<PAGE>
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 DECEMBER 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
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 February 10, 1996, there were 30,487,962 shares of the Registrant's Common
Stock, par value $.10 per share, outstanding.
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AM COMMUNICATIONS, INC.
FORM 10-QSB
FOR THE QUARTER ENDED DECEMBER 30, 1995
INDEX
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PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1. Financial Statements
Balance Sheets -- December 30 (Unaudited) and April 1, 1995 3
Statements of Operations -- Three Month Period and Nine Month 4
Period Ended December 30, 1995 and December 31, 1994,
(Unaudited)
Statements of Cash Flows -- Nine Months Ended December 30, 1995
and December 31, 1994 (Unaudited) 5
Notes to Financial Statements 6, 7
Item 2. Management's Discussion and Analysis of Operation 8 - 10
PART II. OTHER INFORMATION
- ----------------------------
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
<PAGE>
Item 1. Financial Statements
AM COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 30, April 1,
1995 1995
----------- --------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 245,000 $ 454,000
Accounts Receivable 1,354,000 811,000
Inventory 2,343,000 1,360,000
Prepaid Expenses and Other 54,000 42,000
Deferred Tax Asset 229,000 229,000
-------------- --------------
Total Current Assets 4,225,000 2,896,000
Equipment and Fixtures, Net 521,000 194,000
Deferred Software Development Costs, Net of
Accumulated Amortization of $427,000 at
December 30 and $315,000 at April 1, 1995 197,000 308,000
Deferred Tax Asset, Net 707,000 707,000
Other 76,000 76,000
-------------- --------------
Total Assets $ 5,726,000 $ 4,181,000
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Capital Lease Obligations $ 32,000 $ ---
Accounts Payable 1,032,000 600,000
Advances 71,000 368,000
Accrued and Other Expenses 355,000 395,000
-------------- --------------
Total Current Liabilities 1,490,000 1,363,000
Capital Lease Obligations - Long Term 65,000 ---
-------------- --------------
1,555,000 1,363,000
-------------- --------------
Commitments and Contingencies
Stockholders' Equity:
Senior Convertible Redeemable Preferred Stock,
$100 Par Value, Authorized; Issued and
Outstanding 25,825 Shares at December 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 December 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 (32,183,000) (30,903,000)
--------------- --------------
Stockholders' Equity 4,171,000 2,818,000
-------------- --------------
Total Liabilities & Stockholders' Equity $ 5,726,000 $ 4,181,000
-------------- --------------
</TABLE>
See Notes to Financial Statements
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OPERATIONS
(Unaudited)
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<CAPTION>
Three Months Ended Nine Months Ended
December 30, December 31, December 30, December 31,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product Sales $ 2,042,000 $ 1,469,000 $ 5,352,000 $ 3,427,000
Cost and Expenses:
Cost of Sales 1,783,000 610,000 3,598,000 1,473,000
Selling, General and Administration 486,000 337,000 1,417,000 845,000
Research and Development 530,000 266,000 1,645,000 566,000
------------ ------------ ------------ ------------
Operating (Loss) Income (757,000) 256,000 (1,308,000) 543,000
Other (Income) Expense (4,000) 2,000 (28,000) (1,000)
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes (753,000) 254,000 (1,280,000) 544,000
Income Tax Provision 221,000 30,000 -- 65,000
------------ ------------ ------------ ------------
Net Income (Loss) $ (974,000) $ 224,000 $ (1,280,000) $ 479,000
============ ============ ============ ============
Earnings Per Weighted Average
Common & Common Equivalent Share $ (0.03) $ 0.01 $ (0.04) $ 0.02
============ ============ ============ ============
Weighted Average Common & Common
Equivalent Shares Outstanding Used
in Computing Earnings Per Share 33,290,000 32,699,000 32,774,000 32,699,000
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
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December 30 December 31,
1995 1994
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<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $(1,280,000) $ 479,000
Adjustments to Reconcile Net Income (Loss) to
Net Cash Used in Operating Activities:
Depreciation and Amortization 250,000 146,000
Changes in Assets and Liabilities Which
Provided (Used) Cash:
Accounts Receivable (543,000) 218,000
Inventory (983,000) (645,000)
Prepaid Insurance and Other (12,000) (3,000)
Accounts Payable 432,000 225,000
Advances (297,000) 17,000
Accrued and Other Expenses (40,000) 10,000
----------- -----------
Net Cash Provided By (Used In) Operating
Activities (2,473,000) 447,000
Cash Flows From Investing Activities:
Purchase of Equipment and Intangible Assets (466,000) (58,000)
Deferred Software Development Costs -- (155,000)
----------- -----------
Net Cash Provided by (Used In) Investing Activities (466,000) (213,000)
Cash Flows from Financing Activities:
Proceeds from Issuance of Short Term Debt -- 200,000
Repayments of Short Term Debt -- (100,000)
Exercise of Warrants and Stock Options 2,633,000 --
Capital Lease Obligations 103,000 --
Payments Under Capital Lease Obligations (6,000) --
----------- -----------
Net Cash Provided By (Used In) Financing Activities 2,730,000 100,000
Net Increase (Decrease) In Cash (209,000) 334,000
Cash:
Beginning 454,000 190,000
----------- -----------
Ending $ 245,000 $ 524,000
=========== ===========
</TABLE>
See Notes to Financial Statements
<PAGE>
AM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
As of December 30, 1995 and for the 39 Week
Periods Ended December 30, 1995 and December 31, 1994
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 December 30,
1995 and the related Statements of Operations and Statements of Cash Flows for
the quarters and nine months ended December 30, 1995 and December 31, 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.
