<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 SEPTEMBER 28, 1996
[ ] 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 Drive, Quakertown, Pennsylvania 18951-2237
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(215) 538-8700
--------------
(Issuer's Telephone Number)
1900 AM Drive, P.O. Box 9004, Quakertown, PA 18951-9004
- ----------------------------------------------- ----------
(Former address of principal executive offices) (Zip Code)
(215) 536-1354
--------------
(Issuer's Former 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, 1996, there were 31,033,630 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 28, 1996
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Financial Statements
Balance Sheets -- September 28 (Unaudited) and
March 30, 1996 3
Statements of Operations - Quarters and Six Months Ended
September 28, 1996 and September 30, 1995 (Unaudited) 4
Statements of Cash Flows -- Six Months Ended
September 28, 1996 and September 30, 1995 (Unaudited) 5
Notes to Financial Statements 6, 7
Item 2. Management's Discussion and Analysis of Operations 8 - 10
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K 10
2
<PAGE>
Item 1. Financial Statements
- -----------------------------
AM COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, March 30,
1996 1996
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 79,000 $ 664,000
Accounts Receivable 2,037,000 1,588,000
Notes Receivable 359,000 ---
Inventory 1,760,000 2,334,000
Prepaid Insurance and Other 139,000 112,000
Deferred Tax Asset 229,000 229,000
----------- -----------
Total Current Assets 4,603,000 4,927,000
Equipment and Fixtures, Net 838,000 565,000
Intangibles, Net of Accumulated Amortization of
$475,000 at September 28 and $469,000 at
March 30, 1996 61,000 54,000
Deferred Software Development Costs, Net of
Accumulated Amortization of $524,000 at
September 28 and $462,000 at March 30, 1996 100,000 162,000
Deferred Tax Asset, Net 707,000 707,000
Other 20,000 20,000
----------- -----------
Total Assets $ 6,329,000 $ 6,435,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Capital Lease Obligations $ 109,000 $ 63,000
Accounts Payable 1,193,000 1,233,000
Advances 17,000 39,000
Accrued and Other Expenses 420,000 375,000
------------ -----------
Total Current Liabilities 1,739,000 1,710,000
----------- -----------
Capital Lease Obligations - Long Term 186,000 110,000
----------- -----------
Total Liabilities $ 1,925,000 $ 1,820,000
=========== ===========
Commitments and Contingencies
Stockholders' Equity:
Senior Convertible Redeemable Preferred Stock,
$100 Par Value, Authorized 1,000,000 Shares;
Issued and Outstanding 25,825 Shares at
September 28 and March 30,1996 2,583,000 2,583,000
Common Stock, $.10 Par Value, Authorized 40,000,000
Shares at September 28 and March 30, 1996;
Issued and Outstanding 31,033,630
Shares at September 28
and 30,962,962 Shares at March 30, 1996 3,103,000 3,096,000
Capital in Excess of Par 31,262,000 30,940,000
Accumulated Deficit (32,544,000) (32,004,000)
----------- -----------
Stockholders' Equity 4,404,000 4,615,000
----------- -----------
Total Liabilities and Stockholders' Equity $ 6,329,000 $ 6,435,000
=========== ===========
</TABLE>
See Notes to Financial Statements
3
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product Sales $ 2,586,000 $ 2,020,000 $ 5,049,000 $ 3,310,000
Cost and Expenses:
Cost of Sales 1,807,000 1,265,000 2,875,000 1,815,000
Selling, General and Administrative 594,000 482,000 1,127,000 930,000
Research and Development 870,000 535,000 1,599,000 1,115,000
----------- ----------- ----------- -----------
Operating Loss (685,000) (262,000) (552,000) (550,000)
Other Income 13,000 3,000 12,000 23,000
----------- ----------- ----------- -----------
Loss Before Income Taxes (672,000) (259,000) (540,000) (527,000)
Income Tax Benefit -- (109,000) -- (221,000)
----------- ----------- ----------- -----------
Net Loss $ (672,000) $ (150,000) $ (540,000) $ (306,000)
=========== =========== =========== ===========
Loss Per Weighted Average
Common & Common Equivalent Share $ (0.02) $ Nil $ (0.02) $ (0.01)
=========== =========== =========== ===========
Weighted Average Common and Common
Equivalent Shares Outstanding Used in
Computing Loss Per Share 31,029,000 36,408,000 30,998,000 35,036,000
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements
4
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 28, September 30,
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (540,000) $ (306,000)
Adjustments to Reconcile Net Loss to
Net Cash Provided By (Used in) Operating Activities:
Depreciation and Amortization 215,000 155,000
Changes in Assets and Liabilities Which
Provided (Used) Cash:
Accounts Receivable (449,000) (422,000)
Inventory 574,000 (1,512,000)
Prepaid Insurance and Other (27,000) 9,000
Deferred Income Tax --- (221,000)
