<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 27, 1997
[ ] 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)
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, 1997, there were 31,052,296 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 27, 1997
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------- --------
Item 1. Financial Statements
Balance Sheets -- September 27 (Unaudited) and
March 29, 1997 3
Statements of Operations - Quarters and Six Months Ended
September 27, 1997 and September 28, 1996 (Unaudited) 4
Statements of Cash Flows -- Six Months Ended
September 27, 1997 and September 28, 1996 (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 11
2
<PAGE>
Item 1. Financial Statements
AM COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 27, March 29,
1997 1997
------------- ---------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 161,000 $ 620,000
Accounts Receivable, Less Doubtful Accounts of
$9,000 at September 27 and March 29, 1997 2,285,000 1,160,000
Inventory 2,483,000 2,106,000
Prepaid Expenses and Other 102,000 68,000
--------------- --------------
Total Current Assets 5,031,000 3,954,000
Equipment and Fixtures, Net 819,000 899,000
Other Assets 85,000 116,000
--------------- --------------
Total Assets $ 5,935,000 $ 4,969,000
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Line of Credit $ 395,000 $ --
Current Portion of Capital Lease Obligations 132,000 133,000
Accounts Payable 1,725,000 1,672,000
Advances 178,000 177,000
Accrued Expenses 728,000 652,000
--------------- --------------
Total Current Liabilities 3,158,000 2,634,000
--------------- --------------
Capital Lease Obligations - Long Term 82,000 149,000
--------------- --------------
Total Liabilities $ 3,240,000 $ 2,783,000
=============== ==============
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 27 and March 29,1997 2,583,000 2,583,000
Common Stock, $.10 Par Value, Authorized 40,000,000
Shares at September 27 and March 29, 1997; Issued
and Outstanding 31,052,296
Shares at September 27
and 31,042,296 Shares at March 29, 1997 3,105,000 3,104,000
Capital in Excess of Par 31,266,000 31,264,000
Accumulated Deficit (34,259,000) (34,765,000)
---------------- -------------
Stockholders' Equity 2,695,000 2,186,000
--------------- --------------
Total Liabilities and Stockholders' Equity $ 5,935,000 $ 4,969,000
=============== ==============
</TABLE>
See Notes to Financial Statements
3
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 4,096,000 $ 2,586,000 $ 7,649,000 $ 5,049,000
Cost and Expenses:
Cost of Sales 2,194,000 1,807,000 3,964,000 2,875,000
Selling, General and Administrative 616,000 594,000 1,185,000 1,127,000
Research and Development 918,000 870,000 1,975,000 1,599,000
------------ ------------ ------------ ------------
Operating (Loss) Income 368,000 (685,000) 525,000 (552,000)
Other Expense 11,000 13,000 19,000 12,000
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes 357,000 (672,000) 506,000 (540,000)
Income Tax Provision -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) $ 357,000 $ (672,000) $ 506,000 $ (540,000)
============ ============ ============ ============
Income (Loss) Per Weighted Average
Common and Common Equivalent
Share $ 0.01 $ (0.02) $ 0.01 $ (0.02)
============ ============ ============ ============
Weighted Average Common Shares
Outstanding Used in Computing
Income (Loss) Per Share 34,187,000 31,029,000 34,142,000 30,998,000
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
4
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------
September 27, September 28,
1997 1996
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $ 506,000 $ (540,000)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided By (Used in) Operating Activities:
Depreciation and Amortization 266,000 215,000
Changes in Assets and Liabilities Which
Provided (Used) Cash:
Accounts Receivable (1,125,000) (449,000)
Inventory (377,000) 574,000
Prepaid Expenses and Other (33,000) (27,000)
Accounts Payable 53,000 (40,000)
Advances 1,000 (22,000)
Accrued and Other Expenses 76,000 45,000
----------- -----------
Net Cash Used In Operating Activities (633,000) (244,000)
----------- -----------
Cash Flows From Investing Activities:
Purchase of Equipment and Intangible Assets (156,000) (278,000)
----------- -----------
Net Cash Used In Investing Activities (156,000) (278,000)
----------- -----------
Cash Flows from Financing Activities:
Net Proceeds from Borrowings on Bank Line of Credit 395,000 --
Notes Receivable -- (359,000)
Exercise of Warrants and Stock Options 3,000 29,000
Sale of Warrants -- 300,000
Payments Under Capital Lease Obligations (68,000) (33,000)
----------- -----------
Net Cash Provided By (Used In) Financing Activities 330,000 (63,000)
----------- -----------
Net Decrease In Cash (459,000) (585,000)
Cash:
Beginning 620,000 664,000
----------- -----------
Ending $ 161,000 $ 79,000
=========== ===========
Interest Paid $ 21,000 $ 10,000
=========== ===========
Income Taxes Paid $ -- $ --
=========== ===========
