<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _______________TO_______________
Commission File Number: 0-9856
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AM COMMUNICATIONS, INC.
-----------------------
(Exact name of small business issuer as specified in its charter)
Delaware 23-1922958
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Commerce Boulevard, Quakertown, PA 18951-2237
-------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(215) 538-8700
-------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes __X__ No ____
On October 31, 2000, there were 33,478,717 shares of the Registrant's Common
Stock, par value $.10 per share, outstanding.
Transitional Small Business Disclosure Format (check one): Yes____ No __X__
<PAGE>
AM COMMUNICATIONS, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Balance Sheets - September 30 (Unaudited) and
April 1, 2000 3
Statements of Operations - Quarters and Six Months Ended
September 30, 2000 and October 2, 1999 (Unaudited) 4
Statements of Cash Flows -- Six Months Ended
September 30, 2000 and October 2, 1999 (Unaudited) 5
Notes to Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Operations 8 - 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14 - 15
2
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Item 1. Financial Statements
AM COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, April 1,
2000 2000
--------------- -------------
ASSETS (Unaudited)
Current Assets:
<S> <C> <C>
Cash $ 20,000 $ 79,000
Accounts Receivable, Net of Reserves of $199,000
at September 30 and April 1, 2000 2,690,000 2,439,000
Due from Affiliate 165,000 52,000
Inventory 1,462,000 1,694,000
Prepaid Expenses and Other 120,000 79,000
--------------- --------------
Total Current Assets 4,457,000 4,343,000
Equipment and Fixtures, Net 186,000 216,000
Other Assets 9,000 16,000
--------------- --------------
Total Assets $ 4,652,000 $ 4,575,000
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Capital Lease Obligations $ 2,000 $ 2,000
Current Portion of Notes Payable 30,000 30,000
Bank Line of Credit 750,000 750,000
Accounts Payable 1,224,000 1,650,000
Deferred Revenue 20,000 126,000
Accrued Expenses 1,113,000 1,149,000
--------------- --------------
Total Current Liabilities 3,139,000 3,707,000
--------------- --------------
Capital Lease Obligations - Long Term 2,000 3,000
Notes Payable - Long Term 90,000 90,000
Deferred Revenue 72,000 ---
Senior Convertible Redeemable Preferred Stock,
$100 Par Value, Authorized 1,000,000 Shares;
Issued and Outstanding 25,825 Shares at
September 30 and April 1, 2000 2,583,000 2,583,000
--------------- --------------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.10 Par Value, Authorized 100,000,000
Shares at September 30 and April 1, 2000; Issued
and Outstanding 33,478,717 Shares at September 30
and 33,335,090 Shares at April 1, 2000 3,349,000 3,333,000
Capital in Excess of Par 33,296,000 33,288,000
Accumulated Deficit (37,879,000) (38,429,000)
---------------- --------------
Stockholders' Equity (Deficit) (1,234,000) (1,808,000)
---------------- --------------
Total Liabilities and Stockholders' Equity $ 4,652,000 $ 4,575,000
=============== ==============
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
3
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AM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 3,887,000 $ 2,126,000 $ 7,621,000 $ 4,169,000
Cost and Expenses:
Cost of Sales 1,942,000 966,000 3,757,000 2,032,000
Selling, General and Administrative 698,000 639,000 1,524,000 1,272,000
Research and Development 863,000 791,000 1,727,000 1,678,000
-------------- ------------- ------------- --------------
Operating Income (Loss) 384,000 (270,000) 613,000 (813,000)
Other Income (Expense) (34,000) (19,000) (63,000) (35,000)
--------------- ------------- ------------- --------------
Income (Loss) Before Income Taxes 350,000 (289,000) 550,000 (848,000)
-------------- ------------- ------------- --------------
Net Income (Loss) $ 350,000 $ (289,000) $ 550,000 $ (848,000)
============== ============= ============== ==============
Basic Net Income (Loss) Per Share $ 0.01 $ (0.01) $ 0.02 $ (0.03)
============== ============= ============= ==============
Diluted Net Income (Loss) Per Share $ 0.01 $ (0.01) $ 0.01 $ (0.03)
============== ============= ============= ==============
Shares Used in Computation of Basic
Net Income (Loss) Per Share 33,429,000 32,270,000 33,406,000 31,739,000
============== ============= ============= ==============
Shares Used in Computation of Diluted
Net Income (Loss) Per Share 53,622,000 32,270,000 53,855,000 31,739,000
============== ============= ============= ==============
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
4
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AM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------
September 30, October 2,
2000 1999
------------------ --------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net Income (Loss) $ 550,000 $ (848,000)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided By (Used in) Operating Activities:
