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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 for the fiscal year ended April 1, 2000
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from to ___________ to ___________
Commission File Number: 0-9856
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)
100 Commerce Blvd, Quakertown, Pennsylvania 18951-2237
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (215) 538-8700
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Securities Registered Under Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class 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
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B which 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 April 1, 2000 were $10,082,000.
On June 7, 2000, the aggregate market value of Registrant's outstanding
voting (Common) Stock held by non-affiliates, was approximately $16,332,897
(based on the average between the bid and the asked prices of such stock on that
date).
On June 7, 2000 there were 33,392,720 shares of the Registrant's Common
Stock, par value $.10 per share, outstanding.
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PART I
Cautionary Statement For Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
The statements contained in this Annual Report on Form 10-KSB along with
statements in other reports filed with the Securities and Exchange Commission,
external documents and oral presentations, which are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements represent the present expectations
or beliefs of AM Communications (the Company) concerning future events. Such
statements must be qualified by important factors that could cause actual
results to differ materially from those achieved in the past or those expected
by the Company. Those factors which specifically relate to the Company's
business include: a history of operating losses including a significant
reduction in revenue in fiscal 1999, rapid technological change along with the
need to continually develop new products and gain customer acceptance,
dependence on a relatively small total available market size, competition,
dependence on key employees, dependence on a small number of large customers,
whose demand for Company products are subject to substantial changes from year
to year, and dependence on certain suppliers and reliance on NeST related
operations for engineering and manufacturing services.
Item 1. Description of Business
Overview
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 (CATV) 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 transmission 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 late
1980's.
In response to a significant loss of revenues during fiscal 1999 (see Item
6, Management's Discussion and Analysis of Operations), the Company undertook
several major strategic actions during fiscal 1999 and fiscal 2000 which are
summarized as follows:
o On November 2, 1998, the Company entered into a Services Agreement with
Javad (Jay) K. Hassan pursuant to which Mr. Hassan (i) was appointed to
the Company's Board of Directors and elected to serve as its Chairman of
the Board, (ii) agreed to assume the duties and responsibilities
described therein, and (iii) was granted an option to purchase 5 million
shares of the Company's common stock, at a per share exercise price equal
to $0.156 (the fair market value of the stock on the date the option was
granted). Mr. Hassan also assumed voting control over 14,391,837 shares
of the Company's common stock owned by the Company's principal
shareholder, Alvin Hoffman.
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o On the same date, the Company entered into a strategic development and
manufacturing agreement with Network Systems & Technologies (P) Ltd.
(NeST (P) Ltd.). NeST (P) Ltd. is a technology company located in India
which provides software and hardware design services and manufacturing
services. NeST (P) Ltd. is controlled and managed by N. Jehangir, who is
the brother of Mr. Jay Hassan. Mr. Hassan is the founder, CEO, and owner
of NeST Technologies, Inc. a U.S. headquartered technology services
company which provides and receives services to and from NeST (P) Ltd.
Collectively these operations are referred to as NeST. The Company has
the option to pay for NeST development services either in cash or through
the issuance of warrants. During fiscal 1999, the Company issued
4,234,018 warrants to purchase AM Common Stock, at an exercise price of
$.01 per share, in payment for $670,000 of NeST services from November
1998 through April 3, 1999. The Company also issued warrants to purchase
3,628,316 shares of the Company's Common Stock at an exercise price of
$.01 per share in payment of $1,157,197 of NeST development services for
the period from April 1999 through January 1, 2000. In addition, a total
of $569,083 of NeST development expenses were incurred during fiscal 2000
of which $299,042 was paid in cash and $270,041 is reflected as a
liability on the Company's balance sheet as of April 1, 2000. The
warrants are presently exercisable and expire five years from the date of
issuance.
o During fiscal 1999, the Company reduced its staff at its Quakertown
facility. This reduction was more than offset by an expanded design and
manufacturing staff provided by NeST in India.
o During the fourth quarter of fiscal 2000, the Company entered into an
agreement with NeSTronix, to outsource all of its manufacturing
requirements commencing January 1, 2000. NeSTronix provides complete
turnkey electronic design and outsourcing services to third party
customers, and is owned and controlled by the Company's Chairman, Mr.
Javad K. Hassan. Under this relationship, the Company's existing
manufacturing staff was transferred and became employees of NeSTronix as
of January 2, 2000. In return, the Company received a long-term
commitment from NeSTronix to manage and supply all of the Company's
manufacturing requirements for a three year period with agreed upon
pricing.
Products
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 located at the "head-end" control
center, and transponders located in the field. The transponder devices are
placed generally within equipment which transmits or powers the CATV signals 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 head-end 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.
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The Company also provides performance monitoring products designed to
assist cable TV operators in collecting and analyzing the data associated with
the mandated FCC system proof of performance tests and to assess operating
characteristics of the system at remote points. Performance monitoring units can
make frequency response measurements from 40 MHz through 1 GHz, 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.
Cable TV and broadband telecommunications systems have and continue to
experience 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 Internet access, video on demand, home shopping, interactive
data services, distance learning, home monitoring, etc. The U.S. telephone
(telco) industry has entered selected markets for video services using various
technologies including HFC, wireless and existing telco infrastructure by
building new communications networks capable of providing voice, video, and data
services. Recent telecommunications legislation has further increased the
competitive environment among service providers.
The communications network 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 order to
deliver the wide range of services planned. Status and performance monitoring
products, as provided by the Company, have become a critical component to
improve operating efficiencies and insure the reliability of the new
communications networks. In response to this, the Company introduced in fiscal
1996 the OmniStat(TM) System, an advanced status monitoring system for broadband
networks. In fiscal 2000 the Company introduced Omni2000TM which represents its
latest generation of monitoring technology.
Omni2000(TM) is a total integrated system comprised of hardware and
software products designed to address the evolving need for standards based
network management architectures and consists of 4 product categories:
1. Plant Equipment Monitoring Devices - These `transponder' units are
installed inside monitored plant equipment, such as optic-electronic nodes,
RF amplifiers, power supplies, and end-of-line monitors. The transponders
measure and monitor various parameters and report the data back to a
central software monitoring system.
2. Monitoring Control Units - These units are installed in the headend and/or
hub locations. They manage the data communications between the plant
transponders and the software monitoring system.
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3. Headend Monitoring Devices - Telemetry Application Monitor (TAM) is a
modular rack unit device housed in the headend. It can be equipped with a
wide range of plug-in application modules.
4. Network Monitoring Software System - This system communicates with the
headend monitoring control units. It collects and processes information
sent back by transponders in the field.
Plant Equipment Monitoring Devices
The Omni2000 Management System incorporates an advanced set of plant
transponders based on AM's FlexStat(TM) platform. The FlexStat platform provides
the following benefits:
o Frequency agile RF modems
o Downloadable firmware
o User defined alarm limits
o Real-time measurement display
o Remote control of network equipment
o Automatic RF return levels
Transponders are available for most every major brand and type of network
distribution equipment including amplifiers, power supplies, and optical nodes.
The Company currently has over 40 different transponders and continues to design
new devices. Amplifier transponders monitor amplifier internal currents,
voltages, signal levels, and temperature and perform certain control functions.
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, and enclosure temperature and monitor the RF
levels of the system monitoring communications channels. 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.
Monitoring Control Units
The Omni2000(TM) Headend Monitoring Control Unit (MCU) is a real-time data
manager that is capable of managing thousands of transponder equipped devices in
the outside plant as well as in the headend. Its key features include:
o Large capacity (over 10,000 transponders)
o Fast polling and alarm processing
o Automatic new transponder detection
o Multi-protocol capability
o Robust communications with error correction
o Scalable hardware and software architecture
o Network capable
o Downloadable software
o Frequency agile
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The MCU has been designed as a scalable unit. It supports multiple
intelligent plug-in RF protocol cards with the master processor on the backplane
of the MCU managing these protocol cards. This hardware modularity makes it
possible to configure the MCU as a cost-effective solution for small to medium
sized networks or as a robust, powerful solution for large networks. The Company
commenced shipment of the OmniMCU during the first quarter of fiscal 1998.
Headend Monitoring Devices
A modern HFC headend facility contains different types and brands of
headend equipment, including optical transmitters, optical receivers,
modulators, and other transmission elements. The manufacturers of these headend
elements often incorporate telemetry interfaces to allow an external manager to
monitor and control their equipment. However, no compatibility standards exist
for these interfaces, and so every manufacturer has developed their own unique
electrical interface as well as proprietary data communication protocols.
The Company's Telemetry Application Monitor (TAM) is a modular rack unit,
which can be equipped with a wide range of application modules to enable
monitoring and control of headend transmission equipment. Serial Application
Modules (SAM) are pre-programmed TAM plug-ins that monitor and manage a specific
brand and type of headend equipment.
The Company also markets its Scanning Ingress Monitor System (SIMS) of
which the second generation unit was introduced in fiscal 2000. The SIMS module
is a TAM based product, which monitors and analyzes the return RF spectrum from
specific node areas. The Company continues to identify new types of plug-in
monitoring modules for modulators, switching equipment, and other headend
systems and will undertake new development efforts when market opportunities
warrant such.
Network Monitoring Software System
The Omni2000(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, head-ends 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 Omni2000(TM) to
operation support systems and other third party software applications. The
Company commenced shipment of its initial release of Omni based software in
April 1996.
In conjunction with the new strategic development relationship with NeST,
the Company undertook a substantial development program, which resulted in the
introduction in the first half of fiscal 2000 of the new Omni2000 software
platform. The Omni2000 product has been designed as a modular software platform
based upon Windows NT and standard Microsoft interfaces, and employs standard
Microsoft development practices. This modular platform provides benefits such as
easier and more efficient maintenance, improved stability, and ease of building
optional modules for increased features and functionality including independent
third-party add-on products. The Company began delivering this product during
fiscal 2000.
