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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee Required) for the fiscal year ended March 30, 1996 [ ] Transition
report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee
Required) for the transition period from to ___________ to ___________
Commission File Number: 0-9856
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AM COMMUNICATIONS, INC.
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(Name of small business issuer in its charter)
Delaware 23-1922958
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1900 AM Drive, Quakertown, Pennsylvania 18951-9004
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (215)-536-1354
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Securities Registered Under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange
on Which Registered
None
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Securities Registered Under Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[ ]
Issuer's revenues for fiscal year ended March 30, 1996 were $8,373,000. On
June 11, 1996, the aggregate market value of Registrant's outstanding
voting (Common) Stock held by non-affiliates, was approximately $10,593,000
(based on the average between the bid and the asked prices of such stock on that
date).
On June 11, 1996, there were 30,962,962 shares of the Registrant's Common
Stock, par value $.10 per share, outstanding.
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PART I
Item 1. Description of Business
AM Communications, Inc. (the "Company", "AM"), a Delaware Corporation,
designs, manufactures and markets network monitoring systems which include
hardware and software to the broadband communications market, primarily for
cable TV systems. AM has applied its technical strengths in RF communications,
microprocessor controlled circuits and application software to produce a
proprietary system that allows CATV operators to monitor the performance and
operation of the complete broadband distribution network, thereby enhancing
network reliability and optimizing performance. The Company's principal activity
from its formation in 1974 to 1989 was the construction of cable TV systems,
which was discontinued in 1989. The Company's current products have been the
result of a diversification strategy undertaken during the 1980's.
The Company's network monitoring systems are computer controlled devices
which monitor the condition and performance of cable TV and broadband
telecommunications systems. A monitoring system includes system software
installed on a PC, master control units, and transponders. These devices are
placed at various locations in a network and continuously monitor such functions
as signal levels and temperature and instantaneously report any problems, thus
enabling the operator of the system to pinpoint trouble spots and avoid or
minimize system downtime. The system software is installed on an IBM compatible
PC at the central monitoring location. The PC is connected to one or more Master
Control Units (MCU) typically located in the headend of a monitored system. The
MCU serves as a real-time "polling engine" for the software system and
communicates with remote monitors called "transponders" via a dedicated RF
frequency on the monitored broadband system. The MCU processes the PC's request
for information, communicates that request to the appropriate transponders, and
distills the response into a form that the PC will accept. The transponders are
data collection and control devices located in remote transmission equipment
(line amplifiers, power supplies, etc.), which can communicate with the MCU.
An extension of the monitoring products is the Company's performance
monitoring system, F.A.C.T.S., (Fully Automated Compliance Test System) which is
designed to assist cable TV operators in collecting and analyzing the data
associated with the mandated FCC system proof of performance tests. Performance
monitoring units can make frequency response measurements from 40 MHz through 1
GHz, can measure RF levels against alarm limits, analyze noise, distortion, and
hum, and measure channel frequencies. They also perform real-time spectrum
analysis and system sweep measures, with the results displayed in
high-resolution color graphics.
Current cable TV and broadband telecommunications systems are experiencing
significant change. The cable TV industry is undergoing a trend toward
consolidation as larger operators purchase systems from smaller operators. Cable
TV operators are also developing plans to expand their revenue base by offering
telephony services and other alternative video and multimedia services such as
video on demand, home shopping, interactive data services, distance learning,
home monitoring, etc. The U.S. telephone (telco) industry also has become
aggressive in their plans to enter the video services business by building new
communications networks capable of providing voice, video and data services. The
recent telecommunications legislation has further increased the competitive
environment among service providers.
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The communications networks conceived to be able to handle the range of
voice, video and data being planned has been termed the "information
superhighway". Both CATV operators and telephone providers desiring to provide
video services recognize a need to upgrade their existing communications
networks to provide two-way transmission and receipt of services in the near
future in order to deliver the wide range of services planned. The Company has
experienced increased demand for status and performance monitoring products as
the monitoring function has become a critical system to improve operating
efficiencies and insure the reliability of the new communication networks.
In response to this increased demand during fiscal 1996 for monitoring
systems, the Company significantly increased its development expenditures and in
April 1996 introduced its advanced status monitoring system for broadband
networks. The OminiStat(TM) system represents the second generation of
monitoring technology built on the Company's technical platform of monitoring
systems.
OmniStat(TM) is a total integrated system comprised of hardware and
software products designed to address the evolving need for standards based
network management architectures. The product family consists of OmniVU(TM)
software, OmniProbe transponders, and the OmniMCU headend controller.
The OmniVU(TM) monitoring software is a multi-user, multi-tasking system
that runs under either Windows 95 or Windows NT. Features include Topologer, a
schematic-based display node that allows a user to view the status of regions,
systems, headends and distribution networks. The system is designed specifically
to address new market requirements for integrated, enterprise wide network
management systems and allows users to interface OmniVU(TM) to operation support
systems and other third party software applications. The Company commenced
shipment of its initial release of OmniVU(TM) in April 1996.
OmniProbe transponders are available for virtually every major brand and
type of network distribution equipment, including amplifiers, power supplies,
and optical nodes. Products include new models with features such as frequency
agility communications and downloadable firmware and existing legacy AM monitor
products.
OmniProbe amplifier monitors are available for popular amplifier brands.
These transponders monitor amplifier internal currents, voltages, signal levels,
and temperature and perform certain control functions.
OmniProbe power supply transponders monitor and control the status of
standby power packs and provide notice of local power failures, state of
batteries, input and output voltages, output current demand, enclosure
temperature and monitor the RF levels of the system monitoring communications
channels.
OmniProbe fiber node transponders monitor and control the operation of the
fiber optic node equipment and measure the optical power received by the node,
as well as the power supply voltages, currents, and temperature within the node.
Node monitors also allow remote control of the possible operational modes of the
node.
In addition, the Company markets an inexpensive general purpose control
modem which monitors and controls non-network equipment such as building
security functions, headend switching equipment, and other on/off monitoring and
control functions.
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The OmniMCU is based on an industrial PC platform, and features
intelligent, frequency agile RF modem cards manufactured by AM. The OmniMCU
polls transponders at the rate of 250 units/second, and processes transponder
alarms in less than 3 seconds, regardless of system size. Each OmniMCU can
control up to 10,000 OmniProbe transponders. The Company expects to commence
shipment of the OmniMCU during the second quarter of fiscal 1997.
The Company's strategy has been to form close working relationships with
the major network equipment suppliers and to develop customized monitors which
meet the specific requirements including size and performance characteristics
for each type of network equipment offered. The Company's system is generally
inter-operable with most cable network distribution and transmission equipment.
The Company believes it has the broadest monitoring product line in the
monitoring industry.
In addition, several of these network equipment suppliers have entered into
OEM agreements with AM to private label the AM product. The Company currently
has OEM agreements with Lucent Technologies, General Instrument and Philips
Broadband Systems. In June 1996, the Company signed an OEM and joint development
agreement with Scientific Atlanta. Under this agreement, Scientific-Atlanta will
license and market AM Communications' status monitoring and control system,
OmniStat(TM), for its broadband transmission products, including RF amplifiers
and opto-electronics equipment. A second phase will involve joint development of
new transponder technology for other Scientific-Atlanta products.
