<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 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
------
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 Comerce Drive, Quakertown, Pennsylvania 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 January 31, 1997, 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 DECEMBER 28, 1996
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Financial Statements
Balance Sheets -- December 28 (Unaudited) and March 30, l996 3
Statements of Operations -- Three Month Periods and Nine Month 4
Periods Ended December 28, 1996 and December 30, 1995,
(Unaudited)
Statements of Cash Flows -- Nine Months Ended December 28, 1996
and December 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 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
2
<PAGE>
Item 1. Financial Statements
- -------------------------------
AM COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 28, March 30,
1996 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 578,000 $ 664,000
Accounts Receivable 2,567,000 1,588,000
Inventory 1,749,000 2,334,000
Prepaid Expenses and Other 63,000 112,000
Deferred Tax Asset 229,000 229,000
----------- -----------
Total Current Assets 5,186,000 4,927,000
Equipment and Fixtures, Net 836,000 565,000
Intangibles, Net of Accumulated Amortization of $477,000
at December 28 and $473,000 at March 30, 1996 90,000 54,000
Deferred Software Development Costs, Net of
Accumulated Amortization of $550,000 at
December 28 and $481,000 at March 30, 1996 73,000 162,000
Deferred Tax Asset, Net 707,000 707,000
Other 20,000 20,000
----------- -----------
Total Assets $ 6,912,000 $ 6,435,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Capital Lease Obligations $ 122,000 $ 63,000
Accounts Payable 1,515,000 1,233,000
Advances 391,000 39,000
Accrued and Other Expenses 409,000 375,000
----------- -----------
Total Current Liabilities 2,437,000 1,710,000
Capital Lease Obligations - Long Term 189,000 110,000
----------- -----------
Total Liabilities 2,626,000 $ 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 December 28 and
March 30, 1996 2,583,000 2,583,000
Common Stock, $.10 Par Value, Authorized 40,000,000
Shares at December 28 and March 30, 1996; Issued
and Outstanding 31,033,630 Shares at December 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 (32,662,000) (32,004,000)
----------- -----------
Stockholders' Equity 4,286,000 4,615,000
----------- -----------
Total Liabilities and Stockholders' Equity $ 6,912,000 $ 6,435,000
=========== ===========
</TABLE>
See Notes to Financial Statements
3
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ ------------------
December 28, December 30, December 28, December 30,
1996 1995 1996 1995
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product Sales $ 3,245,000 $ 2,042,000 $ 8,293,000 $ 5,352,000
Cost and Expenses:
Cost of Sales 1,519,000 1,783,000 4,394,000 3,598,000
Selling, General and Administrative 701,000 486,000 1,827,000 1,417,000
Research and Development 1,145,000 530,000 2,744,000 1,645,000
----------- ----------- ----------- ------------
Operating Loss (120,000) (757,000) (672,000) (1,308,000)
Other Income (2,000) (4,000) (14,000) (28,000)
----------- ----------- ----------- ------------
Loss Before Income Taxes (118,000) (753,000) (658,000) (1,280,000)
Income Tax Provision -- 221,000 -- --
----------- ----------- ----------- ------------
---
Net Loss $ (118,000) $ (974,000) $ (658,000) $(1,280,000)
=========== =========== ========== ===========
Loss Per Weighted Average
Common & Common Equivalent Share Nil $(0.03) $(0.02) $(0.04)
=== ====== ====== ======
Weighted Average Common & Common
Equivalent Shares Outstanding Used
in Computing Loss Per Share 31,034,000 33,290,000 31,010,000 32,774,000
========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
4
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
December 28, December 30,
1996 1995
---------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (658,000) $(1,280,000)
Adjustments to Reconcile Net Loss to
Net Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization 339,000 250,000
Changes in Assets and Liabilities Which
Provided (Used) Cash:
Accounts Receivable (979,000) (543,000)
Inventory 585,000 (983,000)
Prepaid Expenses and Other 49,000 (12,000)
Accounts Payable 282,000 432,000
Advances 352,000 (297,000)
