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, 1995
[ ] 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)
1900 AM Drive, Quakertown, Pennsylvania 18951-9004
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(215) 536-1354
---------------------------
(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, 1995, there were 30,412,961 shares of the Registrant's Common
Stock, par value $.10 per share, outstanding.
<PAGE>
AM COMMUNICATIONS, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Financial Statements
Balance Sheets -- September 30 (Unaudited) and April 1, 1995 3
Statements of Operations - Quarters and Six Months Ended
September 30, 1995 and October 1, 1994 (Unaudited) 4
Statements of Cash Flows -- Six Months Ended September 30,
1995 and October 1, 1994 (Unaudited) 5
Notes to Financial Statements 6,7
Item 2. Management's Discussion and Analysis of Operation 8,9
PART II. OTHER INFORMATION
- --------------------------
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 11
2
<PAGE>
Item 1. Financial Statements
- -----------------------------
AM COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, April 1,
1995 1995
----------- -----------
ASSETS (Unaudited)
Current Assets:
Cash $ 596,000 $ 454,000
Accounts Receivable 1,233,000 811,000
Inventory 2,872,000 1,360,000
Prepaid Insurance and Other 26,000 42,000
Deferred Tax Asset 450,000 229,000
----------- -----------
Total Current Assets 5,177,000 2,896,000
Equipment and Fixtures, Net 484,000 194,000
Intangibles, Net of Accumulated Amortization of
$471,000 at September 30 and $469,000 at
April 1, 1995 55,000 57,000
Deferred Software Development Costs, Net of
Accumulated Amortization of $390,000 at
September 30 and $315,000 at April 1, 1995 234,000 308,000
Deferred Tax Asset, Net 707,000 707,000
Other 26,000 19,000
----------- -----------
$ 6,683,000 $ 4,181,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 1,152,000 $ 600,000
Advances 18,000 368,000
Accrued and Other Expenses 368,000 395,000
----------- -----------
Total Current Liabilities 1,538,000 1,363,000
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Senior Convertible Redeemable Preferred Stock.
$100 Par Value, Authorized; Issued and
Outstanding 25,825 Shares at September 30
and April 1,1995 2,583,000 2,583,000
Common Stock, $.10 Par Value, Authorized
40,000,000 Shares; Issued and Outstanding
30,412,961 Shares at September 30 and
24,564,391 Shares at April 1, 1995 3,041,000 2,456,000
Capital in Excess of Par 30,730,000 28,682,000
Accumulated Deficit (31,209,000) (30,903,000)
----------- -----------
Stockholders' Equity 5,145,000 2,818,000
----------- -----------
$ 6,683,000 $ 4,181,000
=========== ===========
</TABLE>
3
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, October 1, September 30, October 1,
1995 1994 1995 1994
-------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product Sales $ 2,020,000 $ 1,173,000 $ 3,310,000 $ 1,958,000
Cost and Expenses:
Cost of Sales 1,265,000 541,000 1,815,000 868,000
Selling, General and Administration 482,000 243,000 930,000 496,000
Research and Development 535,000 153,000 1,115,000 307,000
-------------- ------------- ------------- --------------
Operating (Loss) Income (262,000) 236,000 (550,000) 287,000
Other (Income) Expense (3,000) (3,000) (23,000) (3,000)
-------------- ------------- ------------- --------------
Income (Loss) Before Income Taxes (259,000) 239,000 (527,000) 290,000
Income Tax Provision (Benefit) (109,000) 29,000 (221,000) 35,000
-------------- ------------- ------------- --------------
Net Income (Loss) $ (150,000) $ 210,000 $ (306,000) $ 255,000
============== ============== ============= ==============
Earnings Per Weighted Average
Common & Common Equivalent Share $ Nil $ 0.01 $ (0.01) $ 0.01
======= ======= ======== =======
Weighted Average Common and Common
Equivalent Shares Outstanding Used in
Computing Earnings Per Share 36,408,000 28,823,000 35,036,000 28,823,000
========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
4
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
September 30, October 1,
1995 1994
--------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $ (306,000) $ 255,000
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided By (Used in) Operating Activities:
Depreciation and Amortization 155,000 93,000
Changes in Assets and Liabilities Which
Provided (Used) Cash:
Accounts Receivable (422,000) 82,000
Inventory (1,512,000) (411,000)
Prepaid Insurance and Other 9,000 9,000
Deferred Income Tax (221,000) --
Accounts Payable 552,000 95,000
Accrued and Other Expenses (377,000) (65,000)
-------------- -------------
Net Cash Provided By (Used In) Operating
Activities (2,122,000) 58,000
-------------- -------------
Cash Flows From Investing Activities:
Exercise of Warrants and Stock Options 2,633,000 --
Purchase of Equipment and Intangible Assets (369,000) (16,000)
Deferred Software Development Costs -- (95,000)
-------------- -------------
Net Cash Provided by (Used In) Investing Activities 2,264,000 (111,000)
-------------- -------------
Net Increase (Decrease) In Cash 142,000 (53,000)
Cash:
Beginning 454,000 190,000
-------------- -------------
Ending $ 596,000 $ 137,000
============== =============
</TABLE>
See Notes to Financial Statements
5
<PAGE>
AM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
As of September 30, 1995 and for The 26 Week Periods Ended
October 1, 1994 and September 30, 1995