Warrants Issued to NeST for Services --- 773,000
Depreciation and Amortization 93,000 164,000
Changes in Assets and Liabilities Which
Provided (Used) Cash:
Accounts Receivable (251,000) 156,000
Due from Affiliate (113,000) (176,000)
Inventory 232,000 (164,000)
Prepaid Expenses and Other (39,000) (15,000)
Accounts Payable (426,000) (273,000)
Deferred Revenue (34,000) ---
Accrued and Other Expenses (36,000) 93,000
---------------- -------------
Net Cash Used In Operating Activities (24,000) (290,000)
---------------- -------------
Cash Flows From Investing Activities:
Purchase of Equipment and Intangible Assets (58,000) (24,000)
---------------- -------------
Net Cash Used In Investing Activities (58,000) (24,000)
---------------- -------------
Cash Flows from Financing Activities:
Proceeds from Borrowings on Bank Line of Credit --- 125,000
Exercise of Stock Options 24,000 191,000
Issuance of Warrants --- 25,000
Payments Under Capital Lease Obligations (1,000) (31,000)
---------------- -------------
Net Cash Provided By Financing Activities 23,000 310,000
--------------- -------------
Net Increase (Decrease) In Cash (59,000) (4,000)
Cash:
Beginning 79,000 24,000
--------------- -------------
Ending $ 20,000 $ 20,000
=============== =============
Interest Paid $ 34,000 $ 38,000
=============== =============
Income Taxes Paid $ --- $ 2,000
=============== =============
Non-Cash Financing Activities:
Equipment Purchased Under Capital Lease $ --- $ 6,000
=============== =============
</TABLE>
The Accompanying Notes are an Integral Part of these Financial Statements.
5
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AM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
As of September 30, 2000 and for the 26 Week Periods Ended
September 30, 2000 and October 2, 1999
1. The accompanying interim financial statements should be read in conjunction
with the annual financial statements and notes thereto included in AM
Communications, Inc.'s Annual Report for the year ended April 1, 2000. The
Balance Sheet as of September 30, 2000 and the related Statements of
Operations and Statements of Cash Flows for the quarters and six months
ended September 30, 2000 and October 2, 1999 are unaudited, but in the
opinion of management include all normal and recurring adjustments
necessary for a fair statement of the results for such interim periods.
September 30, April 1,
2000 2000
--------------- -------------
(Unaudited) (Audited)
2. Inventory Comprises:
Raw Material $ 1,896,000 $ 1,805,000
Work in Process 738,000 1,167,000
Finished Goods 216,000 110,000
--------------- ---------------
2,850,000 3,082,000
Inventory Reserves (1,388,000) (1,388,000)
---------------- ---------------
Net Inventory $ 1,462,000 $ 1,694,000
=============== ===============
3. Accrued Expenses Comprise:
Accrued Compensation $ 294,000 $ 302,000
Accrued Contracted Services 189,000 196,000
Accrued Rent 142,000 160,000
Accrued Real Estate Taxes 111,000 93,000
Warranty Reserve 203,000 203,000
Accrued Professional Fees 48,000 71,000
Other 126,000 124,000
--------------- ---------------
$ 1,113,000 $ 1,149,000
=============== ===============
6
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4. Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109.
The provision for taxes on income consisted of:
Six Months Ended
----------------
September 30, October 2,
2000 1999
------------- ----------
Current Income Taxes $ --- $ ---
Deferred Income Taxes 216,000 (352,000)
Change in Valuation Allowance (216,000) 352,000
---------- ---------
Net $ --- $ ---
========= ==========
A reconciliation between the provision (benefit) 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:
Six Months Ended
----------------
September 30, October 2,
2000 1999
------------- ------------
Federal Income Tax Provision (Benefit) at
Statutory Rate $ 187,000 $(288,000)
State Income Taxes, Net of Federal Benefit 37,000 (56,000)
Research and Development Credits (10,000) (10,000)
Permanent Differences 2,000 2,000
Change in Valuation Allowance (216,000) 352,000
Other --- ---
--------- ----------
Income Tax Provision $ --- $ ---
========= ==========
The components of the net deferred tax asset as of September 30 and April 1
were as follows:
September 30, April 1,
2000 2000
-------------- ------------
Deferred Tax Items:
Inventory $ 563,000 $ 563,000
Accrued Expenses and Reserves 334,000 362,000
Net Operating Loss Carryforwards 9,127,000 9,324,000
Tax Credit Carryforwards 852,000 843,000
Valuation Allowance (10,876,000) (11,092,000)
------------ ------------
Net Deferred Tax Assets $ --- $ ---
============ ============
The Company has total net operating loss carryforwards available to
offset future taxable income of approximately $26 million expiring at various
times from 2001 to 2015. Due to certain statutory limitations under Internal
Revenue Code, a portion of such carryforwards may expire unutilized.