Accrued and Other Expenses 34,000 (40,000)
---------- -----------
Net Cash Provided By (Used In) Operating Activities 4,000 (2,473,000)
Cash Flows From Investing Activities:
Purchase of Equipment and Intangible Assets (362,000) (363,000)
---------- -----------
Net Cash Used In Investing Activities (362,000) (363,000)
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 (57,000) (6,000)
---------- -----------
Net Cash Provided By Financing Activities 272,000 2,627,000
Net Decrease In Cash (86,000) (209,000)
Cash:
Beginning 664,000 454,000
---------- -----------
Ending $ 578,000 $ 245,000
========== ==========
Interest Paid $ 17,000 $ 2,000
========== ==========
Income Taxes Paid $ -- $ 36,000
========== ==========
Non-Cash Financing Activities:
Equipment Purchased Under Capital Lease $ 195,000 $ 103,000
========== ==========
</TABLE>
See Notes to Financial Statements
5
<PAGE>
AM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
As of December 28, 1996 and for the 39 Week Periods Ended
December 28, 1996 and December 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 December 28, 1996
and the related Statements of Operations and Statements of Cash Flows for the
quarters and nine months ended December 28, 1996 and December 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.
December 28, March 30,
1996 1996
--------------- ---------------
(Unaudited)
2. Inventory Comprises:
Raw Material $ 1,992,000 $ 2,205,000
Work in Process 797,000 1,087,000
Finished Goods 217,000 310,000
--------------- ---------------
3,006,000 3,602,000
Inventory Reserves (1,257,000) (1,268,000)
----------------- ----------------
Net Inventory $ 1,749,000 $ 2,334,000
=============== ===============
3. Accrued Expenses Comprise:
Accrued Compensation $ 148,000 $ 182,000
Accrued Commissions 4,000 ---
Accrued Professional Fees 40,000 32,000
Accrued Rent 59,000 ---
Warranty Reserve 25,000 25,000
Other 133,000 136,000
--------------- ---------------
$ 409,000 $ 375,000
=============== ===============
6
<PAGE>
4. Income Taxes:
The benefit for taxes on income consisted of:
Nine Months Ended
-----------------
December 28, December 30,
1996 1995
------------- -------------
Current Income Taxes $ --- $ ---
Deferred Income Taxes (242,000) (520,000)
Change in Valuation Allowance 242,000 520,000
---------- ----------
Net $ --- $ ---
========== ==========
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 provision for income taxes follows:
Nine Months Ended
------------------
December 28, December 30,
1996 1995
------------- ------------
Federal Income Tax Provision at Statutory Rate $ (224,000) $ (435,000)
State Income Taxes, Net of Federal Benefit (44,000) (85,000)
Research and Development Credits (75,000) ---
Permanent Differences 3,000 ---
Other 98,000 ---
Change in Valuation Allowance 242,000 520,000
----------- -----------
Benefit for Income Taxes $ --- $ ---
=========== ============
The components of the net deferred tax asset as of December 28 and March 30,
1996 were as follows:
December 28, March 30,
1996 1996
------------ ------------
Deferred Tax Items:
Inventory $ 511,000 $ 515,000
Accrued Expenses and Reserves 98,000 98,000
Net Operating Loss Carryforwards 7,040,000 6,869,000
Tax Credit Carryforwards 601,000 526,000
Valuation Allowance (7,314,000) (7,072,000)
---------- -----------
Net Deferred Tax Assets $ 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 $26.3 million expiring at various times from 1996
through 2011. Due to certain statutory limitations under Internal Revenue Code
Section 382, only $20.4 million of such carryforwards are available at December
28, 1996. The remaining carryforwards of $5.9 million will become available
ratably over the carryforward period.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Operation
- -------------------------------------------------------------
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. While the Company's legacy products
continue to remain a significant generator of current revenues 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 such
monitoring systems by the industry leading OEM's. Accordingly, the Company
continues to invest heavily in research and development for the OmniSTAT System
and continued support of key OEM relationships including General Instrument,
Philips, Scientific Atlanta, and ADC Communications.