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<CAPTION>
December 30, April 1,
1995 1995
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(Unaudited)
<S> <C> <C>
2. Inventory Comprises:
Raw Material $ 2,319,000 $ 1,572,000
Work in Process 1,121,000 610,000
Finished Goods 194,000 169,000
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Sub-total 3,634,000 2,351,000
Less Reserves (1,291,000) (991,000)
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Net Inventory $ 2,343,000 $ 1,360,000
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3. Accrued Expenses Comprise:
Accrued Compensation $ 133,000 $ 192,000
Commissions -- 3,000
Accrued Professional Fees 35,000 31,000
Warranty Reserve 25,000 20,000
Other 162,000 149,000
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$ 355,000 $ 395,000
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</TABLE>
<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:
Nine Months Ended
December 30, December 31,
1995 1994
--------- ---------
Current Income Taxes $ -- $ 65,000
Deferred Income Taxes (520,000) 163,000
Change in Valuation Allowance 520,000 (163,000)
--------- ---------
Net $ -- $ 65,000
========= =========
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:
Nine Months Ended
December 30, December 31,
1995 1994
--------- ---------
Federal Income Tax Provision at Statutory Rate $(435,000) $ 163,000
State Income Taxes (85,000) 65,000
Utilization of Net Operating Loss Carryforwards -- (163,000)
Change in Valuation Allowance 520,000 --
--------- ---------
Provision for Income Taxes $ -- $ 65,000
========= =========
The components of the net deferred tax asset were as follows:
December 30, April 1,
1995 1995
----------- -----------
Deferred Tax Items:
Inventory $ 538,000 $ 416,000
Accrued Vacation 27,000 27,000
Net Operating Loss Carryforwards 5,986,000 5,588,000
Tax Credit Carryforwards 521,000 521,000
Valuation Allowance (6,136,000) (5,616,000)
----------- -----------
Net Deferred Tax Asset $ 936,000 $ 936,000
=========== ===========
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 $25.6 million expiring at various times from
1999 through 2008. Due to certain statutory limitations under Internal Revenue
Code Section 382, only $17.9 million of such carryforwards are available at
December 30, 1995. The remaining carryforwards of $7.7 million will become
available ratably over the carryforward period.
<PAGE>
Item 2. Management's Discussion and Analysis of Operation
Results of Operations
Revenues increased 39% to $2,042,000 in the third quarter of fiscal 1996
from $1,469,000 in the third quarter of fiscal 1995. For the first nine months
of fiscal 1996 revenues increased 56% to $5,352,000 from $3,427,000 for the
same period in fiscal 1995. These increases resulted primarily from shipments
to AT&T, a major OEM customer, which comprised 75% of revenues for the third
quarter and 54% for the nine months ended December 30, 1995, respectively.
Backlog at February 10, 1996 totaled $4.9 million compared to $2.6
million at February 11, 1995.
Cost of Sales
Cost of sales represented 87.3% of revenues for the third quarter of
fiscal 1996 compared to 41.5% in the comparable prior year quarter. Cost of
sales represented 67.2% of revenues for the first nine months of fiscal 1996
compared to 43% in the same period in fiscal 1995. Cost of sales is dependent
on product mix and customer mix, with sales to OEM customers generally having
a lower profit margin.
The increases in cost of sales as a percentage of revenues is due to the
increase in new OEM business which has a lower profit margin, higher
manufacturing costs associated in transitioning new products to volume
production, and a $300,000 addition to the inventory reserve during the third
quarter of fiscal 1996. As product demand has expanded, the Company has
experienced manufacturing delays due to technical and manufacturing process
issues in transitioning new products from engineering to volume manufacturing.