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The Company's strategy has been to form close working relationships with
the major OEM (original equipment manufacturer) CATV network 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. Omni2000 solutions
are available for virtually every major brand of transmission equipment,
including:
o ADC o Harmonic
o Alpha Technologies o Kathrein
o Antec o Lectro (Exide Electronics)
o Augat (Thomas & Betts) o Philips Broadband Networks
o Fuba Communication Systems o Power Guard
o Motorola (General Instrument) o Scientific-Atlanta
o Wavetek Wandel Goltermann o Barco
In addition, several of the major network equipment suppliers have entered
into OEM agreements with AM to private label the AM product. The Company
currently has OEM agreements or provides OEM private label products to: Motorola
(formerly General Instrument), Scientific-Atlanta and Philips Broadband Systems.
Quick STAT Plant Management System
AM has leveraged the modularity of the Omni2000 platform to develop a
cost-effective solution for monitoring small to medium size systems known as
"QuickSTAT." QuickSTAT is a pre-packaged, economical hardware and software
solution built into a client server PC station. The system components include:
o A single pre-configured PC client/server station
o Omni2000(TM) network monitoring software
o OmniAlert(TM) alarm paging software
o OmniComm(TM) cable system interface card
o QuickTest(TM) embedded test transponder
The Company introduced the QuickStat system in the first quarter of fiscal
2000.
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), Digital Subscriber
Loop (DSL), 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. Should the
industry adopt other competing architectures, the Company's revenue
opportunities for its existing products could be adversely affected.
The Company's business is not subject to marked seasonal fluctuation.
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Major Customers
The Company's revenues in fiscal 2000 included two OEM customers who
individually contributed 38% and 25% of the total revenues, respectively. In
fiscal 1999, the two OEM customers contributed revenues of 29% and 22%,
respectively and one domestic customer contributed 13% of revenues. No other
customer contributed more than 10% of revenues in either year. As the purchase
of the Company's products generally is associated with a customer's capital
upgrade or expansion program, contribution levels of individual customers can be
subject to wide fluctuations.
There is no assurance that any of such customers will be the source of
significant revenues to the Company during the next fiscal year and the loss of
a single customer could have a material adverse effect on the Company's
operating results and financial condition. As disclosed in Item 6, "Management's
Discussion and Analysis of Operations", the Company experienced a substantial
drop in revenues during fiscal 1999 as a result of the cessation of two
customers' capital upgrade programs involving the Company's products.
Backlog
At April 1, 2000, the Company's backlog of orders totaled $4.0 million as
compared with a backlog of $1.9 million as of April 3, 1999. All orders in the
backlog are expected to ship during fiscal 2001.
Marketing and Markets
The Company sells its products directly to end user customers through its
OEM relationships, through its direct sales force, and through independent sales
representatives in selected international markets. During fiscal 1999, the
Company reorganized its sales and marketing organization, which included the
addition and replacement of direct sales and technical support staff.
Promotional advertising and trade show participation also play a key role in
increasing customer awareness and establishing brand recognition. 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 frequently required.
The Company's marketing activity is also directed towards establishing
strategic OEM relationships in which the OEM customer will purchase private
label versions of the Company's products and include them as part of an
integrated package to the OEMs' customers. The OEM strategy allows the Company
to greatly expand its selling presence, particularly in the international
markets. The Company also utilizes its OEM relationships to assist in defining
new products. Direct end user customers and sales representatives generated 31%
of the Company's sales, and OEM partnerships generated 76% of sales during
fiscal 2000 compared to 37% and 63%, respectively in fiscal 1999.
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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 third
party assembly vendors, into finished products which often are integrated with
standard peripherals. The Company's operations also include extensive testing of
its systems and components. The Company is ISO 9001 certified. The Company also
develops the proprietary hardware (master control units) used to control various
network systems, as well as the software (Omni2000) for such systems
As part of the association with the NeST organization, the Company has
entered into a manufacturing support arrangement in which a substantial portion
of the Company's products are manufactured using a NeST associated
sub-contractor assembly and test operation in India supplemented by use of third
party assemblers in the United States and direct testing by AM staff. During the
4th quarter of fiscal 1999, a transition program was initiated which included
transfer of equipment, inventory and product documentation and selected products
were sourced from the Indian operation during fiscal 2000.
During the fourth quarter of fiscal 2000, the Company entered into an
agreement with NeSTronix, to outsource all of its manufacturing requirements
commencing January 1, 2000. NeSTronix provides complete turnkey electronic
design and outsourcing services to third party customers, and is owned and
controlled by the Company's Chairman, Mr. Javad K. Hassan. Under this
relationship, the Company's existing manufacturing staff was transferred and
became employees of NeSTronix as of January 2, 2000. In return, the Company
received a long-term commitment from NeSTronix to manage and supply all of the
Company's manufacturing requirements for a three year period with agreed upon
pricing. NeSTronix utilizes as its subcontractors the Indian based operation and
other third party assemblers as previously described. The Company continues to
purchase and hold title to all material purchases used in the manufacturing
operations and consigns such to NeSTronix as required.
The Company generally has multiple sources of supply for the various
component parts, which it purchases and utilizes several sub-contact board
assemblers. However, shortages or delayed deliveries of certain components are
possible and could have an adverse effect on the Company's business. Recently
the world wide industry demand for electronic components has increased which has
created longer lead times for certain of the Company's components which has
resulted in increased lead times for manufacturing. Continued shortages of
components or production capacity constraints could negatively impact the
Company's ability to meet its customer obligations or result in increased prices
for components. During fiscal 2000, three vendors accounted for over 10% of the
Company's purchases of component parts and assembly services as follows: 16%,
15% and 10%. During fiscal 1999, three vendors accounted for over 10% of the
Company's purchases of component parts and assembly services as follows: 16%,
12% and 11%. In addition, any failure or default by NeST or NeSTronics could
have a material adverse effect on the Company.
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Product Development
Certain areas of the Company's business involve complex systems, software,
and electronics technology, which can 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.
During fiscal 1999, the Company entered into a strategic development and
manufacturing relationship with NeST, under which NeST provides a substantial
portion of the Company's engineering and manufacturing requirements. The
Company, using NeST resources, undertook a substantial program to upgrade its
software platform during fiscal 1999. The new product, Omni2000, was introduced
in the first half of fiscal 2000.
The Company also has several new performance monitoring products and
transponders under development which it believes are critical for improving its
competitive position and the new generation of SIMS product was released during
fiscal 2000.
The Company currently maintains OEM agreements with or provides private
label versions of its products to Motorola, Scientific-Atlanta (SA) and Philips
Broadband Networks (Philips). Under these agreements, the Company generally
designs customer specific versions of its monitoring products and allows OEMs 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 by the OEM. Revenue from custom development efforts
specific to OEMs is recognized as contractual milestones are achieved. In
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 OEMs generally have rights to access the
technology and manufacture the products provided by AM should AM default on the
agreements.
The Company continues to work towards establishing new OEM relationships as
well as expanding existing relationships. Revenues from OEMs for research and
development totaled $205,000 and $275,000 in fiscal 2000 and 1999, respectively.
The Company's research and development costs totaled $3.3 million in fiscal
2000 and $3.9 million in fiscal 1999.
Competition
The diversity of a provider's product lines, including compatibility with
OEM distribution equipment, product features, software, equipment reliability,
price, technical support and warranty terms, is the major competitive factor in
the CATV network monitoring market. 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 substantially increased its spending in research and development and
marketing beginning in fiscal 1997 and maintained this through fiscal 1999. The
level of research and development spending dropped in fiscal 2000 as the Company
transitioned to more cost effective development resources.
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The Company continues to identify product development needs in excess of
its available development resources, which may negatively impact its competitive
position. The Company's strategic development relationship with NeST,
established during the third quarter of fiscal 1999, is expected to
significantly expand the Company's technical resources to enable it to respond
more quickly to market requirements.
There are several competitors providing network monitoring systems to the
CATV industry including the Company's major competitor Cheetah Technologies
(formally Superior Electronics), a Florida-based company. In addition, other
competitors include Tollgrade Communications and other OEM equipment providers
to the CATV industry including C-Cor.Net, Harmonic, Barco and Wavetek Wandelman
Goltermann. All the competitors have greater financial, marketing, and technical
resources than the Company.
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 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.
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. Cable Labs, a CATV
industry standards setting group, along with various OEM equipment and status
monitoring providers and CATV operators, have formulated a committee to work to
establish technical standards for status monitoring systems. The goal is to
develop a set of public domain protocols for transponders and headend
controllers so that monitoring products made by any manufacturer will work
together within the same network. The Company expects that its Omni2000(TM)
family of products will be field upgradeable, when these standards are
finalized. However, the development of standards for status monitoring could
result in additional competitors offering monitoring solutions or downward
pressure on pricing and margins.
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.
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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 7, 2000, the Company had 31 full-time employees including 9 in
administration, 11 in marketing and sales, and 11 in engineering. Through the
NeST strategic relationship, the Company has approximately 50 NeST design staff
members working on AM programs. In addition, the Company utilizes contract
employees and temporary employees to meet peak production demands or special
project needs.
Relationships with Javad Hassan, NeST and Related Entities
As described above, the Company undertook several strategic actions during
fiscal 1999 and fiscal 2000 which included; (a) the election of Javad Hassan as
Chairman, (b) the issuance to Mr. Hassan of a five million share option, (c) the
execution of a voting trust agreement between the Company's majority shareholder
which provides Mr. Hassan with voting control and participation in equity
appreciation over 14,391,837 shares of the Company's Common Stock and, (d)
entering into a strategic development and manufacturing agreement with NeST (P)
Ltd. Keith Schneck, the Chief Financial Officer and a director of the Company,
also provides advisory services to NeST Technologies, Inc. and Mr. Hassan as
part of the Company's administration and support services charged by the
Company.
Under the terms of its development agreement with NeST, the Company elected
to issue NeST warrants to purchase 4,234,018 shares of the Company's common
Stock at an exercise price of $.01 per share in payment of $670,000 of NeST
development services for the period from November 1998 through March 1999. The
Company also issued warrants to purchase 3,628,316 shares of the Company's
common Stock at an exercise price of $.01 per share in payment of $1,157,197 of
NeST development services for the period from April 1999 through January 1,
2000. In addition, a total of $569,083 of NeST development expenses were
incurred during fiscal 2000 of which $299,042 was paid in cash and $270,041 is
reflected as a liability on the Company's balance sheet as of April1, 2000.