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 27, 1997 and for The 26 Week Periods Ended
September 28, 1996 and September 27, 1997
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 27,
1997 and the related Statements of Operations and Statements of Cash Flows
for the quarters and six months ended September 27, 1997 and September 28,
1996 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 27, March 29,
1997 1997
------------- ---------
(Unaudited)
2. Inventory Comprises:
Raw Material $ 1,992,000 $ 2,106,000
Work in Process 1,494,000 749,000
Finished Goods 122,000 391,000
----------- -----------
3,608,000 3,246,000
Inventory Reserves (1,125,000) (1,140,000)
----------- -----------
Net Inventory $ 2,483,000 $ 2,106,000
=========== ===========
3. Accrued Expenses Comprise:
Accrued Compensation $ 334,000 $ 291,000
Accrued Rent 165,000 98,000
Accrued Real Estate Taxes 18,000 27,000
Warranty Reserve 55,000 55,000
Accrued Taxes 2,000 2,000
Accrued Professional Fees 21,000 47,000
Other 133,000 132,000
----------- -----------
$ 728,000 $ 652,000
=========== ===========
6
<PAGE>
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:
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
September 27, September 28,
1997 1996
--------------- -----------
<S> <C> <C>
Current Income Taxes $ --- $ ---
Deferred Income Taxes 85,000 (222,000)
Change in Valuation Allowance (85,000) 222,000
------------- -----------
Net $ --- $ ---
============== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
September 27, September 28,
1997 1996
--------------- -----------
<S> <C> <C>
Federal Income Tax Provision (Benefit) at
Statutory Rate $ 172,000 $ (184,000)
State Income Taxes, Net of Federal Benefit 33,000 (38,000)
Research and Development Credits (25,000) (25,000)
Permanent Differences 2,000 ---
Change in Valuation Allowance (85,000) 222,000
Other (97,000) 25,000
------------- -----------
Income Tax Provision $ --- $ ---
============== ===========
</TABLE>
The components of the net deferred tax asset as of September 27 and
March 29 were as follows:
<TABLE>
<CAPTION>
September 27, September 28,
1997 1996
--------------- -----------
<S> <C> <C>
Deferred Tax Items:
Inventory $ 457,000 $ 463,000
Accrued Expenses and Reserves 122,000 123,000
Net Operating Loss Carryforwards 7,708,000 7,811,000
Tax Credit Carryforwards 700,000 675,000
Valuation Allowance (8,987,000) (9,072,000)
------------ -----------
Net Deferred Tax Assets $ --- $ ---
============ ============
</TABLE>
The Company has total net operating loss carryforwards available to
offset future taxable income of $26.7 million expiring at various times from
1998 to 2012. Due to certain statutory limitations under Internal Revenue Code
Section 382, a portion of such carryforwards may not be available or may expire
before being utilized.
7
<PAGE>
Item 2.Management's Discussion and Analysis of Operations
Results of Operations
AM Communications is a provider of high technology system level products
for the broadband communications industry, primarily for CATV monitoring and
control systems. In response to increased demand for network monitoring systems
from the CATV industry, the Company has undertaken a strategy over the past two
years to significantly upgrade and enhance its products and technology. This has
resulted in a significant expansion of research and development and marketing
expenditures for fiscal 1997 and 1996. During the latter half of fiscal 1997,
the Company commenced shipment of its new OmniStat(TM) System which includes new
application software, a new control unit and new field transponders. 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 and support of
its OEM relationships.
Revenues
Revenues for the second quarter ended September 27, 1997 were $4.1 million,
up 58% from the $2.6 million for the second quarter of fiscal 1997. Revenues for
the first six months of fiscal 1998 totaled $7.6 million, up 51% over the
comparable period a year ago.
The increase in revenues is attributable to increased demand for the
Company's status monitoring products from both OEM customers and direct sales to
CATV operators. The Company has benefited from new product introductions,
including new OEM monitors and the new OmniStat next generation status
monitoring system, which have improved the Company's ability to compete. The
Company also expanded its customer base with the addition of Comcast, Cable One,
Scientific-Atlanta and others to replace the revenue contribution from Lucent
Technologies. Revenues from Lucent Technologies, which totaled $1.0 million and
$1.4 million in the second quarter and first six months of fiscal 1997,
respectively, have terminated as the customer canceled the major project which
involved the Company's products. The Company maintains key strategic OEM
relationships with ADC Communications, Next Level Systems (formerly General
Instrument), Philips Broadband Systems and Scientific-Atlanta.
As a result of the Company's expanded sales and marketing efforts, backlog
at November 7, 1997 exceeded $5.6 million compared to $3.6 million a year ago.