Revenues
Revenues increased 59% to $3,245,000 in the third quarter of fiscal 1997
from $2,042,000 in the third quarter of fiscal 1996. For the first nine months
of fiscal 1997 revenues increased 55% to $8,293,000 from $5,352,000 for the same
period in fiscal 1996. Increases in revenues were attributable to shipments of
new products to new customers and increased volume levels from existing
customers. Offsetting this were reductions in revenue levels from Lucent
Technologies which comprised 54% of fiscal 1996 revenues and 18% of fiscal 1997
revenues. The Company is experiencing increased demand for its products, due to
several factors, including the introduction of the OmniSTAT next generation
monitoring system, increased marketing activities, and increased industry demand
driven by system upgrade activities from the major cable operators.
In January 1997, the Company announced that Comcast Cable Communications,
Inc. (Comcast), a major cable operator, had chosen the AM OmniSTAT System as
their standard monitoring platform for all new hybrid fiber/coax (HFC) systems
construction and upgrades. The Company received a blanket purchase order from
Comcast which could yield up to $9 million of revenues over the next 12 to 18
months. The Company expects to receive initial orders against this blanket
purchase order during the next quarter with shipments commencing thereafter.
Backlog at December 28, 1996 totaled $4.3 million compared to $4.0 million
at September 28, 1996. Order backlog includes only firm released purchase orders
shippable within a one year period.
Cost of Sales
Cost of sales represented 47% of revenues for the third quarter of fiscal
1997 compared to 87% in the comparable prior year quarter. Cost of sales
represented 53% of revenues for the first nine months of fiscal 1997 compared to
67% in the same period in fiscal 1996. Cost of sales is dependent on product mix
and customer mix, with sales to OEM customers generally having a lower profit
margin.
Cost of sales as a percentage of revenues was adversely impacted in fiscal
1996 due to the substantial costs associated with transitioning to a new product
base, including the establishment of a $300,000 inventory reserve and
manufacturing inefficiencies incurred in bringing the Lucent products to market.
The Company has also been able to reduce the cost of sales in fiscal 1997 by
achieving price reductions from vendors and improving manufacturing yields of
the products.
8
<PAGE>
Selling, General and Administrative
Selling, general and administrative (S,G&A) expenses were $701,000 for the
third quarter of fiscal 1997, up 44% from $486,000 in the comparable prior year
period. S,G&A expenses increased 29% in the comparable nine month periods.
Expenses increased due to increased marketing and sales efforts, including the
hiring of field sales support staff, expanded promotional efforts, and expansion
of sales activities into international markets. Administrative costs increased
in response to increased business levels.
Research and Development
Research and development expenses primarily consist of salaries for
research and development personnel and associated fringe benefits, tooling and
supplies for development activities. Research and development expenses increased
$615,000 or 116% in the quarter ended December 28, 1996 compared to the third
quarter of fiscal 1996. For the nine months ended December 28, 1996, research
and development expenses increased $1.1 million, or 67% over the comparable
period in fiscal 1996. These increases are due to expansion of the development
staff, including the hiring of additional hardware and software engineers. The
Company has expanded its development efforts in response to customer and OEM
interest in new status monitoring products and to support the development of the
OmniSTAT monitoring system. 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 $120,000 and $672,000 for
the three months and nine months ended December 28, 1996 compared to losses of
$757,000 and $1,308,000 in the prior year periods. Operating losses in fiscal
1997 are due primarily to significantly higher levels of investment in research
and development and expenses incurred in connection with increased selling
activities. The Company has been able to reduce operating losses from the prior
fiscal year period by expanding sales levels and improving product margins.
As discussed above, the Company has benefited during the current fiscal
year from new product introductions and an expanded customer base. The Company
continues to aggressively pursue new business opportunities and believes that
demand for the Company's products will continue to grow. The Company also has
several new products reaching completion of development, including OEM products
for General Instrument, Scientific Atlanta, Philips, ADC, and others for which
initial orders have been received.
