or held.
"Credit Extension" is each Advance, Equipment Advance or any other
extension of credit by Bank for Borrower's benefit.
"Current Assets" are amounts that under GAAP should be included on that
date as current assets on Borrower's consolidated balance sheet.
"Current Liabilities" are the aggregate amount of Borrower's Total
Liabilities which mature within one (1) year.
"Debt Service Coverage" is earnings after tax less Capitalized Product
Development Costs plus interest and non cash plus or minus, as appropriate, any
decrease or increase in Capitalized Product Development Costs for the specified
period divide by Current Maturities Long Term Debt and capitalized leases, plus
interest.
"Eligible Accounts" are Accounts in the ordinary course of Borrower's
business that meet all Borrower's representations and warranties in Section 5.2;
but Bank may change eligibility
- ---
13
<PAGE>
standards by giving Borrower 30 days prior written notice. Unless Bank agrees
otherwise in writing, Eligible Accounts will not include:
(a) Accounts that the account debtor has not paid within 90 days of
invoice date;
(b) Accounts for an account debtor, 50% or more of whose Accounts have not
been paid within 90 days of invoice date;
(c) Credit balances over 90 days from invoice date;
(d) Accounts for an account debtor, including Affiliates, whose total
obligations to Borrower exceed 25% of all Accounts for the amounts that exceed
that percentage, unless Bank approves in writing;
(e) Accounts for which the account debtor does not have its principal
place of business in the United States except for Eligible Foreign Accounts;
(f) Accounts for which the account debtor is a federal, state or local
government entity or any department, agency, or instrumentality except for
Accounts of the United States if the payee has assigned its payment rights to
Bank and the assignment has been acknowledged under the Assignment of Claims Act
of 1940 (31 U.S.C. 3727);
(g) Accounts for which Borrower owes the account debtor, but only up to
the amount owed (sometimes called "contra" accounts, accounts payable, customer
deposits or credit accounts);
(h) Accounts for demonstration or promotional equipment, or in which goods
are consigned, sales guaranteed, sale or return, sale on approval, bill and
hold, or other terms if account debtor's payment may be conditional; provided,
--------
however, that up to $250,000 of bill and hold Accounts from each Borrowing Base
- -------
Certificate provided by Borrower pursuant to the terms hereof will be considered
Eligible Accounts provided that such Accounts are otherwise eligible hereunder
and provided, further, that Bank may in its sole discretion reduce or revoke
such exemption for bill and hold Accounts based on the results of any field
examinations or audits conducted after the date hereof;
(i) Accounts for which the account debtor is Borrower's Affiliate,
officer, employee, or agent;
(j) Accounts for which the account debtor disputes liability or makes any
claim and Bank believes there may be a basis for dispute (but only up to the
disputed or claimed amount), or if the Account Debtor is subject to an
Insolvency Proceeding, or becomes insolvent, or goes out of business;
(k) Accounts for which Bank reasonably determines collection to be
doubtful.
"Eligible Foreign Accounts" are Accounts for which the account debtor does
not have its principal place of business in the United States but are: (1)
covered by credit insurance satisfactory to Bank, less any deductible; or (2)
supported by letter(s) of credit acceptable to Bank; or (3) that Bank approves
in writing.
"Equipment" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"Equipment Advance" is defined in Section 2.1.5.
14
<PAGE>
"Equipment Availability End Date" is defined in Section 2.1.5.
"Equipment Maturity Date" is defined in Section 2.1.5.
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.
"GAAP" is generally accepted accounting principles.
"Guarantor" is any present or future guarantor of the Obligations.
"Indebtedness" is (a) indebtedness for borrowed money or the deferred price
of property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"Insolvency Proceedings" is any proceeding by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"Intellectual Property" is:
(a) Copyrights, Trademarks, Patents, and Mask Works including amendments,
renewals, extensions, and all licenses or other rights to use and license fees
and royalties from the use;
(b) Any trade secrets and any Intellectual Property Rights in computer
software and computer software products now or later existing, created, acquired
or held;
(c) All design rights which may be available to Borrower now or later
created, acquired or held;
(d) Any claims for damages (past, present or future) for infringement of
any of the rights above, with the right, but not the obligation, to sue and
collect damages for use or infringement of the intellectual property rights
above;
All proceeds and products of the foregoing, including all insurance,
indemnity or warranty payments.
"Inventory" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"Investment" is any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any person.
"Lien" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"Loan Documents" are, collectively, this Agreement, any note, or notes or
guaranties
15
<PAGE>
executed by Borrower or Guarantor, and any other present or future agreement
between Borrower and/or for the benefit of Bank in connection with this
Agreement, all as amended, extended or restated.
"Mask Works" are all mask works or similar rights available for the
protection of semiconductor chips, now owned or later acquired.
"Material Adverse Change" has the meaning set forth in Section 8.3 hereof.
"Maturity Date" is the Revolving Maturity Date.