As a result, manufacturing costs have increased due to excessive yield losses,
product rework, capacity limitations, and expediting costs. The Company has
responded to this by redesign of certain products to reduce costs and improve
yields, evaluation and qualification of new contract assemblers and
restructuring of the management of the manufacturing function.
Development costs charged to cost of sales were $11,000 and $20,000 for
the third quarter of fiscal 1996 and 1995, respectively, and $61,000 and
$203,000 for the first nine month periods in fiscal 1996 and 1995,
respectively. Development funds paid by customers and included in revenues
totaled $253,000 and $34,000 for the third quarter periods, and $418,000 and
$209,000 for the first nine month periods in fiscal 1996 and 1995,
respectively.
Selling, General and Administrative
Selling, general and administrative (S,G&A) expenses were $486,000 for
the third quarter of fiscal 1996, up 44% from the $337,000 in the comparable
prior year period. S,G&A expenses increased 68% in the comparable nine 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.
<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 $264,000 or 100% in the quarter ended December 30, 1995
compared to the third quarter of fiscal 1995. For the nine months ended
December 30, 1995, research and development expenses increased $1,079,000, or
191% over the comparable period in fiscal 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 and OEM interest in status monitoring products and to support the
development of the OmniVU monitoring software, which is currently in Beta
testing. The Company evaluates its software development efforts and determines
if capitalization of such development costs are required under FAS No. 2.
During the three months and nine months ended December 31, 1994, the Company
capitalized $53,000 and $158,000 of development costs, respectively. The
Company's development efforts during fiscal 1996 were expensed. 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 pre-tax operating losses of $757,000 and
$1,308,000 for the three months and nine months ended December 30, 1995. This
was due primarily to significantly higher levels of investment in research and
development and selling activities and lower gross profit margins due to the
increase in OEM level business and manufacturing inefficiencies. During fiscal
1996, 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. The Company's actions in addressing the manufacturing issues are
focused at improving operating results and achieving profitability. The
Company will be reviewing alternative actions to improve operating results
should the manufacturing actions not be sufficient.
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 estimated earnings for the 1996 fiscal year and an
estimated annual 42% effective tax rate. During the third quarter ended
December 30, 1995, the Company estimated its fiscal year operating results and
determined that the interim income tax benefits recorded in the prior two
quarters of fiscal 1996 totaling $221,000 would not be realized during the
remainder of fiscal 1996. Accordingly, the Company reversed $221,000 of tax
benefit in the third quarter ended December 30, 1995.
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.
<PAGE>
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.
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 $2,473,000 during the first
nine months of fiscal 1996 compared to cash generated from operations of
$447,000 in the comparable prior year period. The primary use of cash was to
fund increases 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 expects its inventory position to
decline as manufacturing delays impacting product shipments are resolved.
During the third quarter ended December 30, 1995, the Company determined
that the inventory supply of certain material components purchased in advance
of orders exceeded future estimates of demand. As a result, the Company
increased its reserves for inventory obsolescence by $300,000 in the third
quarter ended December 30, 1995.
Accounts receivable has increased to $1,354,000 during the first nine
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. The Company is focusing its
efforts on eliminating operating losses and achieving profitability. Recent
and ongoing changes in manufacturing are targeted to improve the Company's
ability to increase shipment levels and improve gross margins such that
breakeven levels and profitability are achieved.
The Company believes that its existing sources of liquidity, including
available cash and projected future cash flows from operations based on
achieving profitable financial results, the net operating loss tax
carryforward, and improved inventory management will be sufficient to support
its planned operations. Should the Company continue to generate operating
losses, it may have to seek alternative sources of cash.
<PAGE>
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
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: February 13, 1996 By: /s/ Keith D. Schneck
-------------------- -------------------------------------
Keith D. Schneck
President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-01-1995
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-30-1995
<CASH> 245,000
<SECURITIES> 0
<RECEIVABLES> 1,354,000
<ALLOWANCES> 0
<INVENTORY> 2,343,000
<CURRENT-ASSETS> 4,225,000
<PP&E> 3,648,000
<DEPRECIATION> 3,127,000
<TOTAL-ASSETS> 5,726,000
<CURRENT-LIABILITIES> 1,490,000
<BONDS> 0
<COMMON> 3,041,000
0
2,583,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,726,000
<SALES> 2,042,000
<TOTAL-REVENUES> 2,042,000
<CGS> 1,783,000
<TOTAL-COSTS> 2,799,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (753,000)
<INCOME-TAX> 221,000
<INCOME-CONTINUING> (974,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (974,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