There are several communications delivery technologies which can be
utilized in building the "information superhighway" communications network,
including hybrid fiber/coax (HFC), fiber-to-the curb (FTTC), wireless and
others. HFC technology is being utilized most extensively by the CATV providers
due to its economics and proven architecture and also has been recently chosen
by several telephone providers as the technology used to build their video
delivery systems. The Company's current products are substantially focused in
HFC architecture systems, however, the Company is undertaking a strategy to
broaden its product base. Should the industry adopt other competing
architectures or the Company be unsuccessful in broadening its product base, the
Company's revenue opportunities for its existing products could be adversely
affected.
The Company's business is not subject to marked seasonal fluctuation.
Major Customers
Two customers in fiscal 1996 and three customers in fiscal 1995 accounted
for 10% or more of total revenues as follows: 60% and 12% in fiscal 1996 and
40%, 20%, and 18% in fiscal 1995. Approximately 51% of accounts receivable at
March 30, 1996 represents balances due from the one customer in fiscal 1996. In
March 1996, the Company received notice from the customer who contributed 60% of
fiscal 1996 revenues, that open orders totaling $2 million were being
temporarily put on hold. Subsequently, the Company reached a preliminary
agreement to cancel a portion of these orders as part of a negotiated settlement
which is expected to provide cash payments to AM sufficient to recover the
carrying cost of inventory related to these orders. There is no assurance that
any of such customers will be the source of significant revenues to the Company
during the next fiscal
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year. The Company's customer base changes from year to year due, in part, to
industry rebuild and upgrade cycles.
Backlog
At June 11, 1996, the Company's backlog of orders totaled $2.4 million, net
of orders cancelled as described above, as compared with a backlog of $4.8
million as of June 11, 1995. All orders in the backlog are expected to ship
during fiscal 1997.
Marketing and Markets
The Company sells its products directly to end user customers through its
OEM (original equipment manufacturer) relationships, through its direct sales
force, and through independent sales representatives in selected international
markets. Beginning in fiscal 1996, the Company expanded its direct sales
strategy for the U.S. market by hiring direct sales staff to replace third party
sales representatives and expanding promotional advertising and trade show
participation which previously was limited. Direct end user accounts are
typically large cable television systems where considerable time and technical
support are necessary to complete a sale and ensure proper installation and
customer satisfaction. The complex nature of the Company's products necessitates
close on-going marketing and technical engineering support for its direct end
users, OEM partners, and representatives. This is accomplished, when possible,
through telephone support but during initial product demonstration, installation
and subsequent after sale support, on site support by the Company's technical
personnel is required. The Company's marketing activity is also directed towards
establishing strategic OEM relationships in which the OEM customer will buy the
Company's products and include them as part of an integrated package to the
OEM's customers. The Company also utilizes its OEM relationships to assist in
defining new products. Direct end user customers and sales representatives
generated 27% of the Company's sales, and OEM partnerships generated 73% of
sales during fiscal 1996 compared to 32% and 68%, respectively in fiscal 1995.
Promotional advertising and trade show participation also play a key role in
increasing customer awareness and establishing brand recognition.
Manufacturing and Supplies
The Company purchases parts, components and subassemblies (some of which
are designed by the Company) necessary for its products from various suppliers,
primarily in the United States. These materials are then assembled by the
Company into finished products which often are integrated with standard
peripherals. The Company has recently begun to utilize third party vendors for
assembly of higher volume products. The Company develops the proprietary
hardware used to control various network systems, as well as the software for
such systems. The Company's operations also include extensive testing of its
systems and components.
The Company generally has multiple sources of supply for the various
component parts which it purchases. However, shortages or delayed deliveries of
certain components are possible and could have an adverse effect on the
Company's business.
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Product Development
Certain areas of the Company's business involve sophisticated technology
and undergo rapid technological change. The Company's ability to compete
successfully in these areas will depend upon the continued refining and
enhancing of its existing products and its development of new products.
The Company currently maintains OEM agreements with General Instrument
(GI), Lucent Technologies (Lucent), and Philips Broadband Networks (Philips).
The Company previously had agreements with Texscan and HP-Calan, which are no
longer in effect. Under these agreements, the Company generally designs customer
specific versions of its monitoring products and allows OEM's to purchase
private label versions of these products for resale. Development is undertaken
pursuant to an agreement which may include funding of a portion of the
development costs. Under certain instances, the Company may market the OEM
specific products directly and pay the OEM a royalty. The OEM agreements do not
require the purchase of any minimum quantity of product.
The Company continues to work towards establishing new OEM relationships as
well as expanding existing relationships. During June 1996, the Company executed
a new OEM and joint development agreement with Scientific Atlanta, a major
equipment provider to the CATV industry.
The Company's research and development costs totaled $2,234,000 in fiscal
1996, net of $68,000 charged to cost of sales. The Company's research and
development costs totaled $902,000 in fiscal 1995, net of $109,000 charged to
cost of sales and $274,000 of capitalized software costs.
Competition
The diversity of product lines including compatibility with OEM
distribution equipment, product features, software, equipment reliability,
price, technical support and warranty terms are major factors of competition in
the CATV network monitoring market. The Company has substantially increased its
spending in research and development and marketing during fiscal 1996 and
believes that it has improved its competitive position with respect to these
factors.
The network systems monitoring market is intensely competitive and the
Company must continue to invest significant amounts in technology development to
maintain or increase its market position.
The Company's major competitor for its monitoring system is Superior
Electronics, a Florida based company. The Company also competes with smaller OEM
suppliers who continue to market their own line of monitoring products.
There can be no assurance that either existing or new competitors will not
develop products or provide services that are more advanced than the Company's
products or services or achieve greater market acceptance.
The Company's family of status monitoring products is designed to be
compatible with many brands of amplifiers and power supplies. This has enabled
the Company to form
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business relationships with OEM suppliers who otherwise would have been
competitors but who chose to replace their status monitoring equipment with a
product developed by the Company.
Warranties
The Company warrants its products against defects in materials and
workmanship for up to five years for its performance/status monitoring products.
Warranties on these products are on a repair or replacement policy.
Patent Protection
It is the Company's policy to seek patents on significant products and
systems where possible and to take other measures to protect proprietary
information concerning its products and systems. The Company holds several
patents relating to its status monitoring products. Most of these patents have
been issued or applied for within the last five years. The Company believes that
its patents are of significant importance to the Company.
Government Regulation
The Company's manufacturing activities are not subject to any significant
direct governmental regulations, other than those generally applicable to
manufacturers.
Employees
As of June 5, 1996, the Company had 73 employees, 67 of whom were full-time
employees including 8 in administration, 8 in marketing and sales, 25 in
engineering, and 26 in manufacturing.
Item 2. Description of Property.
The Company's office and production operations are located in Quakertown,
PA in a modern leased facility on 60 acres. The building contains 46,000 sq. ft.
of which the Company leases 50%. The Company's lease, which expires on June 30,
1996, has been extended on a month-to-month basis and it is currently evaluating
several facility alternatives which would expand the amount of leased space.
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Item 3. Legal Matters.
On June 6, 1996, the Company was served with a lawsuit filed by Computer
Aid, Inc. in the District Court of Eastern PA. The lawsuit, which names the
Company and other parties, including Hewlett-Packard , Inc., as defendants,
alleges that the defendants acted to wrongfully assert dominion over and exploit
Computer Aid's software product, misappropriated trade secrets and prevented
Computer Aid from marketing its product. The suit seeks damages in excess of
$100 million. The Company believes that the allegations are without merit, and
the Company intends to vigorously defend itself.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Common Equity and Related Stockholders Matters.