The Company provides certain administrative and support services and office
space to NeST, NeSTronix and several other entities associated with Mr. Hassan's
non-AM business ventures. During fiscal 2000, the Company received fees totaling
$613,500 for such services. Should the level of services exceed planned levels,
the parties will negotiate an increase in the fee.
In June 1999, the Company entered into an agreement with its chairman,
Javad K. Hassan, whereby Mr. Hassan will provide a $500,000 line of credit to
the Company, with interest payable at 10%. No amounts were borrowed under this
line during fiscal 2000. The line expires December 31, 2001.
Effective January 1, 2000, the Company entered into an agreement with
NeSTronix whereby NeSTronix assumed all responsibility for the manufacture of
the Company's hardware products. Company employees who were associated with the
manufacturing of the Company's products became employees of NeSTronix and
NeSTronix assumed financial responsibility for certain of the Company's
inventory. NeSTronix agreed to provide the Company favorable fixed pricing for
its hardware products in return for the transfer of manufacturing rights.
NeSTronix is a newly formed entity providing outsource manufacturing services
through its network of on-shore and India based electronic manufacturing
operations. NeSTronix is owned by Javad K. Hassan, the Company's Chairman.
NeSTronix was paid a total of $441,000 during fiscal 2000 for manufacturing
services provided to the Company.
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Item 2. Description of Property.
The Company's office and production operations are located in Quakertown,
PA in a 40,000 sq. ft. modern, leased facility. The Company's lease expires on
January 31, 2002.
Item 3. Legal Matters.
There are no pending or, to the Company's knowledge, threatened legal
actions, to which the Company is a party.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on March 3, 2000. At
such meeting, the following directors were elected:
Abstentions
Number of Votes and Broker
For Against Non-Votes
----------------------------------------------------------------------------
R. Barry Borden 30,021,136 6,890 181,610
Jill A. Felix 30,021,136 6,890 181,610
Javad K. Hassan 30,020,871 7,155 181,610
Alvin Hoffman 30,020,786 7,240 181,610
Keith D. Schneck 30,021,121 6,905 181,610
Lemuel Tarshis 30,021,136 6,890 181,610
In addition to the election of the foregoing directors, the shareholders of
the Company approved the amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock of the Company from
50,000,000 to 100,000,000. The following is a tabulation of the votes cast at
the meeting on such proposal:
Number of Votes
For Against Abstain
-----------------------------------------------
29,879,066 317,720 18,050
PART II
Item 5. Market for Common Equity and Related Stockholders Matters.
The Company's Common Stock is quoted on the OTC Bulletin Board of the NASD,
Inc. under the symbol "AMCM." The following table sets forth the closing high
and low bid information as supplied by the NASD market makers for each quarter
within the Company's
13
<PAGE>
last two fiscal years. These bid 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
-------------- ---- ---
1999
----
First Quarter .625 .219
Second Quarter .328 .109
Third Quarter .188 .125
Fourth Quarter .188 .125
2000
----
First Quarter .375 .172
Second Quarter .563 .188
Third Quarter .531 .203
Fourth Quarter 3.563 .234
As of June 7, 2000 there were approximately 898 holders 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 earning for use in the
Company's business, and does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future.
Recent Sales of Unregistered Securities
On November 2, 1998, the Company entered into a Services Agreement with
Javad (Jay) K. Hassan (the "Services Agreement"). Pursuant to the terms of the
Services Agreement, the Company granted an option to Mr. Hassan to acquire
5,000,000 shares of the Company's Common Stock, at a per share exercise price of
$0.156 (which is equal to the fair market value of the Company's common stock on
the date the option was granted). The option is first exercisable on February
19, 2000, and expires on February 19, 2009. The option was issued by the Company
in exchange for certain advisory and consulting services to be provided by Mr.
Hassan to the Company. The option was issued by the Company to Mr. Hassan in
reliance upon the exemption from registration provided for in Section 4 (2) of
the Securities Act of 1933, as amended, as a transaction not involving any
public offering.
On November 2, 1998, the Company also entered into a Strategic Development
and Manufacturing Agreement with Network Systems & Technologies (P) Ltd. (NeST
(P) Ltd.). NeST (P) Ltd. is a technology company located in India which provides
software and hardware design services and manufacturing services. NeST (P) Ltd.
is controlled and managed by N. Jehangir, who is the brother of Mr. Jay Hassan.
Mr. Hassan is the founder, CEO, and owner of NeST Technologies, Inc., a U.S.
headquartered technology services company which provides and receives services
to and from NeST (P) Ltd. Collectively these operations are referred to as NeST.
Under the terms of the Strategic Development and Manufacturing Agreement,
the Company on April 3, 1999 issued NeST warrants to purchase 4,234,018 shares
of the Company's Common Stock, at an exercise price of $.01 per share, as
payment for $670,000 in development services provided by NeST to the Company for
the period from November 1998 through April 3, 1999. The Company also issued
warrants to purchase 3,628,316 shares of the Company's common Stock at an
exercise price of $.01 per share in payment of $1,157,197 of NeST development
services for the period from April 1999 through January 1, 2000.
14
<PAGE>
The warrants were issued by the Company to NeST in reliance upon the
exemption from registration provided for in Section 4(2) of the Securities Act
of 1933, as amended, as a transaction not involving any public offering. The
warrants were issued to NeST as compensation for services provided by NeST to
the Company. No offer of the warrants was made by the Company to any other
person or entity.
Item 6. Management's Discussion and Analysis of Operations
The following discussion should be read in conjunction with the Financial
Statements and notes thereto appearing elsewhere in this Form 10-KSB.
Overview
The Company is a provider of high technology system level products for the
broadband communications industry, primarily for CATV monitoring and control
systems. During fiscal 1999, the Company experienced a significant downturn in
its business, primarily due to the cessation of programs involving two major
customers, which contributed approximately 50% of revenues in fiscal 1998. In
addition, the Company undertook a substantial development program to upgrade its
software and certain hardware products, which were introduced in the 1st quarter
of fiscal 2000. These products include complete new system platforms for the
Company's Omni2000 software, Scanning Ingress Monitoring Systems, and QuickSTAT.
Also during fiscal 1999, the Company undertook several major organizational
changes which are described in Item 1. Description of Business.
During fiscal 1999, the Company incurred a substantial operating loss which
was financed by a reduction in working capital and borrowings under the
Company's line of credit and the payment of technology development costs by the
issuance of warrants.
15
<PAGE>
During fiscal 2000, the Company experienced improvement in its operations
as revenue levels increased due to the improved product set and expanded
marketing activities. Operating costs decreased due to improved gross profit
margins as a result of the transition to the NeST based manufacturing strategy
and development spending declined due to the transition to more cost effective
Indian based development resources. While the Company experienced an operating
loss for the fiscal year 2000, it did achieve profitability in its fourth
quarter of fiscal 2000.
Results of Operations
Fiscal 2000 vs. 1999
--------------------- Fiscal 2000 Fiscal 1999
----------- -----------
Revenues 100.0% 100.0%
Cost of Sales 50.5 61.6
Selling, General and Administrative 27.0 30.0
Research and Development 32.7 46.2
----- -----
Operating Loss (10.2) (37.8)
Other Expense (.9) (.3)
----- -----
Loss Before Income Taxes (11.1) (38.1)
Income Tax Provision -- (.3)
----- -----
Net Loss (11.1)% (38.4)%
===== =====
Revenues
Revenues for the fiscal year ended April 1, 2000 were $10.1 million,
representing a 11% increase compared to fiscal 1999 revenues. Revenues for the
fiscal year ended April 3, 1999 were $9.1 million, representing a 46% decrease
compared to fiscal 1998 revenues of $16.9 million. The decrease in revenues in
fiscal 1999 was due to the cessation of programs involving two major customers
which totaled approximately $8 million of revenues during the Company's 1998
fiscal year. The Company was limited during fiscal 1999 in its ability to
replace these revenues with new customers as it was undertaking a major upgrade
to its technology software platform which was not completed until the first
quarter of fiscal 2000. During fiscal 2000, the Company's revenues began
improving in the December and March quarters of fiscal 2000 due to the market
acceptance of the new products and increased marketing and selling activities.
OEM revenues were 76% of total revenues in fiscal 2000 compared to 63% in
fiscal 1999. The Company maintains key strategic OEM relationships with
Motorola, Philips and Scientific-Atlanta. The increase in OEM revenues in fiscal
2000 was due to OEM sales primarily into several large European accounts.
The Company's revenues in fiscal 2000 included two OEM customers who
individually contributed 38% and 25% of the total revenues, respectively. In
fiscal 1999, these two OEM customers contributed revenues of 29% and 18%,
respectively and one domestic customer contributed 15% of revenues. No other
customer contributed more than 10% of revenues in either year. As the purchase
of the Company's products generally is associated with a customer's capital
upgrade or expansion program, contribution levels of individual customers can be
subject to wide fluctuations.
16
<PAGE>
Development and software revenues totaled $3.3 million and $4.2 million in
fiscal 2000 and 1999, respectively. Development revenues primarily relate to OEM
development efforts which are recognized when defined milestones are reached,
the timing of which may be different from when the related development expenses
were incurred. The related development costs are reported as research and
development expense. All software development costs are charged to research and
development when incurred. Development spending declined in fiscal 2000 due to
the complete transition to more cost effective Indian based resources supplied
under the NeST strategic development agreement.
Cost of Sales
Costs of sales include manufacturing costs of the Company's hardware
products. Cost of sales represented 59% of revenues in fiscal 2000 compared to
70% in fiscal 1999 (excluding non-hardware revenues of $1.4 million and $1.1
million in fiscal 2000 and 1999, respectively). The Company's gross product
margins are generally dependent on product mix and customer mix, with sales to
OEM customers generally having a lower profit margin. Cost of sales decreased as
a percentage of revenues in fiscal 2000 due to reduced material component costs
related to design of new products released in fiscal 2000 and lower
manufacturing variances due to the transition to NeST and NeSTronix supplied
turn-key manufacturing services during fiscal 2000.