5. Net Income (Loss) Per Share
The following is a reconciliation of the numerator and denominators of the
basic and diluted EPS computations:
<TABLE>
<CAPTION> Three Months Ended Six Months Ended
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net Income (Loss) $ 350,000 $ (289,000) $ 550,000 $ (848,000)
Basic Weighted Shares
Outstanding 33,429,000 32,270,000 33,406,000 31,739,000
Convertible Preferred Stock,
Warrants and Dilutive Options 20,193,000 --- 20,449,000 ---
------------- ----------- ------------- -----------
Diluted Shares 53,622,000 32,270,000 53,855,000 31,739,000
Net Income (Loss) Per Common
Share
Basic 0.01 (0.01) 0.02 (0.03)
Diluted 0.01 (0.01) 0.01 (0.03)
</TABLE>
In fiscal 2000, 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 per share.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Operations
The following discussion contains "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 Company's present expectations or beliefs concerning
future events. The Company cautions that such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results. Potential risks and
uncertainties include, without limitation, the impact of economic conditions
generally; the competitive nature of the CATV network monitoring market; the
Company's ability to enhance its existing products and develop and introduce new
products which keep pace with technological developments in the marketplace; and
market demand. 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.
The following discussion should be read in conjunction with the Company's
Form 10-KSB for its 2000 fiscal year ended April 1, 2000.
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 and fiscal 2000, the Company experienced a
significant restructuring of its business, primarily due to the cessation of
programs involving two major customers, which contributed approximately 50% of
revenues in fiscal 1998. As part of the restructuring, the Company undertook
several major organizational changes including the election of Mr. Javad Hassan
as Chairman and the execution of a strategic development and manufacturing
relationship with NeST (as defined below). Pursuant to this relationship, NeST
provides a substantial portion of the Company's engineering and manufacturing
requirements. Mr. Hassan is also the Chairman and primary shareholder of NeST
Technologies, Inc. and NeSTronix, Inc. which are U.S. based technology service
providers that provide engineering development services and turn-key
manufacturing services, primarily through the use of technology staff resources
and electronic manufacturing operations located in India and controlled by Mr.
Hassan's brother, N. Jehangir. Collectively, these operations are referred to as
"NeST" resources.
As a result of the restructuring actions taken and other contractual
agreements between the Company and NeST, Mr. Hassan and the NeST related
companies control the voting of 14,391,837 shares of the Company's Common Stock
presently owned by the Company's majority shareholder, hold a stock option to
purchase 5,000,000 shares of common stock at $.15 per share, and hold warrants
to purchase 7,862,334 shares of common stock at $.01 per share.
8
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Using the NeST resources, the Company undertook a substantial development
program to upgrade its software and certain hardware products, which were
introduced during fiscal 2000. These products include complete new system
platforms for the Company's Omni2000 software, Scanning Ingress Monitoring
Systems, and QuickSTAT.
During the second half of fiscal 2000 and continuing into fiscal 2001, the
Company experienced significant improvements in its operations as revenue levels
increased due to the improved product set and expanded marketing activities.
Gross profit margins also improved due to the transition to the NeST-based
manufacturing strategy and operating costs decreased due to more efficient
development spending through the use of India-based NeST 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
Quarter 2 Fiscal 2001 vs. 2000
Quarter 2 Quarter 2
2001 2000
-------- --------
Revenues 100.0% 100.0%
Cost of Sales 50.0 45.4
Selling, General and Administrative 18.0 30.1
Research and Development 22.0 37.2
---- ----
Operating Income (Loss) 10.0 (12.7)
Other Income (Expense) (1.0) (.9)
----- -----
Income (Loss) Before Income Taxes 9.0 13.6
Income Tax Provision -- --
----- -----
Net Income (Loss) 9.0% 13.6%
===== =====
Revenues
Revenues were $3.9 million and $7.6 million for the second quarter and
first six months of fiscal 2001 ended September 30, 2000, representing an 83%
increase, compared to the prior year periods. The increase in revenues is due to
expanding revenues from sales of the Company's products to both existing and new
customers. During the second half of fiscal 2000 and continuing into fiscal
2001, the Company's revenues showed growth due to market acceptance of the
Company's new products and increased marketing and selling activities by the
Company. The Company is experiencing the benefit of its new Omni2000 software
platform introduced during fiscal 2000 and continued strong sales to its OEM and
MSO channels.