The Company's Common Stock is traded in the over-the-counter market under
the symbol AMCI. The following table sets forth the closing bid quotations as
supplied by NASD market makers. These quotations reflect inter-dealer prices,
without retail mark-ups, mark-downs or commissions and do not necessarily
represent actual transactions.
Bid Quotations
Fiscal Quarter High Low
1996
First Quarter 2 1/2 1 1/8
Second Quarter 1 9/16 1
Third Quarter 13/16 3/4
Fourth Quarter 11/16 9/16
1995
First Quarter 3/4 1/4
Second Quarter 7/8 5/8
Third Quarter 2 1/2 3/4
Fourth Quarter 2 5/8 1 3/4
As of June 11, 1996 there were approximately 1,067 holders of record of the
Company's Common Stock.
The Company has never declared nor paid any dividends on its Common Stock.
The Board of Directors currently intends to retain any earnings for use in the
Company's business, and does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future.
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Item 6. Management's Discussion and Analysis of Operations
Since 1990 when the Company exited the cable TV construction business, it
has transitioned to an electronics product manufacturing business. In the
process, the Company made significant research and development expenditures and
incurred significant losses in its construction and products businesses. During
this time, the Company's operating deficiencies were supported by loans from the
majority stockholder totaling $6,557,000, which effective March 31, 1994, were
converted from long term debt to equity with accrued interest forgiven. This
conversion resulted in the Company's negative equity of $4,908,000 changing to a
positive equity of $2,004,000 at fiscal year ended April 2, 1994.
Management has undertaken a strategy to expand the business in response to
increased demand for status monitoring products worldwide. This has resulted in
significant expansion of research and development and marketing expenditures. As
a result, the Company incurred an operating loss in fiscal 1996, which was
funded primarily by an exercise of stock warrants which occurred in April 1995.
See "Description of Business".
The Company expects to continue its level of commitment to expand its
business and anticipates revenue growth in fiscal 1997, however no assurance can
be provided that revenue levels will be sufficient to allow the Company to
achieve profitability.
Results of Operations
Fiscal 1996 vs. 1995
Fiscal 1996 Fiscal 1995
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Revenues 100.0% 100.0%
Costs of Sales 63.1 60.9
Selling, General and Administrative 23.6 23.1
Research and Development 26.7 17.1
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Operating Loss (13.4) (1.1)
Other Income (.3) (.1)
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Loss Before Taxes (13.1) (1.0)
Income Tax Provision (Benefit) --- (15.5)
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Net Income (Loss) (13.1)% 14.5 %
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Revenues
Revenues for the fiscal year ended March 30, 1996 were $8.4 million,
representing a 58.5% increase compared to fiscal 1995 revenues. This increase in
revenues is due to increased demand for the Company's status and performance
monitoring products and the Company's success in expanding its OEM
relationships. Revenues from OEM relationships represented 73% of revenues in
fiscal 1996 compared to 68% in 1995. The increase in revenues is a result of new
product introductions developed as part of strategic OEM relationships with
these customers. The Company maintains key strategic OEM relationships with
Lucent Technologies, General Instrument, and Philips. In June 1996, the Company
signed an OEM agreement with Scientific-Atlanta.
During fiscal 1996, 60% of the Company's revenues were derived from sales
to one customer, Lucent Technologies. In the fourth quarter of fiscal 1996, AM
was notified by this
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OEM that open orders totaling $2 million were temporarily put on hold.
Subsequently, the Company reached a preliminary agreement to cancel a portion of
these orders as part of a negotiated settlement which is expected to provide
cash payments to AM sufficient to recover the carrying cost of inventory related
to these orders.
Backlog at June 11, 1996 was $2.4 million down from $4.8 million at June
11, 1995. The drop in backlog is due to the cancellation of open orders from the
major customer. Notwithstanding this, the Company is currently experiencing a
significant increase in the volume (both quantity and dollar value) of new sales
opportunities, driven by increased demand from both cable operators and major
telephone providers which are entering the market for video and data services.
However, there can be no assurance that these opportunities can be converted
into sales orders or that such orders would be sufficient to replace the volume
of business related to Lucent as described above.
Cost of Sales
Costs of sales includes manufacturing costs of the Company's hardware
products, inventory reserves and costs related to development revenues. Cost of
sales represented 63.1% of revenues in fiscal 1996 compared to 60.9% in fiscal
1995. The Company's margins are generally dependent on product mix and customer
mix, with sales to OEM customers generally having a lower profit margin. During
fiscal 1995 and 1996 the Company experienced a growth in manufacturing volume
related to increased demand and new product introductions. The Company has
responded by increasing manufacturing capacity including expansion of its work
force and use of third party contractors.
Cost of sales were impacted in fiscal year 1996 due to production
inefficiencies and higher costs in ramping new products to volume production.
This included excessive yield losses, product research, capacity limitations and
expediting costs. The Company responded to these by re-designing certain
products, evaluation and qualification of new contract assemblers and
restructuring the management of the manufacturing operations. The Company
experienced improvements resulting from these actions as cost of sales comprised
55.8% of revenue during the fourth quarter of fiscal 1996.
During fiscal 1995 and 1996, the Company recorded significant charges
related to establishing inventory reserves due to product transitions. Charges
of $958,000 and $300,000 were recorded in fiscal 1995 and 1996, respectively, as
the Company evolved its product line to address changing needs in the
marketplace.
Development costs charged to costs of sales were $68,000 and $109,000 in
fiscal 1996 and 1995, respectively. Development revenues primarily related to
OEM development efforts, totaled $456,000 and $292,000 in fiscal 1996 and 1995,
respectively. Development revenues are recognized when defined milestones are
reached, the timing of which may be different from when the related development
expenses were incurred.
Selling, General and Administrative
Selling, general and administrative (S,G&A) expenses were $2.0 million in
fiscal 1996, compared to $1.2 million in fiscal 1995, representing a 62.1%
increase. Expenses increased in 1996 due to increased marketing and sales costs
related to expanded business opportunities including establishment of a direct
sales strategy. The Company expects S,G&A expenses to increase in the future as
it continues to expand its sales force, field
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support and marketing activities and increases its administrative staff to
support increased growth opportunities world-wide.
Research and Development
Research and development expense increased $1.3 million to $2.2 million in
fiscal 1996, compared to $902,000 in fiscal 1995. Expenses increased in fiscal
1996 due to expanded OEM development efforts and expanded hardware and software
development efforts resulting in the introduction in April 1996 of the Company's
OmniStat(TM) monitoring system.
During fiscal 1995, the Company capitalized certain software development
costs (refer to Note 1 in Notes to the Financial Statements) which totaled
$218,000. None of the Company's software development efforts in fiscal 1996 met
the requirements for capitalization. The Company expects research and
development activities to continue to increase as it focuses on expanding
development of new status monitoring products and software and evaluation of
technology opportunities in related products and markets.
Income Taxes
Due to the significant net operating loss carryforward, the Company pays
minimum income taxes which include state income taxes and limited federal income
taxes.
Included as a component of income taxes for fiscal 1995 was a significant
positive income tax adjustment totaling $936,000 to recognize a portion of the
future income tax benefits available to the Company. In 1995, the Company had
determined that future realization of a portion of the available tax benefit
totaling $936,000 was "more likely than not" to occur. Accordingly, the Company
recorded a $936,000 positive tax adjustment reflected as a deferred tax asset on
the Balance Sheet and a positive income tax expense in the Statement of
Operations for 1995. The Company evaluated the carrying value of this asset for
fiscal 1996, and determined that no adjustment was necessary.