Selling, General and Administrative
Selling, general and administrative (S, G&A) expenses were approximately
$2.7 million in fiscal 2000 and fiscal 1999 but included higher sales expenses
in fiscal 2000 due to expanded activities in marketing the newly released
products. General and administrative expenses declined in fiscal 2000 as the
Company offset costs by billing other NeST companies for services provided to
such entities. The Company expects to experience increased selling expenses but
expects general and administrative expenses to remain at approximately the same
levels during fiscal 2001.
Research and Development
Research and development expense totaled $3.3 million for fiscal 2000
compared to $4.2 million in fiscal 1999. The Company continued to spend a
significant amount on research and development during fiscal 2000 and 1999 which
included expenditures relating to the Company's major development efforts to
upgrade its software products and the transition to development resources in
NeST. NeST development services totaled $1.7 million and $670,000 in fiscal 2000
and 1999, respectively. The Company expects research and development spending to
increase in fiscal 2001 in response to increased customer demand for more
advanced systems and software.
Operating Loss
The Company experienced a substantial operating loss for fiscal 1999, due
to the reduced revenue levels as described above. The Company reduced its annual
operating costs, primarily through staff reductions at its Quakertown facility.
Such cost reductions have been offset in part by spending related to the NeST
technical resources as well as continued internal spending to fund critical
research and development efforts.
The Company experienced reduced operating losses in each of the first three
quarters of fiscal 2000 and reported a profit in the fourth quarter of fiscal
2000, which resulted in a reduction in the net loss from $3.5 million in fiscal
1999 to $1.1 million in fiscal 2000. The improved operating results were due to
increased revenues, reduced manufacturing costs and a decline in research and
development spending as described above.
17
<PAGE>
Income Taxes
Due to the significant net operating loss carry-forward, the Company pays
minimum income taxes which include state income taxes and federal income taxes,
based on an "alternative minimum tax" calculation.
Industry Factors
The cable and broadband communications industry is undergoing significant
change as cable television (CATV) operators continue to expand and consolidate
their operations. Operators are also implementing new interactive services such
as video on demand, Internet access and telephony. In addition, competition for
video services has increased with new entrants, including telephone and
satellite providers. This has resulted in existing CATV operators planning to
expand and upgrade their distribution infrastructures and new providers planning
to construct new distribution systems capable of providing a mix of 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 CATV monitoring products has increased as monitoring of cable
distribution systems has become an important factor in increasing operating
efficiency and reliability. As previously noted, the Company's operations were
adversely impacted in fiscal 1999 by the combined impact of reduced revenues and
the need to upgrade its software products. The Company's operations are subject
to the timing and success of new product introductions and the scheduling of
orders by customers. The Company also continues to identify product development
needs in excess of its available development resources, which in the past has
negatively impacted its competitive position. The Company believes its strategic
relationship with NeST will allow the Company to become more responsive to
market requirements.
Liquidity and Capital Resources
In fiscal 2000, the Company generated net cash of $55,000 compared to
consuming cash of $686,000 in fiscal 1999.
The Company financed its operating losses in fiscal 2000 primarily through
increases in accounts payable, accrued expenses and issuance of warrants for
NeST services. The Company financed its operating losses in fiscal 1999 through
reductions in cash, accounts receivables and inventory, an increase in accounts
payables, drawdowns on its line of credit and the payment of NeST development
expenses through the issuance of warrants.
During fiscal 1999, the Company received a $150,000 technology improvement
fund loan from the Ben Franklin Technology Center of Southeastern Pennsylvania.
The loan was for the initial phase development of the Company's Omni2000
software package. The loan principal is payable in quarterly installments of
$7,500 over the next five years. Interest is payable quarterly, contingent on
the commercial success of the product, in an amount equal to 3% of the product
sales for the immediately preceding quarter until a cumulative amount equal to
50% of the loan has been repaid.
18
<PAGE>
The Company's line of credit is limited to $750,000 which was fully
borrowed and outstanding at April 1, 2000. Borrowings under the line are based
on 80% of the value of qualified accounts receivable. Under the terms of the
agreement, all the Company's assets are pledged and interest is payable at 2%
above prime. As a result of the losses incurred for fiscal 2000, the Company was
in technical default on several financial covenants under the line of credit
agreement. Subsequent to year-end, the Company received from the bank a waiver
of the default and also an extension of the line through July 31, 2001.
In June 1999, the Company entered into an agreement with its chairman,
Javad K. Hassan, whereby Mr. Hassan will provide a $500,000 line of credit to
the Company, with interest payable at 10%. Payment of all outstanding borrowings
and interest is due by December 31, 2000. No amounts were borrowed under this
line during fiscal 2000.
Under the terms of the NeST development agreement, the Company has the
option to pay for NeST development services either in cash or by the issuance of
warrants to purchase AM Common Stock. The Company elected to issue NeST warrants
to purchase 4,234,018 shares of the Company's common Stock at an exercise price
of $.01 per share in payment of $670,000 of NeST development services for the
period from November 1998 through April 3, 1999. The Company also issued
warrants to purchase 3,628,316 shares of the Company's common Stock at an
exercise price of $.01 per share in payment of $1,157,197 of NeST development
services for the period from April 1999 through January 1, 2000. In addition, a
total of $569,083 of NeST development expenses were incurred during fiscal 2000
of which $299,042 was paid in cash and $270,041 is reflected as a liability on
the Company's balance sheet as of April 1, 2000. As a result of improved
operations, the Company expects to pay ongoing NeST development expenses in
cash, but continues to have the option to issue warrants up to a limit of 10
million total shares under the NeST agreement.
The Company's restructuring actions taken during fiscal 1999 and 2000
reduced operating cash expenses. The Company expects to continue to utilize the
NeST technology resources in India and NeSTronix for core development and
manufacturing efforts and provide ongoing support services to NeST based
businesses, which is expected to allow the Company to improve its operating cost
structure. The Company began experiencing positive results from this strategy
during fiscal 2000.
The Company believes that existing cash, available lending lines and the
ability to pay for NeST development services in cash or warrants, will provide
sufficient liquidity to support operations through the next fiscal year.
However, should operating losses continue beyond levels which can be supported,
the Company would expect to implement further actions to reduce expenses or
raise additional capital to enable continued execution of its strategy. There
can be no assurance that additional capital could be raised under acceptable
terms.
Capital expenditures totaled $95,000 in fiscal 2000 and $77,000 in fiscal
1999 which included capital leases, computers, manufacturing assembly and test
equipment and facility related improvements and fixtures.
19
<PAGE>
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of operations, including among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company believes that it has minimal exposure to contingencies related
to the Year 2000 Issue for the products it has sold.
The Company has determined that its internal reporting system will not
properly utilize dates beyond December 31, 1999. A plan has been initiated to
implement a replacement software system. Management expects this software system
will be installed and fully operational by July 1, 2000. The anticipated cost of
this project is $150,000, of which $50,000 has been expensed to date.
The Company has undertaken a review of all internal systems and products
and have replaced or modified any non-compliant software and hardware with new
compliant systems. As a result, the Company believes that it has minimal
exposure to contingencies related to the Year 2000 Issue for the products it has
sold and its financial and accounting systems. The Company has expended
approximately $10,000 in external costs to date on such efforts and believes any
additional amounts in the future to be minimal.
The Company has engaged in formal communication with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. Based on the information received from such parties, the Company believes
that most of its suppliers are addressing any issues associated with their Year
2000 plans. There can be no guarantee that the systems of other companies on
which the Company's systems rely or interface with will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company.
20
<PAGE>
Item 7. Financial Statements
Report of Independent Certified Public Accountants
Board of Directors
AM Communications, Inc.
We have audited the balance sheet of AM Communications, Inc. as of April 1,
2000, and the related statements of operations, stockholders' deficiency, and
cash flows for the 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 audit. The financial
statements of AM Communications, Inc. as of and for the year ended April 3,
1999, were audited by other auditors whose report dated June 30,1999, 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 financial statements referred to above present fairly, in
all material respects, the financial position of AM Communications, Inc. as of
April 1, 2000, and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Philadelphia, Pennsylvania
May 24, 2000
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
AM Communications, Inc.
Quakertown, Pennsylvania
We have audited the accompanying balance sheets of AM Communications, Inc. as of
April 3, 1999 and the related statements of operations, stockholders' equity,
and cash flows for the 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 audit.
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 financial statements referred to above present fairly, in
all material respects, the financial position of AM Communications, Inc. as of
April 3, 1999 and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
June 30, 2000
22
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
Fiscal Year Ended
April 1, April 3,
2000 1999
------------ ------------
Revenues $ 10,082,000 $ 9,069,000
Costs and Expenses:
Cost of Sales 5,087,000 5,587,000
Selling, General and Administrative 2,722,000 2,716,000
Research and Development 3,303,000 4,192,000
----------- ------------
Operating Loss (1,030,000) (3,426,000)
Other Expense (91,000) (26,000)
----------- ------------
Loss Before Income Taxes (1,121,000) (3,452,000)
Income Tax Provision -- 28,000
----------- ------------
Net Loss $ (1,121,000) $ (3,480,000)
============ ============
Basic Net Loss Per Share $ (0.03) $ (0.11)
============ ============
Diluted Net Loss Per Share $ (0.03) $ (0.11)
============ ============
Shares Used in Computation of Basic
Net Loss Per Share 32,143,000 31,072,000
============ ============
Shares Used in Computation of
Diluted Net Loss Per Share 32,143,000 31,072,000
============ ============
The Accompanying Notes are an Integral Part of these Financial Statements.
