<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 QUARTER ENDED JUNE 27, 1998
[ ] 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.
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(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)
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 August 11, 1998, there were 31,072,296 shares of the Registrant's Common
Stock, par value $.10 per share, outstanding.
<PAGE>
AM COMMUNICATIONS, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 27, 1998
INDEX
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PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1. Financial Statements
Balance Sheets - June 27 (Unaudited) and March 28, 1998 3
Statements of Operations - Quarters Ended June 27, 1998 4
and June 28, 1997 (Unaudited)
Statements of Cash Flows - Quarters Ended June 27, 1998 5
and June 28, 1997 (Unaudited)
Notes to Financial Statements 6, 7
Item 2. Management's Discussion and Analysis of Operations 8 - 11
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K 11
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2
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Item 1. Financial Statements
AM COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 27, March 28,
1998 1998
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<S> <C> <C>
ASSETS
Current Assets:
Cash $ 213,000 $ 710,000
Accounts Receivable, Net of Reserves
of $32,000 at June 27 and March 28,1998 1,456,000 1,851,000
Inventory l,998,000 2,073,000
Prepaid Expenses and Other 52,000 63,000
------------ ------------
Total Current Assets 3,719,000 4,697,000
Equipment and Fixtures, Net 620,000 734,000
Other Assets 19,000 19,000
------------ ------------
Total Assets $ 4,358,000 $ 5,450,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Capital Lease Obligations $ 91,000 $ 108,000
Accounts Payable 695,000 991,000
Advances 99,000 194,000
Accrued Expenses 918,000 987,000
------------ ------------
Total Current Liabilities 1,803,000 2,280,000
------------ ------------
Capital Lease Obligations - Long Term 20,000 39,000
Notes Payable - Long Term 29,000 --
Senior Convertible Redeemable Preferred Stock,
$100 Par Value, Authorized 1,000,000 Shares;
Issued and Outstanding 25,825 Shares at June 27
and March 28, 1998 2,583,000 2,583,000
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, $.10 Par Value, Authorized
50,000,000 Shares at June 27 and March 28, 1998;
Issued and Outstanding 31,072,296 Shares at
June 27 and March 28, 1998 3,107,000 3,107,000
Capital in Excess of Par 31,269,000 31,269,000
Accumulated Deficit (34,453,000) (33,828,000)
------------ ------------
Stockholders' Equity (Deficit) (77,000) 548,000
------------ ------------
Total Liabilities and Stockholders' Equity $ 4,358,000 $ 5,450,000
============ ============
</TABLE>
See Notes to Financial Statements
3
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AM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
June 27, June 28,
1998 1997
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Revenues $ 2,438,000 $ 3,553,000
Costs and Expenses:
Cost of Sales 1,275,000 1,770,000
Selling, General and Administrative 748,000 569,000
Research and Development 1,041,000 1,057,000
------------ ------------
Operating Income (Loss) (626,000) 157,000
Other Income 1,000 8,000
------------ ------------
Income (Loss) Before Income Taxes (625,000) 149,000
Income Tax Provision --- ---
------------ ------------
Net Income (Loss) $ (625,000) $ 149,000
============= ============
Basic Net Income (Loss) Per Share $ (0.02) $ Nil
============= ============
Diluted Net Income (Loss) Per Share $ (0.02) $ Nil
============= ============
Shares Used in Computation of Basic
Net Income (Loss) Per Share 31,072,000 31,042,000
============ ============
Shares Used in Computation of
Diluted Net Income (Loss) Per Share 31,072,000 34,096,000
============ ============
</TABLE>
See Notes to Financial Statements
4
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AM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
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<CAPTION>
Quarters Ended
June 27, June 28,
1998 1997
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Cash Flows from Operating Activities:
Net Income (Loss) $ (625,000) $ 149,000
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided By (Used in) Operating Activities:
Depreciation and Amortization 133,000 133,000
Changes in Assets and Liabilities Which
Provided (Used) Cash:
Accounts Receivable 395,000 (1,314,000)
Inventory 75,000 91,000
Prepaid Expenses and Other 2,000 (24,000)
Accounts Payable (296,000) 217,000
Advances (95,000) 157,000
Accrued and Other Expenses (69,000) (90,000)
----------- -----------
Net Cash Used In Operating Activities (480,000) (681,000)
----------- -----------
Cash Flows From Investing Activities:
Purchase of Equipment and Intangible Assets (10,000) (45,000)