OEM revenues were 70% and 73% of total revenues in the second quarter and
first six months of fiscal 2001, respectively compared to 59% and 66% in the
comparable periods in fiscal 2000. The Company maintains key strategic OEM
relationships with General Instrument, Philips and Scientific-Atlanta and
others, which purchase the Company's products under private label relationships
and re-sell them primarily to their international customers. Two OEMs
contributed 46% and 54% of total revenues for the second quarter and first six
months of fiscal 2001, respectively, compared to 45% and 57% in the comparable
periods in fiscal 2000. 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.
9
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Backlog was $4.4 million at September 30, 2000 compared to $2.0 million a
year ago. While the backlog has subsequently risen to $5.6 million as of
November 9, 2000, the Company's ability to continue revenue growth in the
near-term December 2000 quarter is being impacted by material component
shortages, lengthening material lead times and delays in receiving recent new
orders which impact the Company's manufacturing cycle times. The Company expects
that any revenue shortfall from this situation will be recovered in the
Company's fourth quarter ended March 2000.
Development and software revenues totaled $609,000 and $1.0 million in the
second quarter and first six months of fiscal 2001, respectively, compared to
$358,000 and $620,000 in the second quarter and first six months of fiscal 2000,
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. The increase in revenues is primarily due to the introduction of the
Company's new Omni2000 software platform.
Cost of Sales
Cost of sales includes all manufacturing costs of the Company's hardware
products. Cost of sales represented 50% of revenues in the second quarter of
fiscal 2001 compared to 45% in the second quarter of fiscal 2000 and 49% and 49%
in the first six months of fiscal 2001 and 2000, respectively. The increase in
the cost of sales percentage for the second quarter of fiscal 2001 is due to
larger manufacturing variances incurred in the second quarter of fiscal 2001
including increased purchase prices on material components due to industry
shortages on certain items. The Company's margins are generally dependent on
product mix and customer mix, with sales to OEM customers generally having a
lower profit margin.
Selling, General and Administrative
Selling, general and administrative (S,G & A) expenses were $698,000 and
$639,000 in the second quarter of fiscal 2001 and fiscal 2000, respectively, and
$1.5 million and $1.3 million for the first six months of fiscal 2001 and 2000,
respectively. S,G & A expenses increased as the Company has added to its direct
sales and application engineering staff to support the Company's new product
introductions and expanded selling efforts. The Company expects S,G & A expenses
to continue to increase to support the expanded revenue base.
Research and Development
Research and development expense totaled approximately $863,000 and $1.7
million in the second quarter and first six months of fiscal 2001 compared to
$791,000 and $1.7 million reported in the comparable periods a year ago. The
Company was previously limited in its access to development resources and this
negatively impacted its competitive position. As a result of the NeST
partnership announced in November 1998, the Company has significantly increased
the number of engineering staff members working on Company projects and began
releasing new products in the second quarter of fiscal 2000, including its new
Omni2000 software platform, Omni2000 Ingress Management System, a new lower cost
master control unit, and several new
10
<PAGE>
transponders. The Company expects research and development spending to continue
to increase during the remainder of fiscal 2001 to support increased customer
demand for more advanced systems and software.
The Company has the option of paying for development services provided by
NeST in cash or warrants to purchase shares of the Company's stock. NeST
expenses incurred during the second quarter and first six months of fiscal 2001
were $520,000 and $1.0 million, respectively, and are being paid in cash. NeST
expenses incurred during the second quarter and first six months of fiscal 2000
were $383,000 and $823,000, respectively, and were paid by the issuance of
warrants to purchase 2,489,248 shares of the Company's Common Stock. The
warrants are exercisable at $0.01 per share, subject to the application of
certain anti-dilution provisions set forth in the warrants, on or before April
3, 2004.
Operating Income (Loss)
The Company reported operating income of $384,000 and $613,000 for the
second quarter and first six months of fiscal 2001, respectively, compared to
operating losses of $270,000 and $813,000 for the second quarter and first six
months of fiscal 2000, respectively. The transition by the Company from an
operating loss to operating profit is the result of increasing revenues and a
reduction in operating costs, including product costs and research and
development, as a percentage of revenues. This reduction in operating costs is
primarily attributable to the cost savings achieved from the Company's strategic
relationship with NeST.