Operating Loss
The Company experienced a significant operating loss of $1,123,000 for
fiscal 1996, primarily due to the $1.3 million increase in research and
development expenses as the Company developed and launched its OmniStat(TM)
monitoring system. The Company reported an operating loss of $59,000 for fiscal
1995, primarily due to the $958,000 inventory reserve recorded. Fiscal 1995
operating income would have been $899,000, excluding the effect of the inventory
reserve.
Industry Factors
The cable and broadband communications industry is undergoing significant
change as cable television (CATV) operators begin to respond to the competitive
threat of telephone companies (telcos) entering the cable video services market.
This has resulted in CATV operators planning to expand and upgrade their
distribution infrastructures and telcos planning to construct new distribution
systems capable of providing telephony and video services. There continues to be
many unresolved issues and uncertainties impacting this convergence of CATV and
telecommunications industries including governmental regulations, competing
distribution technologies, and significant capital costs.
Demand for the Company's monitoring products has increased as monitoring of
cable distribution systems has become an important factor in increasing
operating efficiency and reliability. The Company believes it is positioned
favorably to take advantage of
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opportunities in the evolving "information superhighway", however, any increased
demand for the Company's products related to this changing environment is
subject to risk.
In addition, the Company's operations are subject to the timing and success
of new product introductions and the scheduling of orders by customers. Due to
the effects of these factors on future operations, past performance is a limited
indicator in assessing potential future performance and such factors could
impact the trading price of the Company's common stock.
Liquidity and Capital Resources
In 1996, the Company's operating activities consumed net cash of
$1,916,000 due primarily from increased inventories, increased receivables and
operating losses. Cash used in operations totaled $217,000 in fiscal 1995.
In fiscal 1996, the Company financed its operations primarily through cash
provided by exercise of warrants and stock options. During April 1995, warrants
to purchase a total of 5,848,470 shares of common stock were exercised at $.45
per share with cash proceeds totaling $1,781,000 (of which $351,000 was received
prior to the end of fiscal 1995 and reflected as an advance pending exercise in
April 1995) and an interest bearing $851,000 note receivable provided by the
majority shareholder due and paid on June 30, 1995. Exercise of stock options
during fiscal 1996 provided an additional $266,000 of cash.
As of March 30,1996, the Company's cash totaled $664,000 compared to
$454,000 at April 1, 1995. In addition, the Company has reached a preliminary
agreement with a major customer regarding their liability related to the
cancellation of open purchase orders, which is expected to provide cash payments
sufficient to allow AM to recover its inventory investment related to these
orders. The exact timing of these payments is still being negotiated The Company
is also focusing its efforts on reaching profitability through the increasing
sales and marketing efforts including the introduction of its next generation
monitoring system called OmniStat(TM) which was introduced in April 1996,
greater promotional and trade show activities, and expansion of direct sales and
OEM activities. The Company believes that these sources of liquidity, including
projected cash flows from operations and the net operating loss carry forwards,
will satisfy the projected working capital and capital expenditure requirements
for at least the next twelve months.
Capital expenditures totaled $594,000 in fiscal 1996 and $133,000 in fiscal
1995 and include computers, manufacturing assembly and test equipment. Included
in capital expenditures in fiscal 1996 is $286,000 of equipment purchased under
capital leases.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS 123) was issued in October 1995. SFAS 123 gives
companies the options and stock based awards or to continue to account for such
items using the intrinsic value method as outlined under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25) with
pro forma disclosures of net income and net income per share as if the fair
value method applied. The Company intends to continue to apply APB 25 for
future stock options and stock based awards, and, accordingly, does not
anticipate that the adoption of SFAS 123 will have a material impact on its
results of operations or financial position.
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Item 7. Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
AM Communications, Inc.
Quakertown, Pennsylvania
We have audited the accompanying balance sheet of AM Communications, Inc. as of
March 30, 1996, and the related statements of operations, retained earnings, and
cash flows for the year ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The accompanying financial
statements of AM Communications, Inc. as of April 1, 1995 were audited by other
auditors whose report thereon dated June 26, 1995 expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the financial position of AM Communications, Inc. as
of March 30, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
June 21, 1996
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
AM Communications, Inc.
Quakertown, Pennsylvania
We have audited the accompanying balance sheet of AM Communications, Inc. as of
April 1, 1995 and the related statements of operations and stockholders' equity
and cash flows for the fiscal year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of AM Communications, Inc. as of April 1, 1995,
and the results of its operations and its cash flows for the fiscal year then
ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Philadelphia, PA
June 21, 1996
14
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
Fiscal Year Ended
March 30, April 1,
1996 1995
------------ ----------
Revenues:
Product Sales $ 8,373,000 $ 5,280,000
Costs and Expenses:
Cost of Sales 5,285,000 3,218,000
Selling, General and Administrative 1,977,000 1,219,000
Research and Development 2,234,000 902,000
----------- -----------
Operating Loss (1,123,000) (59,000)
Other Income (34,000) (10,000)
----------- -----------
Loss Before Income Taxes (1,089,000) (49,000)
Income Tax Provision (Benefit) 12,000 (816,000)
----------- -----------
Net Income (Loss) $(1,101,000) $ 767,000
=========== ===========
(Loss) Earnings Per Weighted Average
Common and Common Equivalent Share ($.04) $0.02
====== =====
Weighted Average Common and Common
Equivalent Shares Outstanding Used
in Computing Earnings Per Share 30,042,000 33,823,000
=========== ===========
See Notes to Financial Statements
15
<PAGE>
AM COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 30, April 1,
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current Assets:
Cash ........................................... $ 664,000 $ 454,000
Accounts Receivable, Less Allowance for Doubtful
Accounts of $9,000 - 1996 and $2,000 - 1995 . 1,588,000 811,000
Inventory ...................................... 2,334,000 1,360,000
Prepaid Expenses and Other ..................... 112,000 42,000
Deferred Tax Asset ............................. 229,000 229,000
------------ ------------
Total Current Assets ..................... 4,927,000 2,896,000
Equipment and Fixtures, Net ....................... 565,000 194,000
Intangibles, Net of Accumulated Amortization of
$473,000 - 1996 and $469,000 - 1995 ............ 54,000 57,000
Deferred Software Development Costs, Net of
Accumulated Amortization of $481,000 - 1996,
and $315,000 - 1995 ............................ 162,000 308,000
Other ............................................. 20,000 19,000
Deferred Tax Asset, Net ........................... 707,000 707,000
------------ ------------
Total Assets ...................................... $ 6,435,000 $ 4,181,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Capital Lease Obligations ... $ 63,000 $ --
Accounts Payable ............................... 1,233,000 600,000
Advances ....................................... 39,000 368,000
Accrued and Other Expenses ..................... 375,000 395,000
------------ ------------
Total Current Liabilities ................ 1,710,000 1,363,000
------------ ------------
Capital Lease Obligations - Long Term ............. 110,000 --
------------ ------------