23
<PAGE>
AM COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
April 1, April 3,
ASSETS 2000 1999
------------- -------------
<S> <C> <C>
Current Assets:
Cash $ 79,000 $ 24,000
Accounts Receivable, Net of Reserves
of $199,000 - 2000 and $221,000 - 1999 2,439,000 1,489,000
Due From Affiliate 52,000 42,000
Inventory 1,694,000 1,218,000
Prepaid Expenses and Other 79,000 43,000
-------------- -------------
Total Current Assets 4,343,000 2,816,000
Equipment and Fixtures, Net 216,000 396,000
Other Assets 16,000 16,000
-------------- -------------
Total Assets $ 4,575,000 $ 3,228,000
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Current Portion of Capital Lease Obligations $ 2,000 $ 38,000
Current Portion of Notes Payable 30,000 30,000
Bank Line of Credit 750,000 625,000
Accounts Payable 1,650,000 1,163,000
Advances 126,000 --
Accrued Expenses 1,149,000 889,000
-------------- -------------
Total Current Liabilities 3,707,000 2,745,000
-------------- -------------
Capital Lease Obligations - Long Term 3,000 --
Notes Payable - Long Term 90,000 120,000
Senior Convertible Redeemable Preferred Stock,
$100 Par Value, Authorized 1,000,000 Shares;
Issued and Outstanding 25,825 Shares in 2000
and 1999 2,583,000 2,583,000
-------------- -------------
Commitments and Contingencies (Notes 7 and 12)
Stockholders' Deficiency:
Common Stock, $.10 Par Value, Authorized
100,000,000 Shares in 2000 and
50,000,000 Shares in 1999; Issued and
Outstanding 33,335,090 Shares in 2000 and
31,072,296 Shares in 1999. 3,333,000 3,107,000
Capital in Excess of Par 33,288,000 31,981,000
Accumulated Deficit (38,429,000) (37,308,000)
-------------- -------------
Stockholders' Deficiency (1,808,000) (2,220,000)
-------------- -------------
Total Liabilities and Stockholders' Deficiency $ 4,575,000 $ 3,228,000
============= =============
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
24
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Capital
------------ in Excess Accumulated
Shares Amount of Par Deficit
------ ------ ------ -----------
<S> <C> <C> <C> <C>
Balance, March 28, 1998 31,072,296 $3,107,000 $31,269,000 $(33,828,000)
========== ========== =========== ============
Issuance of Warrants -- -- 712,000 --
Net Loss for Year Ended
April 3, 1999 -- -- -- (3,480,000)
---------- ---------- ----------- ------------
Balance, April 3, 1999 31,072,296 $3,107,000 $31,981,000 $(37,308,000)
========== ========== =========== ============
Exercise of Incentive Stock Options 2,262,794 226,000 114,000 --
Issuance of Warrants -- -- 1,193,000 --
Net Loss for Year Ended
April 1, 2000 -- -- -- (1,121,000)
---------- ---------- ----------- ------------
Balance, April 1, 2000 33,335,090 $3,333,000 $33,288,000 $(38,429,000)
========== ========== =========== ============
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
25
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
April 1, April 3,
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(1,121,000) $(3,480,000)
Adjustments to Reconcile Net Loss to
Net Cash Used In Operating Activities:
Warrants Issued to NeST for Services 1,155,000 670,000
Depreciation and Amortization 279,000 431,000
Changes in Assets and Liabilities Which
Provided (Used) Cash:
Accounts Receivable (950,000) 362,000
Due from Affiliate (10,000) (42,000)
Inventory (476,000) 855,000
Prepaid Expenses and Other (36,000) 7,000
Accounts Payable 487,000 172,000
Advances 126,000 (194,000)
Accrued and Other Expenses 260,000 (98,000)
----------- -----------
Net Cash Used In Operating Activities (286,000) (1,317,000)
Cash Flows From Investing Activities:
Purchase of Equipment and Intangible Assets (89,000) (77,000)
----------- -----------
Net Cash Used In Investing Activities (89,000) (77,000)
Cash Flows from Financing Activities:
Proceeds from Borrowings Under Bank Line of Credit 125,000 625,000
Proceeds from Note Payable -- 150,000
Exercise of Stock Options 340,000 --
Issuance of Warrants 38,000 42,000
Payments on Note Payable (30,000) --
Payments Under Capital Lease Obligations (39,000) (109,000)
----------- -----------
Net Cash Provided By Financing Activities 434,000 708,000
Net Increase (Decrease) In Cash 55,000 (686,000)
Cash:
Beginning 24,000 710,000
----------- -----------
Ending $ 79,000 $ 24,000
=========== ===========
Interest Paid $ 95,000 $ 33,000
=========== ===========
Income Taxes Paid (Refunded) $ -- $ (27,000)
=========== ===========
Non-Cash Financing Activities:
Equipment Purchased Under Capital Lease $ 6,000 $ --
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
26
<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 April 1, 2000 and April 3, 1999 included 52 weeks and 53
weeks, respectively.
Revenue Recognition
AM Communications, Inc. (the "Company") derives its revenues principally
from sales of its products to the cable TV industry. 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. Revenue from custom
development efforts is recognized as contractual milestones are achieved.
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. Patents are 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. As of April 1, 2000 all goodwill has been
fully amortized.
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 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. Other research and development costs
are expensed currently. None of the Company's software development efforts in
fiscal 2000 or 1999 met the requirements for capitalization.
27
<PAGE>
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.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) was adopted by the Company in April 1996
and the Company continued 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, as discussed in
Note 10.
Income (Loss) Per Common Share
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share."
Note 2. Inventory:
April 1, April 3,
2000 1999
----------- -----------
Raw Material $ 1,805,000 $ 1,940,000
Work-in-Process 1,167,000 595,000
Finished Goods 110,000 183,000
----------- -----------
3,082,000 2,718,000
Inventory Reserve (1,388,000) (1,500,000)
----------- ------------
Net Inventory $ 1,694,000 $ 1,218,000
=========== ============
The Company evaluates the inventory reserve annually to reflect product
line transitions which have resulted from new product development. The reserve
represents management's estimate of excess inventory not usable in new product
generations.
28
<PAGE>
Note 3. Equipment and Fixtures:
<TABLE>
<CAPTION>
Estimated April 1, April 3,
Useful Lives 2000 1999
------------ ----------- ------------
<S> <C> <C> <C>
Equipment 3-5 yrs. $ 4,049,000 $ 3,957,000
Furniture and Fixtures 3-5 yrs. 314,000 314,000
Leasehold Improvements 5 yrs. 126,000 126,000
------------- ------------
4,489,000 4,397,000
Accumulated Depreciation & Amortization (4,273,000) (4,001,000)
------------- ------------
$ 216,000 $ 396,000
============= ============
</TABLE>
For the years ended April 1, 2000 and April 3, 1999, depreciation and
amortization expense was $279,000 and $431,000, respectively.
Note 4. Related Party Transactions:
Under a consulting agreement with Lemuel A. Tarshis, a director of the
Company, the Company expensed a total of $35,000 during fiscal 2000.
In November 1999, the Company entered into a Strategic Development and
Manufacturing Agreement with Network Systems and Technologies, Ltd. (NeST (P)
Ltd.). NeST (P) Ltd. is a technology company located in India which provides
software and hardware design services and manufacturing services. NeST (P) Ltd.
is controlled and managed by N. Jehangir, who is the brother of Mr. Javad
Hassan. Mr. Hassan is the founder, CEO, and owner of NeST Technologies, Inc., a
U.S. headquartered technology services company which provides and receives
services to and from NeST (P) Ltd. Collectively these operations are referred to
as NeST. Under the Agreement, services performed by NeST are compensated at a
negotiated rate and the Company has the ability to pay in warrants or cash. See
Note 10.
In June 1999, the Company entered into an agreement with its chairman,
Javad K. Hassan, whereby Mr. Hassan will provide a $500,000 line of credit to
the Company, with interest payable at 10% and payment of all outstanding
borrowings and interest due by December 31, 2000. No amounts were borrowed under
this line during fiscal 2000.
Effective January 1, 2000, the Company entered into an agreement with
NeSTronix whereby NeSTronix assumed all responsibility for the manufacture of
the Company's hardware products. Company employees who were associated with the
manufacturing of the Company's products became employees of NeSTronix and
NeSTronix assumed financial responsibility for certain of the Company's
inventory. NeSTronix agreed to provide the Company competitive fixed pricing for
its hardware products in return for the transfer of manufacturing rights.
NeSTronix is a newly formed entity providing outsource manufacturing services
through its network of on-shore and India based electronic manufacturing
operations. NeSTronix is owned by Javad K. Hassan, the Company's Chairman. The
Company paid $441,000 to NeSTronix during fiscal 2000 for such services.
The Company provides certain administrative and support services and office
space to NeST, NeSTronix and several other entities associated with Mr. Hassan's
non-AM business ventures. During fiscal 2000, the Company received fees totaling
$613,500 for such services. Should the level of services exceed planned levels,
the parties will negotiate an increase in the fee.
29
<PAGE>
Note 5. Accrued Expenses:
Accrued expenses consist of the following items:
April 1, April 3,
2000 1999
---------- ----------
Accrued Compensation $ 302,000 $ 341,000
Accrued Rent 160,000 180,000
Accrued Real Estate Taxes 93,000 41,000
Warranty Reserve 203,000 203,000
Accrued Taxes --- 2,000
Accrued Professional Fees 71,000 63,000
Accrued Contracted Services 196,000 ---
Other 124,000 59,000
----------- ----------
$ 1,149,000 $ 889,000
=========== ==========
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 2000 Fiscal 1999
----------- -----------
Current Income Taxes $ -- $ 28,000
Deferred Income Taxes (471,000) (1,464,000)
Change in Valuation Allowance 471,000 1,464,000
----------- -----------
Net $ -- $ 28,000
=========== ===========
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 2000 Fiscal 1999
----------- -----------
Federal Income Tax Provision (Benefit) at
Statutory Rate $ (381,000) (1,174,000)
State Income Taxes, Net of Federal Benefit (74,000) (185,000)
Research and Development Credits (20,000) (75,000)
Non-deductible Amounts 4,000 4,000
Change in Valuation Allowance 471,000 1,464,000
Other -- (6,000)
----------- -----------
Income Tax Provision $ -- $ 28,000
=========== ===========
The components of the net deferred tax asset as of April 1, 2000 and April
3, 1999 were as follows:
April 1, April 3,
2000 1999
----------- -----------
Deferred Tax Items:
Inventory $ 563,000 $ 609,000
Accrued Expenses and Reserves 362,000 379,000
Net Operating Loss Carryforwards 9,324,000 8,811,000
Tax Credit Carryforwards 843,000 822,000
Valuation Allowance (11,092,000) (10,621,000)
----------- -----------
Net Deferred Tax Assets $ -- $ --
=========== ===========
30
<PAGE>
The Company has total net operating loss carryforwards available to offset
future taxable income of approximately $26 million expiring at various times
from 2000 to 2014. Due to certain statutory limitations under the Internal
Revenue Code, a portion of such carryforwards may expire unutilized.