The Company continues to pursue new business opportunities and believes that
demand for the Company's products will continue to grow. As discussed above, the
Company has commenced delivery of initial versions of its OmniSTAT system which
is responsible for generating much of the increased backlog. As this is a
complex new system, the Company continues to make enhancements and improvements
to the system. As a result, the Company has experienced implementation delays in
certain customer locations including Comcast, which has resulted in delays in
current shipments against open purchase orders. The Company believes the issues
related to the system will be resolved in the near term, however, the Company's
operations could be adversely impacted should they not be resolved to the
customers' satisfaction.
8
<PAGE>
Cost of Sales
Cost of sales includes manufacturing costs of the Company's hardware
products. Cost of sales represented 54% of revenues in the second quarter of
fiscal 1998 compared to 70% in the comparable period in fiscal 1997. Cost of
sales represented 52% and 57% for the first six months of fiscal 1998 and 1997,
respectively. Cost of sales was adversely impacted in fiscal 1997 due to the
termination of the Lucent business. 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 $616,000 in the
second quarter of fiscal 1998, up 4% compared to $594,000 in the second quarter
of fiscal 1997. S,G&A expenses increased 5% in the comparable six month periods.
The Company expects S,G&A expenses to increase in the future as it expands its
field support and marketing activities and increases its administrative staff to
support increased growth opportunities world-wide.
Research and Development
Research and development expenses totaled $918,000 and $870,000 in the
second quarters of fiscal 1998 and 1997, respectively. For the six month period
of fiscal 1998, research and development expenses were $2.0 million, an increase
of 24% over the amount expended in the comparable period in fiscal 1997.
Expenses increased in fiscal 1998 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,
though at a more moderate rate, development expenditures in software and
hardware in response to continued customer interest in the Company's products.
Income Taxes
As the Company has available unused federal and state net operating loss
carry-forwards in excess of $25 million, and has fully provided a valuation
allowance against its existing deferred tax assets, it will generally not record
significant income tax expense until such time as the net operating loss
carryforwards are utilized, expire, or that the valuation allowance is reduced.
The current expiration dates range from the years 1998 through 2012. Due to
certain statutory limitations under Internal Revenue Code Section 382, a portion
of such carryforwards may not be available or may expire before being utilized.
Industry Factors
The cable and broadband communications industry continues to undergo
significant change as cable television (CATV) operators plan to offer expanded
services driven largely by the growing interest in Internet access over cable
and respond to the competitive threat of others (including telephone companies)
entering the cable video and data services market. This has resulted in CATV
operators planning to expand and upgrade their distribution infrastructures and
other providers planning to construct new distribution systems capable of
providing telephone, video and data 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 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 1998, the Company's activities consumed
net cash of $633,000 compared to $244,000 net cash consumed in the first six
months of fiscal 1997.
In September 1997, the Company received a working capital line of credit
from a commercial bank to provide up to $1 million based on the value of
accounts receivable. Under the terms of the agreement, all the Company's assets
are pledged and interest is payable at 1 1/2% above prime. The Company's net
balance on this line was $395,000 as of September 27, 1997.
Capital expenditures totaled $156,000 and $278,000 in the first six months
of fiscal 1998 and 1997, respectively, which includes computers, and
manufacturing assembly and test equipment.
In fiscal 1998, the Company obtained $155,000 of manufacturing, assembly
and test equipment through capital leases.
The Company is focusing its efforts on maintaining profitability and
believes that available sources of liquidity, including projected cash flows
from operations, future equipment leasing arrangements, net operating loss
carryforwards and the new line of credit commitment will satisfy the projected
capital requirements for at least the next twelve months.
Forward Looking Statements
This Form 10-QSB discusses primarily historical information. Statements
included in this Form 10-QSB, to the extent that they are forward looking, are
based on current management expectations that involve a number of uncertainties
and risks. 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.
10
<PAGE>
PART II. OTHER INFORMATION
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 10, 1997 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> MAR-29-1997
<PERIOD-START> JUN-29-1997
<PERIOD-END> SEP-27-1997
<CASH> 161,000
<SECURITIES> 0
<RECEIVABLES> 2,285,000
<ALLOWANCES> 9,000
<INVENTORY> 2,483,000
<CURRENT-ASSETS> 5,031,000
<PP&E> 4,150,000
<DEPRECIATION> 3,330,000
<TOTAL-ASSETS> 5,935,000
<CURRENT-LIABILITIES> 3,158,000
<BONDS> 0
0
2,583,000
<COMMON> 3,105,000
<OTHER-SE> 31,266,000
<TOTAL-LIABILITY-AND-EQUITY> 5,935,000
<SALES> 4,096,000
<TOTAL-REVENUES> 4,096,000
<CGS> 2,194,000
<TOTAL-COSTS> 3,728,000
<OTHER-EXPENSES> (1,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,000
<INCOME-PRETAX> 357,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 357,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 357,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