Total Liabilities ........................ $ 1,820,000 $ 1,363,000
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Senior Convertible Redeemable Preferred Stock,
$100 Par Value, Authorized; Issued and
Outstanding 25,825 Shares in 1996 and 1995 .. 2,583,000 2,583,000
Common Stock, $.10 Par Value, Authorized
40,000,000 Shares in 1996 and 1995; Issued
and Outstanding 30,962,962 Shares in 1996,
24,564,391 Shares in 1995 ................... 3,096,000 2,456,000
Capital in Excess of Par .......................... 30,940,000 28,682,000
Accumulated Deficit ............................... (32,004,000) (30,903,000)
------------ ------------
Stockholders' Equity ........................ 4,615,000 2,818,000
------------ ------------
Total Liabilities & Stockholders' Equity .......... $ 6,435,000 $ 4,181,000
============ ============
</TABLE>
See Notes to Financial Statements
16
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
Senior Convertible
Preferred Stock Common Stock Capital
-------------------- -------------------- in Excess Accumulated
Shares Amount Shares Amount of Par Deficit
------ ------ ------ ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance,
April 2, 1994 25,825 $2,583,000 24,457,724 $2,446,000 $28,645,000 $(31,670,000)
Exercise of
Warrants --- --- 105,000 10,000 37,000 ---
Exercise of
Incentive Stock
Options --- --- 1,667 --- --- ---
Net Income for
Year Ended
April 2, 1995 --- --- --- --- --- 767,000
------ ---------- ---------- ---------- ----------- ----------
Balance,
April 1, 1995 25,825 $2,583,000 24,564,391 $2,456,000 $28,682,000 $(31,903,000)
====== ========== ========== ========== =========== ============
Exercise of
Warrants --- --- 5,848,570 585,000 2,047,000 ---
Exercise of
Incentive Stock
Options --- --- 550,001 55,000 211,000 ---
Net Loss
for Year
March 30, 1996 --- --- --- --- --- (1,101,000)
------ ---------- ---------- ---------- ----------- ----------
Balance,
March 30, 1996 25,825 $2,583,000 30,962,962 $3,096,000 $30,940,000 $ 30,004,000
====== ========== ========== ========== =========== ============
</TABLE>
See Notes to Financial Statements
17
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
March 30, April 1,
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $(1,101,000) $ 767,000
Adjustments to Reconcile Net Income to Net
Cash Provided By (Used In) Operating Activities:
Depreciation and Amortization 372,000 200,000
Changes in Assets and Liabilities Which
Provided (Used) Cash:
Accounts Receivable (777,000) (19,000)
Inventory (974,000) (94.000)
Prepaid Expenses and Other (71,000) (28,000)
Deferred Income Taxes -- (936,000)
Accounts Payable 633,000 315,000
Advances 22,000 17,000
Accrued and Other Expenses (20,000) (5,000)
----------- -----------
Net Cash Used In
Operating Activities (1,916,000) (217,000)
----------- -----------
Cash Flows From Investing Activities:
Purchase of Equipment & Intangible Assets (396,000) (133,000)
Deferred Software Development Costs -- (218,000)
Net Cash Used In Investing Activities (396,000) (351,000
Cash Flows from Financing Activities:
Exercise of Warrants and Stock Options 2,547,000 47,000
Advance Payment for Warrant Exercise -- 351,000
Proceeds from Issuance of Short Term Debt -- 200,000
Repayments of Short Term Debt -- (200,000)
Payments Under Capital Lease Obligations (25,000) --
----------- -----------
Net Cash Provided By Financing Activities 2,522,000 398,000
----------- -----------
Net Increase in Cash 210,000 264,000
Cash:
Beginning 454,000 190,000
----------- -----------
Ending 664,000 $ 454,000
=========== ===========
Interest Paid $ 9,000 $ 4,000
=========== ===========
Income Taxes Paid $ 37,000 $ 175,000
=========== ===========
Non-Cash Financing Activities:
Equipment Purchased Under Capital Lease $ 198,000 $ --
=========== ===========
</TABLE>
See Note 4 with respect to conversion of debt to Common and Preferred Stock.
See Notes to Financial Statements
18
<PAGE>
AM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies:
Description of Business
AM Communications, Inc. (the "Company", "AM"), a Delaware Corporation,
designs, manufactures and markets network monitoring systems which include
hardware and software to the broadband communications markets, primarily for
cable TV systems.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to the end of March.
The fiscal years ending March 30, 1996 and April 1, 1995 included 52 weeks each.
Revenue Recognition
AM Communications, Inc. (the "Company") derives its revenues principally
from sales of its products to the cable TV and data communications industries.
As is customary in the industry, the Company's sales are made pursuant to
individual purchase orders and are recognized upon the shipment of the product.
In 1996, revenue of approximately $300,000 was recognized under a
bill-and-hold transaction related to the cancellation of certain purchase orders
as discussed in Note 9 to the financial statements. The related receivable
remains outstanding at March 30, 1996.
Inventory
Manufacturing inventory which comprises raw materials, work-in-process and
finished goods is valued at the lower of cost (first-in, first-out method) or
market.
Equipment and Fixtures
Equipment and fixtures are stated at cost. Depreciation is provided over
the estimated useful lives of the related assets using the straight-line method.
Intangibles
Intangibles include goodwill and the costs associated with the acquisition
of patents and fees for the successful defense of patents. Goodwill is being
amortized over 40 years and amortization of patents is being provided on a
straight-line basis, over their estimated useful lives of five years. Costs
related to unsuccessful patents or patents relating to products no longer
manufactured are written off.
Deferred Software Development Costs
Costs incurred for the successful production of computer software that is
used as an integral part of certain of the Company's products are not
capitalized until technological
19
<PAGE>
feasibility has been established for the software, and all research and
development activities for the software and for the other components of the
product have been completed. Deferred software development costs consist of
direct salaries, related payroll costs and other direct costs. Amortization, on
a product-by-product basis, commences upon the product's general release to
customers and occurs over a period of three years as a function of estimated
product life. Amortization of deferred software development costs charged to
research and development expense was $146,000 for the year ended March 30, 1996
and $110,000 for the year ended April 1, 1995. Other research and development
costs are expensed currently. None of the Company's software development efforts
in fiscal 1996 met the requirements for capitalization. Income Taxes
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes".
Use of Estimates
The Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) was issued in October 1995. SFAS 123 gives
companies the option to adopt the fair value method for expense recognition of
employee stock options and stock based awards or to continue to account for such
items using the intrinsic value method as outlined under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25) with
pro forma disclosures of net income and net income per share as if the fair
value method applied. The Company intends to continue to apply APB 25 for future
stock options and stock based awards, and, accordingly, does not anticipate that
the adoption of SFAS 123 will have a material impact on its results of
operations or financial position.
Income (Loss) Per Common Share
Income per common and common equivalent share has been computed based on
the weighted average number of common shares outstanding during the period plus
the effect of common shares contingently issuable (to the extent such shares
have a dilutive effect) for convertible preferred stock, options and warrants.
In loss years common stock equivalents are not included int the calculation of
loss per share.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
20
<PAGE>
Note 2. Inventory:
March 30, April 1,
1996 1995
------------- -------------
Raw Material $ 2,205,000 $ 1,572,000
Work-in-Process 1,087,000 610,000
Finished Goods 310,000 169,000
------------- -------------
3,602,000 2,351,000
Inventory Reserves (1,268,000) (991,000)
------------- -------------
Net Inventory $ 2,334,000 $ 1,360,000
============= =============
During fiscal years 1996 and 1995, the Company increased the inventory
reserve to reflect product line transitions which has resulted from new product
development. The reserve represents management's estimate of excess inventory
not usable in new product generations.