Accounts Payable (40,000) 552,000
Advances (22,000) (350,000)
Accrued and Other Expenses 45,000 (27,000)
----------- -----------
Net Cash Used In Operating Activities (244,000) (2,122,000)
----------- -----------
Cash Flows From Investing Activities:
Purchase of Equipment and Intangible Assets (278,000) (369,000)
Notes Receivable (359,000) --
----------- -----------
Net Cash Used In Investing Activities (637,000) (369,000)
----------- -----------
Cash Flows from Financing Activities:
Exercise of Warrants and Stock Options 29,000 2,633,000
Sale of Warrants 300,000 --
Payments Under Capital Lease Obligations (33,000) --
----------- -----------
Net Cash Provided By Financing Activities 296,000 2,633,000
----------- -----------
Net Increase (Decrease) In Cash (585,000) 142,000
Cash:
Beginning 664,000 454,000
----------- -----------
Ending $ 79,000 $ 596,000
=========== ===========
Interest Paid $ 10,000 $
=========== ===========
Income Taxes Paid $ -- $ 36,000
=========== ===========
Non-Cash Financing Activities:
Equipment Purchase Under Capital Lease $ 155,000 $ --
=========== ===========
</TABLE>
See Notes to Financial Statements
5
<PAGE>
AM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
As of September 28, 1996 and for The 26 Week Periods Ended
September 30, 1995 and September 28, 1996
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 28,
1996 and the related Statements of Operations and Statements of Cash Flows
for the quarters and six months ended September 28, 1996 and September 30,
1995 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 28, March 30,
1996 1996
------------- -------------
(Unaudited)
2. Inventory Comprises:
Raw Material $ 1,875,000 $ 2,205,000
Work in Process 902,000 1,087,000
Finished Goods 206,000 310,000
------------- -------------
2,983,000 3,602,000
Inventory Reserves (1,223,000) (1,268,000)
------------- -------------
Net Inventory $ 1,760,000 $ 2,334,000
============= =============
3. Accrued Expenses Comprise:
Accrued Compensation $ 213,000 $ 182,000
Accrued Professional Fees 41,000 32,000
Warranty Reserve 25,000 25,000
Other 141,000 136,000
------------- -------------
$ 420,000 $ 375,000
============= =============
6
<PAGE>
4. Income Taxes:
The benefit for taxes on income consisted of:
Six months Ended
----------------
September 28, September 30,
1996 1995
Current Income Taxes $ --- $ ---
Deferred Income Taxes (222,000) (221,000)
Change in Valuation Allowance 222,000 ---
-------------- ------------
Net $ --- $ (221,000)
============== =============
A reconciliation between the benefit for income taxes, computed by applying
the statutory federal income tax rate of 34% to income before income taxes and
the actual benefit for income taxes follows:
Six months Ended
----------------
September 28, September 30,
1996 1995
------------- ------------
Federal Income Tax Benefit at Statutory Rate $ (184,000) $ (104,000)
State Income Taxes, Net of Federal Benefit (38,000) (21,000)
Research and Development Credits (25,000) ---
Change in Valuation Allowance 222,000 ---
Other 25,000 (96,000)
---------- -----------
Benefit for Income Taxes $ --- $ (221,000)
========== ===========
The components of the net deferred tax asset as of September 28 and March 30
were as follows:
September 28, March 30,
1996 1996
--------------- --------------
Deferred Tax Items:
Inventory $ 497,000 $ 515,000
Accrued Expenses and Reserves 98,000 98,000
Net Operating Loss Carryforwards 7,084,000 6,869,000
Tax Credit Carryforwards 551,000 526,000
Valuation Allowance (7,294,000) (7,072,000)
---------------- ---------------
Net Deferred Tax Assets $ 936,000 $ 936,000
================ ==============
During fiscal 1996, 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 $26.2 million expiring at various times from 1996 to
2011. Due to certain statutory limitations under Internal Revenue Code Section
382, only $19.7 million of such carryforwards are available at September 28,
1996. The remaining carryforwards of $6.5 million will become available ratably
over the carryforward period.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Operations
- ------------------------------------------------------------
Results of Operations
- ---------------------
The Company's operations continue to be focused on developing and marketing
its OmniSTAT, next generation status monitoring system which includes new
software, master control unit, and monitors. The Company's existing legacy
products are primarily responsible for generating the current revenue levels and
are compatible with the OmniSTAT system. The Company's future is heavily
dependent on the success of the OmniSTAT system in the marketplace and the
support of the industry leading OEM's. Accordingly, the Company continues to
invest heavily in research and development for OmniSTAT and support of its OEM
relationships.