"Obligations" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and foreign
exchange contracts, if any, and including interest accruing after Insolvency
Proceedings begin and debts, liabilities, or obligations of Borrower assigned to
Bank.
"Patents" are patents, patent applications and like protections, including
improvements, divisions, continuations, renewals, reissues, extensions and
continuations-in-part of the same.
"Permitted Indebtedness" is:
(a) Borrower's indebtedness to Bank under this Agreement or the Loan
Documents;
(b) Indebtedness existing on the Closing Date and shown on the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business; and
(e) Indebtedness secured by Permitted Liens.
"Permitted Investments" are:
(a) Investments shown on the Schedule and existing on the Closing Date;
and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 1
year from its acquisition, (ii) commercial paper maturing no more than 1 year
after its creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue.
"Permitted Liens" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Document;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority
--
over any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower or
its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
--
property and improvements and the proceeds of the equipment;
16
<PAGE>
(d) Leases or subleases and licenses or sublicenses granted in the ordinary
course of Borrower's business, if the leases, subleases, licenses and
sublicenses permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
---
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase
"Person" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.
"Prime Rate" is Bank's most recently announced "prime rate," even if it is
not Bank's lowest rate.
"Quick Assets" is, on any date, the Borrower's consolidated, unrestricted
cash, cash equivalents, net billed accounts receivable and investments with
maturities of less than 12 months determined according to GAAP.
"Responsible Officer" is each of the Chief Executive Officer, the
President,the Chief Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" is the first anniversary of the date of this
Agreement.
"Schedule" is any attached schedule of exceptions.
"Subordinated Debt" is debt incurred by Borrower subordinated to Borrower's
debt to Bank (and identified as subordinated by Borrower and Bank).
"Subsidiary" is for any Person, joint venture, or any other business entity
of which more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.
"Tangible Net Worth" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
-----
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities plus Subordinated Debt.
---
"Total Liabilities" is on any day, obligations that should, under GAAP, be
classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
17
<PAGE>
"Trademarks" are trademark and service mark rights, registered or not,
applications to register and registrations and like protections, and the entire
goodwill of the business of Assignor connected with the trademarks.
BORROWER:
AML COMMUNICATIONS, INC.
By: /s/ Kirk A. Waldron
-----------------------
Title: PRESIDENT & CEO
--------------------
SILICON VALLEY BANK
By:_______________________
Title:____________________
18
<PAGE>
SCHEDULE TO LOAN AND SECURITY AGREEMENT
---------------------------------------
Section 5.3 Litigation:
1. Shareholder lawsuit entitled Ronny Sussman v. AML Communications,
Inc., et. al., Case No. CIV 179776, filed March 19, 1998 in the Superior Court
for the State of California (Ventura County).
2. Shareholder lawsuit entitled Ronny Sussman v. AML Communications,
Inc., et. al., Case No. 98-2010 CAS (Ex) (C.D. Cal.), filed March 20, 1998 in
the federal district court in Los Angeles, CA.
<PAGE>
EXHIBIT A
---------
The Collateral consists of all of Borrower's right, title and interest in
and to the following:
All goods and equipment now owned or hereafter acquired, including, without
limitation, all machinery, fixtures, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of technology
or the rendering of services by Borrower, whether or not earned by performance,
and any and all credit insurance, guaranties, and other security therefor, as
well as all merchandise returned to or reclaimed by Borrower;
All documents, cash, deposit accounts, securities, securities
entitlements, securities accounts, investment property, financial assets,
letters of credit, certificates of deposit, instruments and chattel paper now
owned or hereafter acquired and Borrower's Books relating to the foregoing;
All copyright rights, copyright applications, copyright registration and
like protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; all trade secret
rights, including all rights to unpatented inventions, know-how, operating
manuals, license rights and agreements and confidential information, now
owned or hereafter acquired; all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired; all claims
for damages by way of any past, present and future infringement of any of the
foregoing; and
All Borrower's Books relating to the foregoing and any and all claims, rights
and interests in any of the above and all substitutions for, additions and
accessions to and proceeds thereof.
<PAGE>
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This Intellectual Property Security Agreement is entered into as of
October 26, 1999 by and between SILICON VALLEY BANK ("Bank") and AML
COMMUNICATIONS, INC. ("Grantor").
RECITALS
--------
A. Bank has agreed to make certain advances of money and to extend
certain financial accommodation to Grantor (the "Loans") in the amounts and
manner set forth in that certain Loan and Security Agreement by and between Bank
and Grantor dated of even date herewith (as the same may be amended, modified or
supplemented from time to time, the "Loan Agreement"; capitalized terms used
herein are used as defined in the Loan Agreement). Bank is willing to make the
Loans to Grantor, but only upon the condition, among others, that Grantor shall
grant to Bank a security interest in certain Copyrights, Trademarks, Patents,
and Mask Works to secure the obligations of Grantor under the Loan Agreement.