Note 3. Equipment and Fixtures:
<TABLE>
<CAPTION>
Estimated March 30, April 1,
Useful Lives 1996 1995
------------ ------------- --------------
<S> <C> <C> <C>
Equipment 3-5 yrs. $ 3,161,000 $ 2,580,000
Furniture and Fixtures 3-5 yrs. 172,000 172,000
------------- --------------
3,333,000 2,752,000
Accumulated Depreciation & Amortization (2,768,000) (2,558,000)
------------- --------------
$ 565,000 $ 194,000
============= ==============
</TABLE>
Note 4. Related Party Transactions:
Pursuant to an agreement (the "1994 Agreement") with the Company's majority
stockholder, Alvin Hoffman, as of March 31, 1994, all long term debt owed by the
Company to Mr. Hoffman was converted to equity. As part of this agreement,
$2,200,011 of the debt was converted into 4,888,913 shares of the Company's
Common Stock at $0.45 per share, and $2,582,500 of the debt was converted into
25,825 shares of Senior Convertible Redeemable Preferred Stock, par value $100
per share. This preferred stock can be converted into Common Stock at $1.00 per
share. Also as part of the agreement, $1,774,344 of accrued interest owed by the
Company to Mr. Hoffman was completely forgiven. The excess of the outstanding
principal balance of the debt converted and the interest forgiven less legal
costs ($26,000) over the aggregate par value of the preferred and common stock
issued to Mr. Hoffman in connection with the conversion was credited to
additional paid in capital. This conversion resulted in the Company's negative
equity changing to a positive equity.
21
<PAGE>
Note 5. Accrued Expenses:
Accrued expenses consist of the following items:
March 30, April 1,
1996 1995
-------- --------
Accrued Compensation $182,000 $107,000
Bonus Pay Accrual -- 85,000
Commissions -- 2,000
Accrued Taxes 1,000 --
Accrued Professional Fees 32,000 31,000
Other 160,000 170,000
-------- --------
$375,000 $395,000
======== ========
Note 6. Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109.
The provision (benefit) for income taxes consisted of:
Fiscal 1996 Fiscal 1995
------------- -------------
Current Income Taxes $ 12,000 $ 120,000
Deferred Income Taxes (708,000) (149,000)
Change in Valuation Allowance 708,000 (787,000)
------------- -------------
Net $ 12,000 $ (816,000)
============= =============
A reconciliation between the provision for income taxes, computed by
applying the statutory federal income tax rate of 34% to income before income
taxes and the actual provision for income taxes follows:
Fiscal 1996 Fiscal 1995
----------- -----------
Federal Income Tax Provision at Statutory Rate $ (370,000) $ (16,000)
State Income Taxes, Net of Federal Benefit (37,000) (2,000)
Research and Development Credits (50,000) (47,000)
Other (239,000) 36,000
Change in Valuation Allowance 708,000 (787,000)
---------- ----------
Income Tax Provision $ 12,000 $ (816,000)
========== ==========
The components of the net deferred tax asset as of March 30, 1996 and April
1, 1995 were as follows:
March 30, 1996 April 1, 1995
-------------- -------------
Deferred Tax Items:
Inventory $ 515,000 $ 416,000
Accrued Expenses and Reserves 98,000 95,000
Net Operating Loss Carryforwards 6,869,000 6,220,000
Tax Credit Carryforwards 526,000 569,000
Valuation Allowance (7,072,000) (6,364,000)
------------- -------------
Net Deferred Tax Assets $ 936,000 $ 936,000
============= =============
22
<PAGE>
Included as a component of income taxes for fiscal 1995 was a significant
positive income tax adjustment totaling $936,000 to recognize a portion of the
future income tax benefits available to the Company. In 1995, the Company had
determined that the future realization of a portion of the available tax benefit
totaling $936,000 was "more likely than not" to occur. Accordingly, the Company
recorded a $936,000 positive tax adjustment reflected as a deferred tax asset on
the Balance Sheet and a positive income tax expense in the Statement of
Operations for 1995. The Company evaluated the carrying value of this asset for
fiscal 1996, and determined that nor adjustment was necessary.
The Company has total net operating loss carryforwards available to offset
future taxable income of $25,600,000 expiring at various times from 1996 to
2011. Due to certain statutory limitations under Internal Revenue Code Section
382, only $19,737,000 of such carryforwards are available at March 30, 1996. The
remaining carryforwards of $5,863,000 will become available ratably over the
carryforward period.
23
<PAGE>
Note 7. Operating Leases:
The Company leases its building under a lease expiring in June, 1996 which
has been extended on a month-to-month basis. The Company also leases certain
equipment under short term leases. Rental expense charged to operations for
fiscal years 1996 and 1995 was $250,000 and $199,000, respectively. At March 30,
1996, the rental payments for the next fiscal year under the current lease are
$53,000. The Company is currently evaluating facility alternatives.
Note 8. Obligations Under Capital Leases:
The Company has capital lease agreements for machinery and equipment as
follows:
March 30,
1996
-----------
Capitalized cost $ 286,000
Accumulated amortization (118,000)
-----------
$ 168,000
Amortization expense on assets capitalized under capital lease obligations
is included in depreciation and amortization. The lease agreements are secured
by the leased property.
Future minimum lease payments under capital leases for following fiscal
years, together with the present value of the net minimum lease payments as of
March 30, 1996, are:
1997 $ 80,000
1998 79,000
1999 46,000
----------
Total minimum lease payments 205,000
Less amount representing interest 32,000
----------
Present value of net minimum lease payments 173,000
Less current maturities 63,000
----------
Capital lease obligations - long term $ 110,000
==========
Note 9. Business, Major Customers, and Credit Risk:
The Company has one operating segment which manufactures and supplies
products and services to the broadband telecommunications and the cable TV
industries. The majority of the Company's revenues and accounts receivable
relate to customers in these industries. Approximately 51% of accounts
receivable at March 30, 1996, represents a balance due from one customer.
Two customers in fiscal 1996 and three customers in 1995 accounted for 10%
or more of the Company's revenues as follows: 60%, and 12% in fiscal 1996 and
40%, 20%, and 18% in fiscal 1995.
24
<PAGE>
In the fourth quarter of fiscal 1996, the Company was notified by the OEM
that contributed 60% of fiscal 1996 revenue that open orders totaling $2 million
were put on hold. Subsequently, the Company reached a preliminary agreement to
cancel a portion of these orders as part of a negotiated settlement which is
expected to provide cash payments to AM sufficient to cover the carrying cost of
inventory related to these orders.
Note 10. Capital Stock:
The Company has an incentive stock option plan (the "1991 Plan") for its
employees. Under this Plan, options may be granted to purchase shares of the
Company's stock at a price not less than its fair market value on the date of
the grant. Options become exercisable one-third per year commencing one year
after the date of grant and terminating after 10 years. In November 1993, the
stockholders approved an increase in the number of shares available under the
1991 Plan to 4,000,000.
A prior plan (the "1982 Plan") covering 2,100,000 shares expired on March
24, 1992. Options granted under this plan expire 10 years after the date of
grant.
The following summary shows the aggregate stock option activity expressed
in shares for the 1982 and 1991 Plans:
Fiscal Years Ended
March 30, April 1,
1996 1995
---------- ----------
Outstanding at Beginning of Year 3,949,333 3,212,000
Granted 582,000 748,000
Terminated (85,999) --
Expired (10,000) (9,000)
Exercised (550,001) (1,667
---------- ----------
Outstanding at End of Year 3,885,333 3,949,333
========== ==========
Available for Grant 1,384,667 1,813,000
========== ==========
Exercisable at End of Year 2,843,686 2,683,352
========== ==========
Price Range of Options Outstanding at March 30, 1996 - $0.21 - $1.75
(Weighted Average - $1.07)
At March 30, 1996, the following warrants to purchase the Company's common
stock were outstanding:
Issued in Expiration Exercise Number of
Fiscal Year Date Price Shares
----------- ----------- -------- ---------
1993 March 18, 1998 $0.45 300,000
During fiscal 1995, warrants to purchase 105,000 shares of common stock
were exercised at $.45 per share. During April 1995, warrants to purchase a
total of 5,848,470 shares of common stock were exercised at $.45 per share with
cash proceeds totaling $1,781,009 (of which $351,473 was received prior to year
end and reflected as an advance pending exercise in April 1995) and an interest
bearing $850,803 note receivable provided by the majority shareholder due and
paid on June 30, 1995. An exercise of $0.45 per share warrants totaling 250,000
shares due to
25
<PAGE>
expire on April 30, 1995 has been extended to June 30, 1996. In 1996, 100 shares
of $2.50 Series D Warrants were exercised and the remaining warrants expired.