Income Taxes
Due to its significant net operating loss carryforward, the Company is
subject to 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 presently 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. However, 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 recently 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 and during the first three
quarters of fiscal 2000 by the combined impact of reduced revenues (resulting
from customers electing to cease certain programs) and the need for the Company
to upgrade its software products. The Company's operations and revenues are
driven, in large part by the timing and success of new product introductions and
the scheduling of orders by customers. The Company
11
<PAGE>
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 the first six months of fiscal 2001, the Company consumed net cash of
$59,000 compared to consuming net cash of $4,000 in the first six months of
fiscal 2000. The Company financed its operating loss in the first six months of
fiscal 2000 primarily through a reduction in accounts receivable, an increase in
accrued expenses, borrowings under its line of credit, issuance of warrants to
NeST for development services, and proceeds from the exercise of stock options.
While the Company operated at a profit for the first six months of fiscal
2001, the Company consumed greater net cash compared to the prior year primarily
due to the payment of NeST services in cash, which commenced in January 2000.
Prior to this, NeST development services were paid through the issuance of
warrants by the Company.
The Company's line of credit is limited to $750,000 which was fully
borrowed and outstanding at September 30, 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. In July 2000, the Company received a waiver of the default from the
bank as well as an extension of the line through July 31, 2001. Subsequent to
September 30, 2000, the Company negotiated an increase in availability under the
bank line of credit to $1 million.
In June 1999, the Company entered into an agreement with its chairman,
Javad K. Hassan, whereby Mr. Hassan agreed to provide a $500,000 line of credit
to the Company, with interest payable at 10%. Payment of all outstanding
borrowings and interest is due by December 31, 2001. No amounts were borrowed
under this line since its inception.
Under the terms of the NeST Development Agreement, the Company has the
option to pay for NeST development services either in cash or by the issuance of
warrants to purchase AM Common Stock. The Company elected to issue NeST warrants
($.01 exercise price) to purchase 4,234,018 shares of the Company's common stock
in payment of $670,000 of NeST development services for the period from November
1998 through March 1999 and issued warrants to purchase 3,628,316 shares of the
Company's common stock in payment of $1,157,197 of NeST development services for
the period from April 1999 through December 1999. 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 has been paying 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 Development Agreement.
12
<PAGE>
The Company's restructuring actions taken during fiscal 1999 and 2000
reduced operating cash expenses as a percentage of revenues. The Company expects
to continue to utilize the NeST technology resources in India and NeSTronix for
core development and manufacturing efforts and the finance and administrative
group within the Company will continue to provide ongoing support services to
NeST-based businesses, all of which are expected to continue 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 cash from profitable operations, available
lending lines and the ability to pay for NeST development services in cash or
warrants, will provide sufficient liquidity to support its operations through
the next fiscal year. However, should operating losses re-occur which cannot be
supported, the Company would expect to implement further actions to reduce
expenses or raise additional capital to enable continued execution of its
strategy. The Company has also announced its intention to execute certain new
strategic growth initiatives which would require additional capital to support.
There can be no assurance that additional capital could be raised under
acceptable terms, if at all.
Capital expenditures totaled $58,000 in the first six months of fiscal 2001
and $30,000 in the first six months of fiscal 2000 which included computers,
manufacturing assembly and test equipment, and facility related improvements and
fixtures.
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 determined that its internal reporting system would not
properly utilize dates beyond December 31, 1999. A replacement software system
was installed and has been fully operational since July 10, 2000. The cost of
this project was $200,000.
The Company has undertaken a review of all internal systems and products
and has 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.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) (1) Exhibits
(See end of exhibit list for footnote references indicated by
asterisks
*3-a. (3.1) Restated Certificate of Incorporation of Registrant.
*3-b. (3.2) Amended By-Laws of Registrant.
*4-a. (4.1) Specimen of Common Stock Certificate, par value $.10
per share.
****4-b 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.
***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.
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.
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<PAGE>
**** Incorporated by reference to the Exhibit number indicated
in Registrant's Annual Report on 10-KSB for the fiscal
year ended April 3, 1999.
***** Incorporated by reference to the Exhibit number indicated
in Registrant's Annual Report on 10-KSB for the fiscal
year ended April 1, 2000.
(b) No reports on Form 8-K have been filed for the period covered by this
report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AM COMMUNICATIONS, INC.
(Registrant)
Date: November 14, 2000 By: /s/ Keith D. Schneck
------------------------- ----------------------------
Keith D. Schneck
Chief Financial Officer
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