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Net Cash Used In Investing Activities (10,000) (45,000)
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Cash Flows from Financing Activities:
Proceeds from Note Payable 29,000 --
Borrowings from Principal Stockholder -- 200,000
Exercise of Stock Options -- 3,000
Payments Under Capital Lease Obligations (36,000) (34,000)
----------- -----------
Net Cash Provided By (Used In) Financing Activities (7,000) 169,000
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Net Decrease in Cash (497,000) (557,000)
Cash:
Beginning 710,000 620,000
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Ending $ 213,000 $ 63,000
=========== ===========
Interest Paid $ 5,000 $ 9,000
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Income Taxes Paid $ -- $ --
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</TABLE>
See Notes to Financial Statements
5
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AM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
As of June 27, 1998 and for the Quarters Ended
June 27, 1998 and June 28, 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 June 27, 1998 and
the related Statements of Operations and Statements of Cash Flows for the
quarters ended June 27, 1998 and June 28, 1997 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>
June 27, March 28,
1998 1998
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(Unaudited)
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2. Inventory Comprises:
Raw Material $ 2,185,000 $ 2,171,000
Work-in-Process 919,000 937,000
Finished Goods 109,000 180,000
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3,213,000 3,288,000
Inventory Reserves (1,215,000) (1,215,000)
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Net Inventory $ 1,998,000 $ 2,073,000
=========== ===========
3 Accrued Expenses Comprise:
Accrued Compensation $ 400,000 $ 462,000
Accrued Rent 187,000 180,000
Accrued Real Estate Taxes 42,000 29,000
Warranty Reserve 203,000 203,000
Accrued Income Taxes 32,000 32,000
Accrued Professional Fees 38,000 60,000
Other 16,000 21,000
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$ 918,000 $ 987,000
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</TABLE>
6
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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:
Quarters Ended
--------------
June 27, June 28,
1998 1997
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Current Income Taxes $ -- $ --
Deferred Income Taxes (236,000) 49,000
Change in Valuation Allowance 236,000 (49,000)
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Net $ -- $ --
========= =========
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:
Quarters Ended
--------------
June 27, June 28,
1998 1997
--------- ---------
Federal Income Tax Provision at Statutory Rate $(213,000) $ 51,000
State Income Taxes, Net of Federal Benefit (41,000) 9,000
Research and Development Credits (5,000) (13,000)
Permanent Differences 1,000 1,000
Change in Valuation Allowance 236,000 (49,000)
Other 22,000 1,000
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Income Tax Provision $ --- $ ---
========= ========
The components of the net deferred tax asset as of June 27 and March 28
were as follows:
June 27, March 28,
1998 1998
----------- -----------
Deferred Tax Items:
Inventory $ 493,000 $ 493,000
Accrued Expenses and Reserves 155,000 155,000
Net Operating Loss Carryforwards 7,992,000 7,761,000
Tax Credit Carryforwards 753,000 748,000
Valuation Allowance (9,393,000) (9,157,000)
----------- -----------
Net Deferred Tax Assets $ -- $ --
=========== ===========
The Company has total net operating loss carryforwards available to offset
future taxable income of approximately $24 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
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Item 6. Management's Discussion and Analysis of Operations
The following discussion contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements represent the Company's present expectations or beliefs concerning
future events. The Company cautions that such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results. 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.
The following discussion should be read in conjunction with the Company's Form
10-KSB for its year ended March 1998.
General
AM Communications is a provider of high technology system level products for the
broadband communications industry, primarily for network monitoring of CATV
transmission systems. In response to increased demand for network monitoring
systems from the CATV industry, the Company has undertaken a strategy during
fiscal 1997 and 1998 to significantly upgrade and enhance its products and
technology. This resulted in a significant expansion of research and development
and marketing expenditures during these years and resulted in significant
revenue growth for fiscal years 1996 through 1998.