Subsequent to March 30, 1996, the Company issued warrants to purchase
1,500,000 shares of common stock at $1.00 per share in return for a $300,000
cash payment due July 1, 1996. These warrants become exercisable at the rate of
500,000 shares per year commencing July 1, 1997 and expire five years after they
become exercisable.
As indicated in Note 4, the 25,825 shares of Senior Convertible Redeemable
Preferred Stock is convertible into Common Stock at $1.00 per share. Such stock
is redeemable at the Company's option under certain circumstances should the
holder not elect to convert. In addition, upon the occurrence of certain events
(e.g. - sale of the Company, merger or bankruptcy), the Company may be
required by the holder of any shares of the Senior Convertible Redeemable
Preferred Stock, to redeem, either in whole or in part, shares of this Senior
Convertible Redeemable Preferred Stock at a price of $100 per share, which such
redeemable shares shall then be retired and not reissued.
In addition to the Senior Convertible Redeemable Preferred Stock, the
Company has authorized 974,175 additional shares of Preferred Stock, $.10 par
value, none of which are outstanding as of March 30, 1996.
Note 11. Commitments and Contingencies
On June 6, 1996 the Company was served with a lawsuit filed by Computer
Aid, Inc. in the District Court of Eastern PA. The lawsuit, which named the
Company and other defendants including Hewlett-Packard, Inc. alleges that the
defendants acted to wrongfully assert dominion over and exploit Computer Aid's
software product, misappropriated trade secrets and prevented Computer Aid from
marketing its product. The suit seeks damages in excess of $100 million. The
Company believes that the allegations are without merit, and the Company intends
to vigorously defend itself.
26
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
During the fourth quarter of the year ended March 30, 1996, the Company
filed a Form 8-K with the Securities and Exchange Commission, dated January 16,
1996, pertaining the change in its accountants from Deloitte & Touche to KPMG.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Henry I. Boreen (2) 69 Chairman, Chief Executive Officer,
and Director
Keith D. Schneck 41 President, Chief Financial Officer
and Director
Michael L. Quelly 42 Vice President, Engineering
David L. DeLane 56 Vice President, Sales and Marketing
Robert Vogel 35 Vice President, Strategic Marketing
Joseph D. Rocci 48 Vice President, Products and Technology
Alvin Hoffman (2) 67 Director
Herman O. Benninghoff, II (1) 64 Director
Hal Krisbergh (1) 48 Director
</TABLE>
(1) Member of Compensation and Stock Option Committee of the Board.
(2) Member of Audit Committee of the Board.
All directors and officers of the Company are elected for a term of one
year at the Annual Meeting of Stockholders and the subsequent Board of Directors
meeting, respectively, to serve in their office for the next succeeding year and
until their successors are duly elected and qualified.
Henry I. Boreen has been a director of the Company since 1985 and has
served as Chairman and Chief Executive Officer since October 1990. He also has
served as Chief Financial Officer and President from 1990 through April 1995.
Since 1985, he has been Chief Executive Officer and director of HIB
International, Inc., which participates in high technology joint ventures. Mr.
Boreen is also Chairman of Integrated Circuit Systems, a publicly held company.
Keith D. Schneck joined the Company in April 1995 as President and Chief
Financial Officer and became a Director in June 1995. From 1987 until February
1995, Mr. Schneck held senior management positions at Integrated Circuit
Systems, Inc. including Chief Operating Officer and Senior Vice President,
Finance.
Michael L. Quelly joined the Company in 1982 as an engineer. He served as
Vice President, Engineering from September 1989 to the present, except for the
period October 1990 through March 1995 when he also was Executive Vice
President.
27
<PAGE>
He was employed by E-Com Corporation from 1975 until the Company's
acquisition of E-Com Corporation in 1982.
David L. DeLane joined the Company in January 1988 as Vice President, Sales
and Marketing. From 1986 until he joined the Company, Mr. DeLane served as Vice
Presi-dent, Marketing and Sales for the LC Systems Division of Eagle-Picher
Industries, Inc.
Robert Vogel joined the Company in January 1996 as Vice President,
Strategic Marketing. From 1993 until he joined the Company, Mr. Vogel served as
Director of Digital Systems at General Instrument Corporation. Prior to 1993,
Mr. Vogel was a principal owner for seven years of ISCG (Integrated Systems
Consulting Group), a software and integration consulting firm.
Joseph D. Rocci joined the Company in October 1983 as Director of
Engineering and in 1988 was appointed Vice President of Products and Technology.
Alvin Hoffman was appointed a director of the Company in March 1995. He has
been a private investor and a registered broker with Makefield Securities in
Boca Raton, Florida since 1982.
Herman O. Benninghoff, II has served as a director of the Company since
February 1988. He has been the Chairman of the Board of the Philadelphia Pipe
Bending Co., Philadelphia, PA and D Kay Fabricators, Inc., Youngstown, OH since
1977. He is a director and principal in STF Corporation, Inc., Rockaway, New
Jersey.
Hal Krisbergh was appointed a director of the Company in October 1996. He
is President of WorldGate Communications located in Rydal, PA and is also a
director of Ortel Corporation. Mr. Krisbergh previously served as President of
the Communications Division of General Instrument Corporation from 1971 to 1994.
Section 16 (a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of its
common stock, to file reports of ownership and changes in ownership of the
Common Stock with the Securities and Exchange Commission. An initial report of
stock ownership and a report pertaining to a grant of incentive stock options
were filed late by Robert Vogel. The Company believes that all filing
requirements applicable to its other officers, directors and greater than 10%
beneficial owners have been timely satisfied.
28
<PAGE>
Item 10. Executive Compensation
The following table sets forth information concerning cash remuneration for
each of the last three fiscal years of the Company's Chief Executive Officer,
and with respect to stock options granted during the last three fiscal years to
the Company's Chief Executive Officer.
Annual and Long Term Compensation
---------------------------------
Name & Principal Fiscal Stock Options
Position Year Salary Awarded
- --------------------------------------------------------------------------
Henry I. Boreen 1996 --- ---
Chairman and CEO 1995 --- 10,000
1994 --- ---
<TABLE>
<CAPTION>
No. of Securities % of Total Options Exercise
Underlying Options Granted to Employees Price Expiration
Granted in Fiscal Year ($/Share) Date
------------------ -------------------- --------- ----------
<S> <C> <C> <C> <C>
Henry I. Boreen 10,000 Nil $.84 7/31/05
</TABLE>
The following table sets forth certain information pertaining to the stock
options held by the individual named in the Cash Compensation Table:
<TABLE>
<CAPTION>
Fiscal 1996 Year End Option Values
----------------------------------------------------------------------
Number of Value of
Unexercised Options In-the-Money Options
At Fiscal Year End at March 30, 1996(1)
------------------------------ ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Henry I. Boreen 875,000 --- $203,000 ---
</TABLE>
(1) Value is based upon the closing price of the stock on March 30, 1996,
less the exercise price.