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. The Balance Sheet as of September 30,
1995 and the related Statements of Operations and Statements of Cash Flows
for the quarters and six months ended September 30, 1995 and October 1, 1994
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,
1995 1995
-------------- ---------
(Unaudited)
2. Inventory Comprises:
Raw Material $ 2,512,000 $ 1,572,000
Work in Process 1,015,000 610,000
Finished Goods 336,000 169,000
------------- -------------
Sub-total 3,863,000 2,351,000
Less Reserves (991,000) (991,000)
------------- -------------
Net Inventory $ 2,872,000 $ 1,360,000
============= =============
3. Accrued Expenses Comprise:
Accrued Compensation $ 206,000 $ 192,000
Commissions --- 3,000
Accrued Professional Fees 17,000 31,000
Warranty Reserve 25,000 20,000
Other 120,000 149,000
------------- -------------
$ 368,000 $ 395,000
============= =============
6
<PAGE>
4. Income Taxes:
Effective April 4, 1993, the Company adopted the Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
The provision for taxes on income consisted of:
September 30, October 1,
1995 1994
------------ ------------
Current Income Taxes $ --- $ 29,000
Deferred Income Taxes (109,000) 71,000
Change in Valuation Allowance --- (71,000)
------------ ------------
Net $ (109,000) $ 29,000
============ ============
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:
Federal Income Tax Provision at
Statutory Rate $ (88,000) $ 71,000
State Income Taxes (21,000) 29,000
Utilization of Net Operating
Loss Carryforwards --- (71,000)
------------- -------------
Provision for Income Taxes $ (109,000) $ 29,000
============= =============
The components of the net deferred tax asset were as follows:
Deferred Tax Items:
Inventory $ 443,000 $ 14,000
Net Operating Loss Carryforwards 5,809,000 5,886,000
Tax Credit Carryforwards 521,000 521,000
Valuation Allowance for NOL's &
Tax Credits (5,616,000) (6,421,000)
--------------- --------------
Net Deferred Tax Assets $ 1,157,000 $ ---
=============== ==============
During fiscal 1995, the Company recorded a deferred tax asset in accordance
with FAS No. 109 to recognize a portion of the future income tax benefits
available.
The Company has total net operating loss carryforwards available to offset
future taxable income of $24.7 million expiring at various times from 1999 to
2008. Due to certain statutory limitations under Internal Revenue Code Section
382, only $17.9 million of such carryforwards are available at September 30,
1995. The remaining carryforwards of $6.8 million will become available ratably
over the carryforward period.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Operation
- -----------------------------------------------------------
Results of Operations
Revenues increased 72.2% to $2,020,000 in the second quarter of fiscal 1996
from $1,173,000 in the second quarter of fiscal 1995. For the first six months
of fiscal 1996 revenues increased 69.1% to $3,310,000 from $1,958,000 for the
same period in fiscal 1995. These increases resulted primarily from shipments to
AT&T, a major new OEM customer which comprised 54% of revenues for the second
quarter and 41% for the six months ended September 30, 1995, respectively.
Backlog at September 30, 1995 totaled $5.1 million compared to $3.5 million
at October 1, 1994. The current backlog reflects a substantial amount of orders
from one major OEM customer.
Cost of Sales
Cost of sales represented 62.6% of revenues for the second quarter of
fiscal 1996 compared to 46.1% in the comparable prior year quarter. Cost of
sales represented 54.8% of revenues for the first six months of fiscal 1996
compared to 44.3% in the same period in fiscal 1995.
The increases in cost of sales as a percentage of revenues is due to high
manufacturing costs associated with the new OEM business. The Company has taken
action to reduce manufacturing costs and improve profitability on future
revenues from this customer. These have included design modifications to reduce
costs and improve manufacturing yields and negotiating a price increase with the
customer, which the Company received preliminary agreement effective in October
1995. These actions are anticipated to improve profitability on this product in
future quarters.
Cost of sales is dependent on product mix and customer mix, with sales to
OEM customers generally having a lower profit margin.
Development costs charged to cost of sales were $31,000 and $39,000 for the
second quarter of fiscal 1996 and 1995, respectively, and $50,000 and $70,000
for the first six month periods in fiscal 1996 and 1995, respectively.
Development funds paid by customers and included in revenues totaled $80,000 and
$52,000 for the second quarter periods, and $165,000 and $175,000 for the first
six month periods in fiscal 1996 and 1995, respectively.
Selling, General and Administrative
Selling, general and administrative (S,G&A) expenses were $482,000 for the
second quarter of fiscal 1996, up 98.4% from the $243,000 in the comparable
prior year period. S,G&A expenses increased 87.5% in the comparable six month
periods. Expenses increased due to increased marketing and sales efforts
including hiring of direct sales managers, expanded promotional efforts and
expansion of sales activities into the Far East and other international markets.
Administrative costs increased in response to increased business levels,
including staff additions and the establishment of a quality department.