Income Taxes
Due to the significant net operating loss carryforward, the Company pays
minimum income taxes.
9
<PAGE>
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, and significant capital costs.
Demand for the Company's status monitoring systems has increased as
monitoring of newer advanced 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.
Such factors could impact the trading price of the Company's common stock.
Financial Condition and Liquidity
Cash generated by the Company's operating activities totaled $4,000 during
the first nine months of fiscal 1997 compared to cash consumed of $2,473,000 in
the comparable prior year period. The Company has funded operating losses out of
its current cash balances, the issuance of $300,000 of warrants in June 1996 and
cash provided by Lucent Technologies related to the settlement in the second
quarter of fiscal 1997 of liabilities associated with the cancellation of open
orders. The Company continues to finance a portion of its capital additions
through the use of capital leases with various lenders.
The Company continues to focus on increasing its revenue levels sufficient
to achieve profitability. The Company believes that its sources of liquidity,
including projected cash flows from operations and the net operating loss
carryforwards, will satisfy its projected capital requirements for at least the
next twelve months. However, should operating losses continue for an extended
period, the Company would be required to take action to reduce expenditures
and/or obtain additional financing from outside sources.
Capital additions totaled $557,000 and $466,000 in the first nine
months of fiscal 1997 and 1996, respectively, which includes computers and
manufacturing and test equipment. The Company financed $195,000 and $103,000 of
such expenditures with capital leases for the nine month period ended December
28, 1996 and December 30, 1995, respectively.
10
<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 17, 1996.
(b) Directors elected at the Annual Meeting:
Number of Votes
For Against Abstain
----------------------------------------------------------------------
Henry I. Boreen 27,446,273 27,359 53,212
Keith D. Schneck 27,446,132 8,500 53,212
Herman O. Benninghoff, II 27,246,132 8,500 253,212
R. Barry Borden 27,446,332 9,600 54,212
Alvin Hoffman 27,446,273 9,800 54,212
Burt Hoffman 27,446,232 9,700 54,212
Hal Krisbergh 27,446,282 8,900 53,212
Lemuel A. Tarshis, Ph.D. 27,444,082 11,200 53,125
(c) Other matters voted upon favorably at the meeting:
(i) Amend Article 4 of the Certificate of Incorporation of the Company to
increase the number of authorized shares of Common Stock of the
Company from 40,000,000 shares to 50,000,000 shares;
Number of Votes
For Against Abstain
------------------------------------------------
27,254,547 204,147 49,150
(ii) Amend the Company's 1991 Incentive Stock Option Plan to increase the
aggregate number of shares of the Company's Common Stock authorized
for issuance under the Plan from 4,000,000 to 5,000,000 shares.
Number of Votes
For Against Abstain
------------------------------------------------
26,825,530 303,232 55,150
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------
(a) Exhibits.
27 - Financial Data Schedule
(b) No reports on Form 8-K have been filed for the period covered by this
report.
11
<PAGE>
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 10, 1997 By: /s/ Keith D. Schneck
----------------- -------------------------------------
Keith D. Schneck
President and Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> SEP-29-1996
<PERIOD-END> DEC-28-1996
<CASH> 578,000
<SECURITIES> 0
<RECEIVABLES> 2,576,000
<ALLOWANCES> 9,000
<INVENTORY> 1,749,000
<CURRENT-ASSETS> 5,186,000
<PP&E> 3,843,000
<DEPRECIATION> 3,007,000
<TOTAL-ASSETS> 6,912,000
<CURRENT-LIABILITIES> 2,437,000
<BONDS> 0
0
2,583,000
<COMMON> 3,103,000
<OTHER-SE> 31,262,000
<TOTAL-LIABILITY-AND-EQUITY> 6,912,000
<SALES> 3,245,000
<TOTAL-REVENUES> 3,245,000
<CGS> 1,519,000
<TOTAL-COSTS> 3,365,000
<OTHER-EXPENSES> (8,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,000
<INCOME-PRETAX> (118,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (118,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (118,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