B. Pursuant to the terms of the Loan Agreement, Grantor has granted to
Bank a security interest in all of Grantor's right, title and interest, whether
presently existing or hereafter acquired, in, to and under all of the
Collateral.
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, and intending to be legally bound, as collateral
security for the prompt and complete payment when due of its obligations under
the Loan Agreement, Grantor hereby represents, warrants, covenants and agrees
as follows:
AGREEMENT
---------
To secure its obligations under the Loan Agreement, Grantor grants and
pledges to Bank a security interest in all of Grantor's right, title and
interest in, to and under its Intellectual Property Collateral (including
without limitation those Copyrights, Patents, Trademarks and Mask Works listed
on Schedules A, B, C, and D hereto), and including without limitation all
proceeds thereof (such as, by way of example but not by way of limitation,
license royalties and proceeds of infringement suits), the right to sue for
past, present and future infringements, all rights corresponding thereto
throughout the world and all re-issues, divisions continuations, renewals,
extensions and continuations-in-part thereof.
This security interest is granted in conjunction with the security
interest granted to Bank under the Loan Agreement. The rights and remedies of
Bank with respect to the security interest granted hereby are in addition to
those set forth in the Loan Agreement and other Loan Documents, and those which
are now or hereafter available to Bank as a matter of law or equity. Each right,
power and remedy of Bank provided for herein or in the Loan Agreement or any of
the Loan Documents, or now or hereafter existing at law or in equity shall be
cumulative and concurrent and shall be in addition to every right, power or
remedy provided for herein and the
<PAGE>
exercise by Bank of any one or more of the rights, powers or remedies provided
for in this Intellectual Property Security Agreement, the Loan Agreement or any
of the other Loan Documents, or now or hereafter existing at law or in equity,
shall not preclude the simultaneous or later exercise by any person, including
Bank, of any or all other rights, powers or remedies.
IN WITNESS WHEREOF, the parties have cause this Intellectual Property
Security Agreement to be duly executed by its officers thereunto duly authorized
as of the first date written above.
Address of Grantor: GRANTOR:
AML COMMUNICATIONS, INC.
1000 Avenida Acaso By: /s/ Kirk A. Waldren
Camarillo, CA 93012 -----------------------------
Title: President & CEO
Attn: --------------------------
------------------------
BANK:
Address of Bank: SILICON VALLEY BANK
340 N. Westlake Boulevard, Suite 150 By: /s/ Karl R. Brier
Westlake Village, California 91362 ------------------------------
Title: Vice President
Attn: Manager ---------------------------
<PAGE>
EXHIBIT A
----------
Copyrights
Description Registration/ Registration/
- ----------- Application Application
Number Date
------ ----
NONE
<PAGE>
EXHIBIT B
---------
Patents
<TABLE>
<CAPTION>
Description
- -----------
Registration/ Registration/
Application Application
Number Date
------ ----
<S> <C> <C>
Amplifier with Detuned Test Signal Cancellation for 5,768,699
Improved Wideband Frequency Response
Loss Less RF Feedback for Power Amplifier 5,469,114
Linearization
Feed Forward Cancellation Amplifier Utilizing 5,508,657
Dynamic Vector Control
Cascaded Error Correction in a Feed Forward 09/083,579 May 21, 1999
Amplifier System
Feed-Forward Amplifier Manufacturing Module 09/326,426 June 4, 1999
</TABLE>
<PAGE>
EXHIBIT C
---------
Trademarks
Description Registration/ Registration/
- ----------- Application Application
Number Date
------ ----
Repeat-A-Cell 2,098,157
<PAGE>
EXHIBIT D
---------
Mask Works
Description Registration/ Registration/
- ----------- Application Application
Number Date
------ ----
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 5,697,000 7,532,000
<SECURITIES> 0 0
<RECEIVABLES> 914,000 1,430,000
<ALLOWANCES> 0 0
<INVENTORY> 2,193,000 1,430,000
<CURRENT-ASSETS> 9,586,000 12,099,000
<PP&E> 4,585,000 4,092,000
<DEPRECIATION> 2,642,000 1,933,000
<TOTAL-ASSETS> 11,831,000 14,728,000
<CURRENT-LIABILITIES> 1,548,000 1,544,000
<BONDS> 0 0
0 0
0 0
<COMMON> 63,000 63,000
<OTHER-SE> 10,117,000 13,094,000
<TOTAL-LIABILITY-AND-EQUITY> 11,831,000 14,728,000
<SALES> 2,275,000 1,590,000
<TOTAL-REVENUES> 2,275,000 1,590,000
<CGS> 1,350,000 1,098,000
<TOTAL-COSTS> 2,432,000 2,556,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (67,000) (112,000)
<INCOME-PRETAX> (90,000) (854,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (90,000) (435,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (90,000) (550,000)
<EPS-BASIC> (0.01) (0.09)
<EPS-DILUTED> (0.01) (0.09)
</TABLE>