There were no stock option or stock appreciation rights exercised by Mr.
Boreen during the last fiscal year. The Company does not maintain any long term
incentive plans for its officers.
Directors who are not officers or employees of the Company are paid $500
for each Board of Directors meeting and Committee meeting attended. In 1988, the
Directors agreed to forego receipt of such payments for the foreseeable future.
This policy was reinstated in July, 1995.
The Company does not have any employment contracts or arrangements with any
of its executive officers.
29
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The table below sets forth certain information as of June 11, 1996 with
respect to each person and entity known to the Company to be the beneficial
owner of more than 5% of the outstanding shares of the Company's common stock,
each director of the Company and each executive officer listed in the cash
compensation table who owns shares of common stock, and all officers and
directors of the Company as a group.
Beneficial Ownership
--------------------------------------
Beneficial Owner (1) (2) Amount Percentage of Class
- ------------------------- ---------- -------------------
Alvin Hoffman 19,247,337(3) 57.4%
Henry I. Boreen 1,605,765(4) 5.0%
Herman O. Benninghoff, II 255,000(5) 1.0%
Keith D. Schneck 252,500(6) 1.0%
Hal Krisbergh 10,000(7) *
All Directors and Executive
Officers as a Group (9 Persons) 22,852,592(8) 63.6%
* Less than one percent.
(1) To the best of the Company's knowledge, all shares of stock are owned
beneficially, and sole voting and investment power is held with respect thereto,
by the persons and entities named, except as otherwise noted. Share amounts
assume additional shares issuable pursuant to options or warrants held by such
owners which may be exercised within 60 days.
(2) The addresses of all beneficial owners is C/O AM Communications, Inc.,
1900 AM Drive, Quakertown, PA 18951.
(3) The information concerning the beneficial ownership of Mr. Hoffman is
based, in part, upon information furnished by Mr. Hoffman to the Company. The
beneficial ownership indicated represents (i) an aggregate of 16,191,837 shares
of Common Stock currently owned, (ii) 25,825 shares of Senior Convertible
Preferred Stock convertible into 2,582,500 shares of Common Stock, (iii) 473,000
shares of Common Stock currently owned by Mr. Hoffman's wife. Mr. Hoffman
disclaims beneficial ownership of the shares set forth in (iii) above.
(4) Includes 100,000 shares which may be acquired upon the exercise of
warrants and 875,000 issuable pursuant to stock options.
(5) Includes 160,000 shares issuable pursuant to stock options.
(6) Includes 150,000 shares issuable pursuant to stock options.
(7) Includes 10,000 shares issuable pursuant to stock options.
(8) Includes an aggregate of shares of Common Stock and Preferred Stock
currently owned and shares which may be acquired upon the exercise of options
and warrants.
30
<PAGE>
All outstanding shares of the Company Senior Convertible Redeemable
Preferred Stock as of June 11, 1996 are owned by Alvin Hoffman.
Item 12. Certain Relationships and Related Transactions
During April 1995, warrants held by Messrs. Hoffman, Boreen, Bastian,
Benninghoff along with those held by Keystone Venture II, L.P. were exercised.
The exercise price was paid in cash except for $850,803 which was satisfied by a
note receivable, bearing 8% interest, from Mr. Hoffman. The note was due and
paid June 30, 1995.
Item 13. Exhibits and Reports on Form 8-K
(a) (1) Exhibits
See end of exhibit list for footnote references indicated by asterisks.
*3-a. (3.1) Restated Certificate of Incorporation of Registrant.
*3-b. (3.2) Amended By-Laws of Registrant.
*4-a. (4.1) Specimen of Common Stock Certificate, par value
$.10 per share.
*******10-h. (10) Lease Agreement dated April 26, 1988 between the
Company and Quakertown Interchange Associates.
***********10-l. 1991 Incentive Stock Option Plan.
************10-n. Senior Promissory Notes and Form of Warrant dated
March 18,1993.
10-o. Purchase Agreement between AM Communications, Inc. and
Lucent Technologies effective May 1, 1996.
10-p. Joint Development Agreement between AM Communications and
Scientific-Atlanta dated May 1996.
10-q. Distribution Agreement and Manufacturing License dated
June 14, 1996.
10-r. Registration Rights Agreement dated June 17, 1996.
10-s. Warrant Agreement dated June 17, 1996.
11. Computation of Per Share Earnings for fiscal years ended
March 30, 1996 and April 1, 1995.
23. Independent Auditors' Consent dated June 21, 1996.
Independent Auditors' Consent Dated June 21, 1996.
31
<PAGE>
* Incorporated by reference to the Exhibit with the number
indicated parenthetically in Registrant's Registration
Statement on Form S-1, File No. 33-10163.
******* Incorporated by reference to the Exhibit with the number
indicated parenthetically in Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1988.
*********** Incorporated by reference to the Exhibit number indicated
in Registrant's Annual Report on Form 10-K for the fiscal
year ended March 28, 1992.
************ Incorporated by reference to the Exhibit number indicated
in Registrant's Annual Report on Form 10-KSB for the
fiscal year ended April 3, 1993.
(b) The Company filed a report on Form 8-K in January, 1996 reporting upon a
change in the Company's independent accountants from Deloitte & Touche LLP to
KPMG Peat Marwick LLP.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AM COMMUNICATIONS, INC.
(Registrant)
/s/ Keith D. Schneck
--------------------------
By : Keith D. Schneck
President, Chief Financial Officer and
Chief Accounting Officer
Date: June 28, 1996
-----------------------
In accordance with the Securities Exchange Act, this report has been signed
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
/s/ Henry I. Boreen /s/ Keith D. Schneck
- --------------------------------- ------------------------------
Henry I. Boreen Keith D. Schneck
Chairman, Chief Executive Officer President, Chief Financial Officer,
and Director and Director
Date: June 28, 1996 Date: June 28, 1996
------------------------ --------------------------
/s/ Alvin Hoffman /s/ Herman O. Benninghoff, II
- --------------------------------- ------------------------------
Alvin Hoffman Herman O. Benninghoff, II
Director Director
Date: June 28, 1996 Date: June 28, 1996
------------------------ --------------------------
/s/ Hal Krisbergh
- ---------------------------------
Hal Krisbergh
Director
Date: June 28, 1996
33
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-30-1996
<PERIOD-START> APR-02-1995
<PERIOD-END> MAR-30-1996
<EXCHANGE-RATE> 1
<CASH> 664,000
<SECURITIES> 0
<RECEIVABLES> 1,588,000
<ALLOWANCES> 9,000
<INVENTORY> 2,334,000
<CURRENT-ASSETS> 4,927,000
<PP&E> 3,337,000
<DEPRECIATION> 2,772,000
<TOTAL-ASSETS> 6,435,000
<CURRENT-LIABILITIES> 1,710,000
<BONDS> 0
2,583,000
0
<COMMON> 3,096,000
<OTHER-SE> 30,940,000
<TOTAL-LIABILITY-AND-EQUITY> 6,435,000
<SALES> 8,373,000
<TOTAL-REVENUES> 8,373,000
<CGS> 5,285,000
<TOTAL-COSTS> 4,211,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,000
<INTEREST-EXPENSE> 9,000
<INCOME-PRETAX> (1,089,000)
<INCOME-TAX> 12,000
<INCOME-CONTINUING> (1,101,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,101,000)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