As disclosed in the Company's Form 10-KSB for the fiscal year ended March 28,
1998, the Company experienced a drop in the backlog of open orders during the
end of its 1998 fiscal year. The order slow down was due primarily to the lack
of re-orders related to two major accounts which contributed 34% and 18% of
fiscal 1998 revenues. In both situations, the customers have placed their
capital programs involving the purchase of the Company's products on hold
pending re-evaluation of the program. The Company is unable to determine if
future orders will be forthcoming from these customers and as a result expects
that revenues for fiscal 1999 will be significantly below revenues for fiscal
1998 and that the Company will incur operating losses for at least the first two
quarters of fiscal 1999. The Company has taken several actions to address this
situation including restructuring its sales and marketing activities by adding
additional direct sales staff, aggressively supporting new customer and OEM
installations and reducing operating costs by implementing staffing reductions
during the June 1998 quarter which resulted in a 30% reduction of its full-time
work force. The Company also has several new products under development which
are expected to improve its competitive position, however, such products are not
expected to be available until the second half of fiscal 1999.
8
<PAGE>
Results of Operations
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Quarter 1 Fiscal 1999 vs. 1998
- ------------------------------
Quarter 1 Quarter 1
Fiscal 1999 Fiscal 1998
----------- -----------
Revenues 100.0% 100.0%
Cost of Sales 52.3 49.8
Selling, General and Administrative 30.7 16.0
Research and Development 42.7 29.7
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Operating Income (Loss) (25.7) 4.5
Other Income (Expense) .1 (.3)
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Income (Loss) Before Income Taxes (25.6) 4.2
Income Tax Provision -- --
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Net Income (Loss) (25.6)% 4.2%
====== ======
Revenues
Revenues for the first quarter of fiscal 1999 ended June 27, 1998 were
$2.4 million, representing a 31% decline compared to first quarter fiscal 1998
revenues. The decline in revenues is due to the previously described drop-off of
revenues from two key customers. The Company has refocused its selling efforts
which have identified new opportunities, however, such opportunities are subject
to the risks and uncertainties during the sales cycle in closing new business.
The Company continues to maintain key strategic OEM relationships with General
Instrument, Philips, and Scientific-Atlanta. Backlog at June 27, 1998 was $2.6
million compared to $8.2 million a year ago.
Development and software revenues totaled $485,000 and $459,000 in the first
quarter of fiscal 1999 and 1998, respectively. Development revenues primarily
relate to OEM development efforts which are recognized when defined milestones
are reached, the timing of which may be different from when the related
development expenses were incurred. The related development costs are reported
as research and development expense. All software development costs are charged
to research and development when incurred.
Cost of Sales
Costs of sales includes manufacturing costs of the Company's hardware products.
Cost of sales represented 52.3% of revenues in the first quarter of fiscal 1999
compared to 49.8% in fiscal 1998. The increase in cost of sales percentage is
due to manufacturing variances incurred with lower volume of revenues during the
first quarter of fiscal 1999. The Company's margins are generally dependent on
product mix 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 $748,000 and $569,000
in the first quarters of fiscal 1999 and fiscal 1998, respectively. Expenses
increased in fiscal 1999 due to increased costs related to staff reductions and
restructuring of the sales and marketing function including added staff and
promotion expenses. The Company expects S,G, & A expenses to decline during
fiscal 1999 as a result of recently implemented staffing reductions.
9
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Research and Development
Research and development expense totaled $1.1 million for both the first quarter
of fiscal 1999 and 1998. The Company continues to spend a significant amount on
research and development as it focuses on upgrading and expanding the
OmniStat(TM) status monitoring system and the evaluation of technology
opportunities in related products and markets. The Company continues to identify
product development needs in excess of its available development resources which
has negatively impacted its competitive position. The Company expects R&D
spending to decline during fiscal 1999 as a result of recently implemented
staffing reductions.
Operating Income (Loss)
The Company experienced an operating loss of $625,000 in the first quarter of
fiscal 1999 primarily due to a significant drop-off of revenues as previously
described. The Company has reduced its annual operating costs by approximately
$1.2 million going forward primarily through staff reductions. Should the
Company's revenue levels not improve, further operating losses would be incurred
and the Company would expect to further reduce operating costs to minimize such
losses.
Income Taxes
Due to the significant net operating loss carryforward, the Company is subject
to minimum income taxes which include state income taxes and federal income
taxes based on an "alternative minimum tax" calculation.