8
<PAGE>
Research and Development
Research and development expenses primarily consist of salaries for
research and development personnel and associated personnel benefits, tooling
and supplies for research and development activities. Research and development
expenses increased $382,000 to $535,000 in the quarter ended September 30, 1995
from $153,000 in the second quarter of fiscal 1995. For the six months ended
September 30, 1995, research and development expenses were $1,115,000, an
increase of $808,000 over $307,000 for the same period in fiscal in 1995. These
increases are due to expansion of the development staff including additional
hardware and software engineers. The Company has expanded its development
efforts in response to customer driven interest in status monitoring products
and to support the development of the OmniVU monitoring software, which is
expected to be in Beta testing in the third quarter of fiscal 1996. The Company
expects that research and development expense will continue to increase but at a
substantially slower rate than during the past several quarters.
Operating Loss
The Company incurred operating losses of $262,000 and $550,000 for the
three months and six months ended September 30, 1995. This was due primarily to
significantly higher levels of investment in research and development and
selling activities. The Company has made a strategic decision to aggressively
respond to new customer driven activities as market interest for the Company's
products has expanded. Additionally, the second quarter of fiscal 1995 was
impacted by a drop in margins on new OEM business as previously described above.
Income Taxes
During fiscal 1995, the Company recorded a portion of its future available
income tax benefits as a deferred tax asset. The Company recorded additional
income tax benefits in the second quarter and first six months of fiscal 1996
based on an estimated 42% effective tax rate for fiscal 1996.
Industry Factors
The cable and broadband communications industry is undergoing significant
change as cable television (CATV) operators begin to respond to the competitive
threat of telephone companies (telcos) entering the cable video services market.
This has resulted in CATV operators planning to expand and upgrade their
distribution infrastructures and telcos planning to construct new distribution
systems capable of providing telephone and video services. There continues to be
many unresolved issues and uncertainties impacting this convergence of CATV and
telecommunications industries including governmental regulations, competing
distribution technologies, significant capital costs and others.
Demand for the Company's status monitoring systems has increased as
monitoring of newer advanced distribution systems has become an important factor
in increasing the reliability of the services provided by the service provider.
The Company believes it is positioned favorably to take advantage of
opportunities in the evolving "information superhighway", however, any increased
demand for the Company's products related to this changing environment is
currently unknown.
9
<PAGE>
In addition, the Company's operations are subject to the timing and success
of new product introductions and the scheduling of orders by customers. Due to
the effects of these factors on future operations, past performance is a limited
indicator in assessing potential future performance and such factors could
impact the trading price of the Company's common stock.
Financial Condition and Liquidity
Cash used in operating activities totaled $2,122,000 during the first six
months of fiscal 1996 compared to cash generated from operations of $58,000 in
the comparable prior year period. The primary use of cash was to fund a $1.5
million increase in inventory in response to increased order levels and to
enable the Company to improve manufacturing lead times by purchasing long lead
time items for inventory. The Company believes that its inventory position will
decline as recently implemented improved inventory management controls take
effect. Accounts receivable has increased to $422,000 during the first six
months of fiscal 1996 in response to increased sales levels.
During April 1995, warrants to purchase a total of 5,848,470 shares of
common stock were exercised at $.45 per share with cash proceeds totaling
$1,781,009 (of which $351,473 was received in fiscal 1995 and reflected as an
advance pending exercise in April 1995) and an interest bearing $850,803 note
receivable provided by the majority shareholder due, June 30, 1995. The note
receivable was paid on the due date.
The Company's $500,000 bank line of credit available for working capital
and other cash needs expired on July 31, 1995 and the Company is currently
negotiating to establish a line of credit with another financial institution.
The Company believes that its existing sources of liquidity, including
available cash and projected future cash flows from operations, the net
operating loss tax carryforward, and improved inventory management will be
sufficient to support its planned operations through fiscal 1996.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
(a) Registrant's Annual Meeting of Stockholders was held on
October 16, 1995.
(b) Directors elected at the Annual Meeting:
Henry I. Boreen
Keith D. Schneck
Herman O. Benninghoff
Alvin Hoffman
Hal Krisbergh
10
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(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 1, 1995 By: /s/ Keith D. Schneck
-------------------- ---------------------------------
Keith D. Schneck
President and Chief Financial Officer
11
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<ARTICLE> 5
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-01-1995
<PERIOD-START> JUL-02-1995
<PERIOD-END> SEP-30-1995
<CASH> 596,000
<SECURITIES> 0
<RECEIVABLES> 1,233,000
<ALLOWANCES> 0
<INVENTORY> 2,872,000
<CURRENT-ASSETS> 5,177,000
<PP&E> 3,109,000
<DEPRECIATION> 2,625,000
<TOTAL-ASSETS> 6,683,000
<CURRENT-LIABILITIES> 1,538,000
<BONDS> 0
<COMMON> 3,041,000
0
2,583,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,683,000
<SALES> 2,020,000
<TOTAL-REVENUES> 2,020,000
<CGS> 1,265,000
<TOTAL-COSTS> 2,282,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (259,000)
<INCOME-TAX> (109,000)
<INCOME-CONTINUING> (150,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (150,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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