Note 7. Operating Leases:
The Company leases its facility under a lease expiring in January 2002. The
Company also leases certain equipment under short term leases. Rental expense
charged to operations for fiscal years 2000 and 1999 was $289,000 and $288,000,
respectively.
Future minimum lease commitments under the Company's facility lease are:
2001 $ 350,000
2002 $ 322,000
----------
$ 672,000
==========
Note 8. Obligations Under Capital Leases:
The Company has capital lease agreements for machinery and equipment as
follows:
April 1, April 3,
2000 1999
--------- ----------
Capitalized cost $ 6,000 $ 482,000
Accumulated amortization (1,000) (451,000)
--------- ----------
$ 5,000 $ 31,000
========= ==========
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 the following fiscal
years, together with the present value of the net minimum lease payments as of
April 1, 2000, are:
2001 3,000
2002 2,000
2003 1,000
-----
Total minimum lease payments 6,000
Less amount representing interest 1,000
-----
Present value of net minimum lease payments 5,000
Less current maturities (2,000)
------
Capital lease obligations - long term $3,000
======
Note 9. Business, Major Customers, and Credit Risk:
The Company operates in one business 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.
31
<PAGE>
The Company's revenues in fiscal 2000 included two OEM customers who
individually contributed 38%, and 25% of the total revenues, respectively. In
fiscal 1999, these two customers contributed 29% and 18%, respectively and one
domestic customer contributed 15% of revenues. No other customer contributed
more than 10% of revenues in either year.
Note 10. Capital Stock:
The Company has a stock option plan (the "1999 Plan") for its employees
which was approved by the stockholders in February, 1999. Under this 1999 Plan,
either non-qualified options or incentive stock 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 generally become exercisable one-third
per year commencing one year after the date of grant and terminating after 10
years. The aggregate maximum number of shares for which options may be issued
under the 1999 Plan is 10,000,000.
The Company has previously adopted a 1982 Stock Option Plan and a 1991
Stock Option Plan. Options to acquire 2,000 shares and 2,569,400 shares of the
Company's Common Stock are outstanding under the 1982 Stock Option Plan and the
1991 Stock Option Plan, respectively, and expire 10 years after the date of
grant. No additional options may be granted under either Plan.
The following summary shows the aggregate stock option activity expressed
in shares for the 1982, 1991, and 1999 Plans:
Fiscal Years Ended
April 1, April 3,
2000 1999
---------- -----------
Outstanding at Beginning of Year 11,955,333 6,325,333
Granted 2,070,000 7,563,000
Terminated (238,139) (1,903,000)
Expired (10,000) (20,000)
Exercised 2,262,794 --
---------- ----------
Outstanding at End of Year 11,514,400 11,955,333
========== ==========
Available for Grant 1,057,000 3,102,000
========== ==========
Exercisable at End of Year 4,452,482 3,919,309
========== ==========
Price Range of Options Outstanding at April 1, 2000 - $0.125 - $0.50 (Weighted
Average -$0.21)
In September 1998, the Company modified the terms of all previously issued
and outstanding options and repriced the exercise price using the then current
market price of $0.15 per share.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation cost has been recognized.
Had compensation cost for the Company's Plan been determined consistent with
FASB Statement No. 123, the
32
<PAGE>
Company's net loss and loss per share would have been increased to the pro forma
amounts indicated below:
Fiscal Years Ended
April 1, April 3,
2000 1999
----------- -----------
Net loss as reported As reported $(1,121,000) $(3,480,000)
Pro forma $(1,642,000) $(3,980,000)
Basic loss per share As reported $ (0.03) $ (0.11)
Pro forma $ (0.05) $ (0.13)
Diluted loss per share As reported $ (0.03) $ (0.11)
Pro forma $ (0.05) $ (0.13)
The per share weighted-average fair value of stock options granted during
fiscal years 2000 and 1999 was $0.21 and $.12, respectively, on the date of
grant calculated using the Black Scholes option-pricing model with the following
weighted-average assumptions:
Fiscal Years Ended
April 1, April 3,
2000 1999
--------- -----------
Expected Life (Years) 4.5 5.0
Risk-Free Interest Rate 6.5% 6.0%
Volatility 70% 50.0%
Dividend Yield 0% 0.0%
At April 1, 2000, the following warrants to purchase the Company's common
stock were outstanding:
Issued in Expiration Exercise Number of
Fiscal Year Date Price Shares
----------- --------------- -------- ---------
1996 July 1, 2004 $0.74 2,027,027
1999 April 3, 2004 $0.01 4,234,018
2000 October 2, 2004 $0.01 2,489,248
2000 January 1, 2005 $0.01 1,139,068
In July 1996, the Company issued warrants to purchase 2,027,027 shares of
common stock at $0.74 per share in return for $300,000 cash. These warrants
become exercisable in one third increments per year commencing July 1, 1997 and
expire five years after they become exercisable.
Under the terms of the Strategic Development and Manufacturing Agreement
with NeST, the Company elected to issue warrants to purchase 4,234,018 shares of
the Company's common stock at an exercise price of $.01 per share in payment of
$670,000 of NeST development services charged to earnings for the period of
November 1998 through April 3, 1999 and 3,628,316 warrants to purchase the
Company's Common Stock at an exercise price of $.01 per share as payment for
$1,230,000 owed NeST for services performed from April 4, 1999 through January
1, 2000.
33
<PAGE>
Net Income/(Loss) Per Share
The following is a reconciliation of the numerator and denominators of the
basic and diluted EPS computations at April 1, 2000 and April 3, 1999.
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Net Loss $(1,121,000) $(3,480,000)
Basic Shares 32,143,374 31,072,296
Convertible Preferred Stock and Dilutive Options -- --
----------- -----------
Diluted Shares 32,143,374 31,072,296
Net Loss Per Common Share
Basic (0.03) (0.11)
Diluted (0.03) (0.11)
</TABLE>
In 2000 and 1999, convertible preferred stock, warrants, and options to
purchase common stock were not included in the computation of diluted EPS
because they would be anti-dulutive and increase the net loss.
Note 11. Redeemable Preferred Stock and Debt
Alvin Hoffman, the Company's majority stockholder and a director, owns the
25,825 shares of Senior Convertible Redeemable Preferred Stock which is
convertible into 3,443,333 shares of Common Stock. 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, 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 April 1, 2000.
Note 12. Commitments and Contingencies
None.
Note 13. Working Capital Line of Credit
The Company maintains a working capital line of credit from a commercial
bank to provide up to $750,000 based on 80% of the value of qualified accounts
receivable. Under terms of the agreement, all the Company's assets are pledged
and interest is payable at 2% above prime.
As a result of the financial loss for fiscal 2000, the Company was in
technical default on several financial convenents under the line of credit
agreement. Subsequent to year-end, the Company received from the bank a waiver
of the default and also an extension of the line through July 31, 2001.
34
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
During the fourth quarter of the year ended April 1, 2000, the Company
filed a Form 8-K/A with the Securities and Exchange Commission, dated January
26, 2000, pertaining to the change of accountants from KPMG LLP to Grant
Thornton LLP.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act
Listed below are the directors and executive officers of the Company as of
June 15, 2000:
Name Age Position
---- --- --------
Javad K. Hassan (1) (2) 59 Chairman
Keith D. Schneck 45 Chief Financial Officer and Director
Harry J. Tankin 48 President
Joseph D. Rocci 52 Vice President, Marketing
Michael L. Quelly 46 Vice President, Hardware Engineering
Roger Jack 40 Vice President, Software Engineering
R. Barry Borden (1) 60 Director
Jill A. Felix (2) 56 Director
Alvin Hoffman 71 Director
Lemuel A. Tarshis, Ph.D. (2) 59 Director
(1) Member of Compensation and Stock Option Committee of the Board.
(2) Member of Audit Committee of the Board.
Mr. Tankin resigned as an officer and an employee of the Company effective
July 1, 2000.
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.
Mr. Hassan joined the Company in November 1998 as Chairman of the Board.
Prior to joining the Company, Mr. Hassan held senior level positions at AMP,
Inc. from 1988 until he was named President of AMP Communications Systems
Business, a division of AMP, Inc., in 1995. He previously had a 20 year career
at IBM, starting in 1968 as an engineer, and subsequently promoted to head of
the IBM East Fishkill semiconductor facility and of IBM's Tape Drive Division.
Mr. Hassan is the founder and principal shareholder of NeST Technologies, Inc.,
a U.S. headquartered technology services company which provides and receives
services to and from NeST (P) Ltd. located in India. He currently serves as
Chairman of the Electronic Development Commission for the Government of Kerala
in India. Mr. Hassan also serves as Chairman of NeSTronix and e-Cell
Technologies, Inc. and is a director of Fibercore, Inc., a public company.
35
<PAGE>
Keith D. Schneck joined the Company in April 1995 as President and Chief
Financial Officer and became a Director in June 1995. In January 1998, he was
appointed Chief Executive Officer. In April 2000, Mr. Schneck resigned from his
positions as President and CEO and continues to serve as CFO. Prior to joining
the Company, he held senior management positions at Integrated Circuit Systems,
Inc. including Chief Operating Officer and Senior Vice President, Finance from
1987 until he joined the Company. He is also an advisor to Mr. Hassan and NeST
Technologies, Inc.