Revenues
Revenues for the second quarter ended September 28, 1996 were $2.6 million,
up 28% from the $2.0 million for the second quarter of fiscal 1996. Included in
the revenues for the second quarter of fiscal 1997 are billings of $865,000
representing the final settlement with Lucent Technology for inventory and work
in progress related to order cancellations. Revenues for the first six months of
fiscal 1997 totaled $5.0 million, up 53% over the comparable period a year ago.
The increase in revenues for the comparable six month periods was due to the
increased demand for the company's status monitoring products from both OEM
customers and direct sales to CATV operators, new product introductions and
expanded customer base.
As disclosed in the Company's 1996 Form 10-KSB, revenues from Lucent
Technologies, a major OEM customer which contributed 28% of revenues during the
first six months of fiscal 1997 and 41% in the comparable period of fiscal 1996,
were impacted by the cancellation of open orders totaling $2 million and the
cessation of the project. In June 1996, the Company reached agreement with
Lucent which provided cash payments to AM sufficient to recover the remaining
carrying cost of inventory related to this matter. As a result, the Company
expects future revenues from Lucent to be minimal in the near term.
Notwithstanding the loss of Lucent revenues, the Company has benefited from
new product introductions, including new OEM monitors and the new OmniSTAT next
generation monitoring system, which have improved the Company's ability to
compete. The Company also has expanded its sales and marketing efforts which has
resulted in an expanded world-wide customer base for the Company's products. As
a result, backlog at September 28, 1996 was $4.0 million, up from $2.0 million
at June 30, 1996. The Company continues to pursue new business opportunities and
believes that demand for the Company's products will continue to grow. The
Company also has several new products under development, including OEM products
for Philips, ADC, and Scientific Atlanta, for which limited initial orders have
been received or are expected within this fiscal year. However, there can be no
assurance that these opportunities will be sufficient to replace the volume of
business related to Lucent as described above and that operating results in the
near-term may be negatively impacted.
8
<PAGE>
Cost of Sales
Cost of sales includes manufacturing costs of the Company's hardware
products. Cost of sales represented 70% of revenues in the second quarter of
fiscal 1997 compared to 63% in the comparable period in fiscal 1996. Cost of
sales represented 57% and 55% for the first six months of fiscal 1997 and 1996,
respectively. The cost of sales percentage for the second quarter ended
September 28, 1996 has been negatively impacted by the Lucent settlement billing
for inventory in process. Excluding the Lucent billing, cost of sales would have
totaled 45% and 48% of revenues for the three month and six month periods ended
September 28, 1996, respectively. The Company's margins are generally dependent
on product 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 $594,000 in the
second quarter of fiscal 1997, up 23% compared to $482,000 in the second quarter
of fiscal 1996. S,G&A expenses increased 21% in the comparable six month
periods. Expenses increased in fiscal 1997 due to increased marketing and sales
costs, primarily increased promotional costs, travel costs and staff additions
related to expanded business opportunities. The Company expects S,G&A expenses
to increase in the future as it continues to expand its sales force, field
support and marketing activities and increases its administrative staff to
support increased growth opportunities world-wide.