Industry Factors
The cable and broadband communications industry is undergoing significant change
as cable television (CATV) operators continue to expand and consolidate their
operations. Operators are also implementing new interactive services such as
video on demand, Internet access and telephony. In addition, competition for
video services has increased with new entrants, including telephone and
satellite providers. This has resulted in existing CATV operators planning to
expand and upgrade their distribution infrastructures and new providers planning
to construct new distribution systems capable of providing a mix of services.
There continue 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 CATV network monitoring products has generally increased as
monitoring of cable distribution systems has become an important factor in
increasing operating efficiency and reliability. However, the Company's
operations are subject to the timing and success of new product introductions,
the scheduling of orders by customers and the Company's ability to support its
technology in the field. The Company continues to identify product development
needs in excess of its available development resources, which could negatively
impact its competitive position. 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 quarter of fiscal 1999, the Company consumed net cash of $497,000
compared to consuming cash of $557,000 in the first quarter of fiscal 1998.
10
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As of June 27, 1998, the Company's cash totaled $213,000 compared to $710,000 at
March 28, 1998. As discussed above, the Company expects to incur operating
losses at least through the first six months of fiscal 1999 as a result of a
decline in order bookings. The Company believes that existing cash and available
lending lines, combined with recent operating expense and staff reductions, is
sufficient to support operations over this time period. Should operating losses
continue or exceed planned levels, the Company would expect to further reduce
operating expenses, including additional staff reductions, to allow continued
operation of the business. The Company is also evaluating the need to raise
additional capital to enable continued execution of its development strategy.
There can be no assurance that such additional capital would be available.
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 terms of the agreement, all the Company's assets are pledged
and interest is payable at 1 1/2% above prime. The Company borrowed up to
$612,000 under this line during fiscal 1998, which was repaid, and no amounts
were outstanding at March 28, 1998. The line of credit expired July 31, 1998 and
the Company received a commitment letter extending the line at a reduced level
of $750,000 through July 30, 1999. The Company also received up to a $250,000
commitment from its primary shareholder to provide working capital through July
1999 at 10% interest and payment of outstanding borrowings due by September 30,
1999.
Capital expenditures totaled $10,000 in the first quarter of fiscal 1999 and
$45,000 in the comparable period of fiscal 1998 which include capital leases,
computers, manufacturing assembly and test equipment and facility related
improvements and fixtures.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of operations, including among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company is currently assessing whether its existing computer systems will
properly utilize dates beyond December 31, 1999. If modifications are required
for its existing systems and the modifications are not completed on a timely
basis, the Year 2000 Issue could have a material adverse impact on the
operations of the Company. Presently, the Company does not have an estimate for
the costs of the project and the date on which the Company plans to complete the
Year 2000 modifications, if any. However, based upon the Company's initial
assessment, the Company believes that the costs of the project will not be
material. The Company believes that it has minimal exposure to contingencies
related to the Year 2000 Issue for the products it has sold.
The Company plans to engage in formal communication with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. There can be no guarantee that the systems of other companies on which
the Company's systems rely or interface with will be timely converted, or that a
failure to convert by another company, or a conversion that is incompatible with
the Company's systems, would not have a material adverse effect on the Company.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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(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: August 11, 1998 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> APR-03-1999
<PERIOD-START> MAR-29-1998
<PERIOD-END> JUN-27-1998
<CASH> 213,000
<SECURITIES> 0
<RECEIVABLES> 1,456,000
<ALLOWANCES> 32,000
<INVENTORY> 1,998,000
<CURRENT-ASSETS> 3,719,000
<PP&E> 4,330,000
<DEPRECIATION> 3,710,000
<TOTAL-ASSETS> 4,358,000
<CURRENT-LIABILITIES> 1,803,000
<BONDS> 0
2,583,000
0
<COMMON> 3,107,000
<OTHER-SE> 31,269,000
<TOTAL-LIABILITY-AND-EQUITY> 4,358,000
<SALES> 2,438,000
<TOTAL-REVENUES> 2,438,000
<CGS> 1,275,000
<TOTAL-COSTS> 3,064,000
<OTHER-EXPENSES> (6,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,000
<INCOME-PRETAX> (625,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (625,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (625,000)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