Harry J. Tankin joined the Company in February 1999 as Vice President,
Sales and Marketing. In April 2000, Mr. Tankin was appointed President and
resigned effective July 1, 2000. From 1984 until he joined the Company, he held
marketing and business development positions, including Director of Marketing,
at General Instrument Corporation.
Joseph D. Rocci joined the Company in October 1983 as Director of
Engineering. Mr. Rocci has served as Vice President, Marketing since April 2000.
He served as Vice President, Product Operations of the Company from 1988 to 1989
at which time he was appointed Vice President of Product Technology.
Michael L. Quelly joined the Company in 1982. He has 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.
Roger Jack joined the Company in May 2000 as Vice President, Software
Engineering. Mr. Jack was a software development consultant with for the Company
since 1997. He has served as a software consultant for QVC from 1997 and has
held senior software engineer positions with Visio Corporation, Unisys and ECTA
Corporation from 1988 to 1996.
R. Barry Borden has been a director of the Company since October 1996. Mr.
Borden is President of Broadbeam Corporation (formerly Nettech Systems, Inc.) of
Princeton, New Jersey. He previously has held executive level positions with
other high technology companies including Mergent International, Cricket
Software, Inc., Franklin Computer Corporation and Delta Data Systems. Mr. Borden
is also a director of Fastnet Corporation, and Chairman of Sedona Corporation,
both publicly held companies.
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.
Lemuel A. Tarshis was elected director of the Company in October 1996. Dr.
Tarshis is a private consultant. He also is a research professor at Stevens
Institute of Technology since 1991. Dr. Tarshis held vice president positions
with General Instrument Corporation from 1986 to 1990. He is a director of NeST
Technologies, Inc.
Jill A. Felix was elected director of the Company in March 2000. She has
been President, CEO, and director of the University Science Center since 1997.
She previously held executive level positions with Liberty Property Trust from
1983 to 1997. She also holds director positions for numerous organizations
including Greater Philadelphia First, West Philadelphia Partnership, University
City District, Delaware Valley Industrial Resource Center, Pennsylvania
BioTechnology Association, International House and the Valley Forge Historical
Society.
36
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
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 the issuance of warrants were filed
late by Network Systems & Technologies, Inc. In addition, reports pertaining to
grants of stock options were filed late by Javad K. Hassan, R. Barry Borden,
Alvin Hoffman, Lemuel Tarshis, Joseph D. Rocci, and Michael L. Quelly. The
Company believes that all filing requirements applicable to its other officers,
directors and greater than 10% beneficial owners have been timely satisfied.
Item 10. Executive Compensation
The following tables set forth certain information concerning (a) the cash
remuneration paid by the Company during each of the last three fiscal years to
the Company's Chief Executive Officer and to each executive officer of the
Company whose cash compensation exceeded $100,000 per annum during any such
year, and (b) stock options granted and certain other compensation paid during
the last three fiscal years to each such individual.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual and Long Term Compensation
Name & Principal Fiscal Stock Options Other
Position Year Salary Awarded Compensation
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Keith D. Schneck 2000 $ 138,000 -- $ 4,838 (3)
CFO and Director 1999 138,000 1,350,000 (1) 4,528
1998 133,000 450,000 (2) 4,574
-------------------------------------------------------------------------------------------------
Michael L. Quelly 2000 $ 106,000 -- $ 3,870 (4)
Vice President, 1999 98,000 705,000 (5) 3,342
Engineering 1998 95,000 405,000 (6) 3,060
-------------------------------------------------------------------------------------------------
Joseph D. Rocci 2000 $ 106,000 -- $ 3,185 (7)
Vice President, 1999 94,000 705,000 (8) 2,751
Product Technology 1998 92,000 405,000 (9) 2,812
-------------------------------------------------------------------------------------------------
Harry J. Tankin * 2000 $ 110,000 1,000,000 $ 3,473(10)
President, 1999 28,000 400,000 31
1998 -- -- --
-------------------------------------------------------------------------------------------------
</TABLE>
* Mr. Tankin joined the Company on Feburary 1, 1999. He resigned as an
officer and an employee of the Company effective July 1, 2000 and his
options will be forfeited.
(1) Includes 850,000 shares of repriced stock options previously issued in
fiscal years 1997 and 1996.
(2) Repriced stock options previously issued in fiscal year 1996.
(3) Represents $554, $403 and $400 in group life insurance premiums paid by the
Company in fiscal 2000, 1999 and 1998, respectively, and $4,284, $4,125 and
$4,174 in matching contributions under the Company's 401(k) plan paid by the
Company in fiscal 2000, 1999, and 1998, respectively.
(4) Represents $554, $402 and $384 in group life insurance premiums paid by the
Company in fiscal 2000, 1999 and 1998, respectively, and $3,316, $2,940 and
$2,676 in matching contributions under the Company 401(k) plan paid by the
Company in fiscal 2000, 1999 and 1998, respectively.
37
<PAGE>
(5) Includes 405,000 shares of repriced stock options previously issued in
fiscal years 1998, 1997, 1995, and 1993.
(6) Includes 280,000 shares of repriced stock options previously issued in
fiscal years 1997, 1995, and 1993.
(7) Represents $554, $402 and $376 in group life insurance premiums paid by the
Company in fiscal 2000, 1999 and 1998, respectively, and $2,630, $2,349 and
$2,436 in matching contributions under the Company 401(k) plan paid by the
Company in fiscal 2000, 1999 and 1998, respectively.
(8) Includes 405,000 shares of repriced stock options previously issued in
fiscal years 1998, 1997, 1995, and 1993.
(9) Includes 255,000 shares of repriced stock options previously issued in
fiscal years 1997, 1995, and 1993.
(10) Represents $554 and $31 in group life insurance premiums paid by the
Company in fiscal 2000 and 1999, respectively, and $2,919 in matching
contributions under the Company 401(k) plan paid by the Company in fiscal
2000.
Other than the salary and bonus described herein, the Company did not pay
the executive officers named in the Summary Compensation Table any fringe
benefits, perquisites or other compensation in excess of 10% of such executive
officer's salary and bonus during fiscal 2000, 1999, and 1998. The above
compensation does not include certain insurance and other personal benefits, the
total value of which does not exceed, as to any named officer, the lesser of
$50,000 or 10% of such person's cash compensation.
All of the Company's group life, health, hospitalization or medical
reimbursement plans, if any, do not discriminate in scope, terms, or operation
in favor of the executive officers or directors of the Company and are generally
available to all salaried employees.
The Company has a stock option plan (the "1999 Plan") for its employees,
directors, and other persons responsible for significant contributions to the
Company's business. Under this 1999 Plan, which was approved by the stockholders
in February, 1999, either non-qualified options or incentive stock options may
be granted to purchase shares of the Company's stock at a price not less than
its fair market value on the date of the grant. Options generally become
exercisable one-third per year commencing one year after the date of grant and
terminating after 10 years. The aggregate maximum number of shares for which
options may be issued under the 1999 Plan is 10,000,000.
The following table sets forth options granted to the named executive
officers during fiscal 2000:
<TABLE>
<CAPTION>
% of Total
No. of Securities Options Granted Exercise
Fiscal Underlying Options to Employees Price Expiration
Year Granted in Fiscal Year ($/Share) Date
---- ---------------------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Keith D. Schneck 2000 -- -- -- --
Michael L. Quelly 2000 -- -- -- --
Joseph D. Rocci 2000 -- -- -- --
Harry J. Tankin * 2000 1,000,000 52% $0.50 2/3/10
</TABLE>
* Options were forfeited as Mr. Tankin resigned as an officer and employee
of the Company.
The following table sets forth certain information pertaining to the stock
options held by the individuals named in the Summary Cash Compensation Table
upon exercise of stock options in fiscal 2000 and pertaining to the number and
value of options held by such individuals at year end:
38
<PAGE>
<TABLE>
<CAPTION>
Fiscal 2000 Option Exercises and Year End Option Values
-----------------------------------------------------------------
Number of Value of
Unexercised Options In-the-Money Options
Shares Value At Fiscal Year End at April 1, 2000(2)
Acquired on Realized ------------------ -------------------
Name Exercise ($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Keith D. Schneck 200,000 $420,000 816,666 333,334 $ 1,175,000 $ 478,000
Michael L. Quelly 90,000 30,218 463,333 241,667 666,600 346,800
Joseph D. Rocci 90,000 30,218 455,000 250,000 654,600 358,800
Harry J. Tankin 133,334 360,468 -- 1,266,666 -- 1,472,400
</TABLE>
(1) Value realized is the difference between the market price of a share of
Common Stock on the date of exercise and the exercise price of the option,
multiplied by the number of shares underlying the option.
(2) Value is based upon the closing price of the stock on April 1, 2000, less
the exercise price.
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 addition
to the standard director fees, each director was granted options to purchase
50,000 shares at an exercise price of $0.50 on February 3, 2000. These options
were fully vested as of the date of grant. In addition, Javad K. Hassan received
an option grant on February 19, 1999 to purchase 5,000,000 shares exercisable
equally over a three year period at an exercise price of $0.156 in accordance
with a Services Agreement with the Company. All the options granted to Mr.
Hassan became fully vested as part of the negotiated terms of a $500,000 line of
credit commitment from Mr. Hassan to the Company in June 1999.
The Company does not have any employment contracts or arrangements with any
of its executive officers.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The table below sets forth certain information as of June 30, 2000 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(11)
------------------------- ------ -----------------------
Javad K. Hassan 27,254,171(3) 59.1%
Alvin Hoffman 18,758,170(4) 50.9%
Keith D. Schneck 986,666(5) 2.9%
Michael L. Quelly 538,332(6) 1.6%
Joseph D. Rocci 507,846(7) 1.5%
R. Barry Borden 210,000(8) *
Lemuel A. Tarshis 200,000(9) *
Jill A. Felix -- --
Harry J. Tankin -- *
All Directors and Executive
Officers as a Group (9 Persons) 30,730,014(10) 63.4%
* Less than one percent.