Research and Development
Research and development expense increased $335,000 to $870,000 in the
second quarter of fiscal 1997, compared to $482,000 in the same period in fiscal
1996. For the six month period ended September 28, 1996, research and
development expenses were $1.6 million, an increase of 43% over the amount
expended in the comparable period in fiscal 1996. Expenses increased in fiscal
1997 due to expanded OEM development efforts and expanded hardware and software
development efforts primarily in the development of the OmniSTAT monitoring
system. The Company expects to continue to increase development expenditures in
software and hardware development in response to expanded customer interest in
the Company's products.
Income Taxes
Due to the significant net operating loss carryforward, the Company pays
minimum income taxes which include state income taxes and limited federal income
taxes.
Industry Factors
The cable and broadband communications industry continues to undergo 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, and significant capital costs.
9
<PAGE>
Demand for the Company's monitoring products has increased as monitoring of
cable distribution systems has become an important factor in increasing
operating efficiency and reliability. The Company believes it is positioned
favorably to take advantage of opportunities in the evolving "information
superhighway", however, any increased demand for the Company's products related
to this changing environment is subject to risk.
In addition, the Company's operations are subject to competition and to the
timing and success of new product introductions and the scheduling of orders by
customers. Due to the effects of these factors on future operations, past
performance is a limited indicator in assessing potential future performance and
such factors could impact the trading price of the Company's common stock.
Liquidity and Capital Resources
In the first six months of fiscal 1997, the Company's activities consumed
net cash of $585,000 compared to cash generated of $142,000 in the first six
months of fiscal 1996. The Company has funded operating losses out of its
current cash balances and cash provided by Lucent Technologies related to the
settlement of liabilities from the canceled orders. In July 1996, the Company
received $300,000 related to the sale of warrants to purchase 1.5 million shares
of the Company's stock. In addition, the Company negotiated capital leases for
certain fixed asset purchases made during the six months ended September 28,
1996.
The Company projects that it will generate operating losses for at least
the next quarter as it continues to fund development expenditures critical to
generating new revenues and as it continues to replace the revenues lost from
Lucent. The Company believes that its sources of liquidity, including projected
cash flows from operations and the net operating loss carryforwards, will
satisfy the projected working capital and capital expenditure requirements for
at least the next twelve months. However, should operating losses continue past
or exceed planned levels, the Company would be required to take action to reduce
expenditures and or obtain additional financing from outside sources.
Capital expenditures totaled $278,000 and $369,000 in the first six months
of fiscal 1997 and 1996, respectively, which includes computers, and
manufacturing assembly and test equipment. Additionally, the Company entered
into capital lease agreements for an additional $155,000 in furniture, data
communications, and engineering equipment. Included in fiscal 1996 expenditures
and capital lease agreements are $220,000 of items related to the Company's
relocation of its offices into a newly leased facility.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ----------------------------
On June 6, 1996, the Company was served with a lawsuit filed by Computer
Aid, Inc. in the District Court of Eastern PA. The lawsuit, which names the
Company and other parties, including Hewlett-Packard, Inc., as defendants,
alleges that the defendants acted to wrongfully assert dominion over and exploit
Computer Aid's software product, misappropriated trade secrets including alleged
copyright infringement and prevented Computer Aid from marketing its product.
The suit seeks damages in excess of $100 million. The Company believes that the
allegations are without merit, and the Company intends to vigorously defend
itself.
Item 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 11, 1996 By: /s/ Keith D. Schneck
----------------- ---------------------
Keith D. Schneck
President and Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> JUN-30-1996
<PERIOD-END> SEP-28-1996
<CASH> 79,000
<SECURITIES> 0
<RECEIVABLES> 2,037,000
<ALLOWANCES> 9,000
<INVENTORY> 1,760,000
<CURRENT-ASSETS> 4,603,000
<PP&E> 3,761,000
<DEPRECIATION> 2,923,000
<TOTAL-ASSETS> 6,329,000
<CURRENT-LIABILITIES> 1,739,000
<BONDS> 0
0
2,583,000
<COMMON> 3,103,000
<OTHER-SE> 31,262,000
<TOTAL-LIABILITY-AND-EQUITY> 6,329,000
<SALES> 2,586,000
<TOTAL-REVENUES> 2,586,000
<CGS> 1,807,000
<TOTAL-COSTS> 3,271,000
<OTHER-EXPENSES> (22,000)
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (672,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (672,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (672,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