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<PAGE>
(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
include additional shares issuable pursuant to options or warrants held by such
owners which are exercisable or may become exercisable within 60 days of the
date hereof.
(2) The address of all beneficial owners is c/o AM Communications, Inc.,
100 Commerce Boulevard, Quakertown, PA 18951-2237.
(3) Includes (i) 14,391,837 shares of the Common Stock pursuant to The
Voting Trust and Share Price Participation Agreement between Mr. Hoffman and Mr.
Hassan, as the Voting Trustee, over which Mr. Hassan exercises all voting
rights, (ii) 1,666,666 shares issuable pursuant to stock options, (iii)
1,130,053 shares issuable pursuant to the NeST Technologies, Inc. warrants
issued for services rendered, of which Mr. Hassan is CEO and sole owner, and
(iv) 6,732,281 shares issuable pursuant to the NeST (P) Ltd. warrants issued for
services rendered, which are controlled by Mr. Hassan's brother. Mr. Hassan
disclaims beneficial ownership of the shares set forth in (iv) above.
(4) 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) 25,825 shares of Senior
Convertible Preferred Stock convertible into 3,443,333 shares of Common Stock,
(ii) 150,000 shares issuable pursuant to stock options, (iii) 773,000 shares of
Common Stock currently owned by Mr. Hoffman's wife, and (iv) 14,391,837 shares
of Common Stock of the Company which the Hoffman Trust beneficially owns but
over which Javad K. Hassan, as Voting Trustee, exercises all voting rights. Mr.
Hoffman disclaims beneficial ownership of the shares set forth in (iii) above.
(5) Includes 816,666 shares issuable pursuant to stock options.
(6) Includes 463,332 shares issuable pursuant to stock options.
(7) Includes 455,000 shares issuable pursuant to stock options.
(8) Includes 200,000 shares issuable pursuant to stock options.
(9) Includes 200,000 shares issuable pursuant to stock options
(10) Includes (i) an aggregate of 14,391,837 shares of Common Stock
beneficially owned by the Hoffman Trust but over which Javad K. Hassan, as
Voting Trustee, exercises all voting rights, (ii) 25,825 shares of Senior
Convertible Preferred Stock convertible into 3,443,333 shares of Common Stock,
(iii) 773,000 shares of Common Stock currently owned by Mr. Hoffman's wife as to
which Mr. Hoffman disclaims beneficial ownership, (iv) 2,284,998 shares of
Common Stock which may be acquired upon the exercise of outstanding options (v)
9,529,000 options and warrants held by Mr. Hassan and the NeST entities of which
Mr. Hassan disclaims beneficial ownership of 6,732,281 shares, and (vi) 307,846
shares of Common Stock held by other officers and directors.
(11) The percentages have been calculated on the basis of treating as
outstanding, for a particular holder, all shares of the Common Stock outstanding
on said date and all shares of the Common Stock issuable to such holder in the
event of exercise or conversion of outstanding options, warrants and convertible
securities owned by such holder at said date which are exercisable or
convertible within 60 days of such date.
40
<PAGE>
All outstanding shares of the Company's Senior Convertible Redeemable
Preferred Stock as of June 30, 2000 are owned by Alvin Hoffman.
On November 2, 1998, the Alvin Hoffman Revocable Trust UAD 2/28/86 entered
into a Voting Trust and Share Price Participation Agreement dated November 2,
1998 (the "Voting Trust"), with Javad (Jay) K. Hassan as voting trustee (the
"Voting Trustee"), and pursuant thereto deposited with the Voting Trustee
14,391,837 shares of the common stock of the Company. Pursuant to the terms of
the Voting Trust, the Voting Trustee is entitled, for the five year term of the
Voting Trust, to exercise all voting rights with respect to such shares.
Accordingly, the Company believes that, while Alvin Hoffman, the settlor of the
Alvin Hoffman Revocable Trust UAD 2/28/86, remains a beneficial owner of such
shares, the transfer of voting rights with respect to such shares resulted in a
change in control of the Company from Mr. Hoffman to Mr. Hassan.
Neither Mr. Hoffman nor the Alvin Hoffman Revocable Trust UAD 2/28/86
received any consideration for the above-described transfer of voting rights.
Item 12. Certain Relationships and Related Transactions
In July 1998, the Company received a $250,000 commitment from its primary
shareholder, Alvin Hoffman, to provide working capital through July 1999 at 10%
interest and payment of outstanding borrowings due by September 30, 1999. No
amounts were borrowed under this commitment.
On November 2, 1998, Javad (Jay) K. Hassan entered into a Services
Agreement with the Company pursuant to which Mr. Hassan (i) was appointed to the
Company's Board of Directors and elected to serve as its Chairman of the Board,
(ii) agreed to assume the duties and responsibilities described therein, and
(iii) was granted an option to acquire 5,000,000 shares of the Company's Common
Stock, at a per share exercise price of $0.156 which was equal to the fair
market value of the stock on the date of grant.
On the same date, the Company entered into a strategic development and
manufacturing agreement with Network Systems & Technologies (P) Ltd. (NeST (P)
Ltd.). NeST (P) Ltd. is a technology company located in India which provides
software and hardware design services and manufacturing services. NeST (P) Ltd.
is controlled and managed by N. Jehangir, who is the brother of Mr. Jay Hassan.
Mr. Hassan is the founder, CEO, and owner of NeST Technologies, Inc. a U.S.
headquartered technology services company which provides and receives services
to and from NeST (P) Ltd. Collectively these operations are referred to as NeST.
The Company has the option to pay for NeST development services either in cash
or through the issuance of warrants. During fiscal 1999, the Company issued
4,234,018 warrants to purchase AM Common Stock, at an exercise price of $.01 per
share, in payment for $670,000 of NeST services from November 1998 through April
3, 1999. The Company also issued warrants to purchase 3,628,316 shares of the
Company's Common Stock at an exercise price of $.01 per share in payment of
$1,157,197 of NeST development services for the period from April 1999 through
January 1, 2000. In addition, a total of $569,083 of NeST development expenses
were incurred during fiscal 2000 of which $299,042 was paid in cash and $270,041
is reflected as a liability on the Company's balance sheet as of April 1, 2000.
The warrants are presently exercisable and expire five years from the date of
issuance.
41
<PAGE>
Keith D. Schneck, the Chief Operating Officer and a director of the Company
also provides advisory services to Mr. Hassan and NeST Technologies, Inc.
During the fourth quarter of fiscal 2000, the Company entered into an
agreement with NeSTronix, to outsource all of its manufacturing requirements
commencing January 1, 2000. NeSTronix provides complete turnkey electronic
design and outsourcing services to third party customers, and is owned and
controlled by the Company's Chairman, Mr. Javad K. Hassan. Under this
relationship, the Company's existing manufacturing staff was transferred and
became employees of NeSTronix as of January 2, 2000. In return, the Company
received a long-term commitment from NeSTronix to manage and supply all of the
Company's manufacturing requirements for a three year period with agreed upon
pricing. The Company paid $441,000 during fiscal 2000 for such services.
In June 1999, the Company entered into an agreement with its chairman,
Javad K. Hassan, whereby Mr. Hassan provided a $500,000 line of credit to the
Company, with interest payable at 10%. Payment of all outstanding borrowings and
interest is due by December 31, 2000; however, no amounts were borrowed under
this line during fiscal 2000.
During the first quarter of fiscal 2000, the Company agreed to provide
certain administrative and manufacturing support services and provide office
space to NeST and several other entities associated with Mr. Hassan's non-AM
business ventures. The Company received fees of $615,500 for such services.
Should the level of services exceed planned levels, the parties will negotiate
an increase in the quarterly fee.
Item 13. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a)(1) Exhibits
<S> <C>
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.
4-b (4.2) Warrant issued to NeST.
9-a Voting Trust and Share Participation Agreement (Exhibit 9.1)
**10-a. 1991 Incentive Stock Option Plan.
***10-b. Joint Development Agreement between AM Communications and
Scientific-Atlanta dated May 1996.
***10-c. Distribution Agreement and Manufacturing License dated June 14, 1996.
***10-d. Registration Rights Agreement dated June 17, 1996.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
***10-e. Warrant Agreement dated June 17, 1996.
10-f. 1999 Stock Option Plan.
10-g. Line of Credit Commitment Letter with Progress Bank dated June 29, 1999.
****10-h. Services Agreement between the Company and Jay Hassan
****10-i. Consulting Services Agreement between the Company and NeST.
10-j. Manufacturing Services Agreement between the Company and NeSTronix. (Exhibit 10.1)
23. Consent of Grant Thornton LLP dated June 30, 2000.
23.1 Consent of KPMG LLP dated June 28, 2000.
27. Financial Data Schedule
* 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 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 March 30, 1996.
**** Incorporated by reference to the Exhibit number indicated in Registrant's
Report on Form 8-K dated November 9, 1998.
</TABLE>
(b) The Company filed a report on Form 8-K/A in January, 2000 reporting upon a
change in the Company's independent certified accountant.
43
<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/ Javad K. Hassan
---------------------------
By : Javad K. Hassan
Chairman of the Board
Date: July 11, 2000
--------------
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/ Javad K. Hassan /s/ Keith D. Schneck
------------------------------- -------------------------------------
Javad K. Hassan Keith D. Schneck
Chairman of the Board Chief Financial Officer and Director
(Principal Executive Officer) (Principal Financial and Accounting
Date: July 11, 2000 Officer)
-------------------------- Date: July 11, 2000
--------------------------------
/s/ R. Barry Borden /s/ Alvin Hoffman
------------------------------- -------------------------------------
R. Barry Borden Alvin Hoffman
Director Director
Date: July 11, 2000 Date: July 11, 2000
-------------------------- --------------------------------
/s/ Lemuel A. Tarshis /s/ Jill A. Felix
------------------------------- -------------------------------------
Lemuel A. Tarshis Jill A. Felix
Director Director
Date: July 11, 2000 Date: July 11, 2000
-------------------------- --------------------------------
44
