<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 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
--------
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, 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 30, 1998, there were 31,062,296 shares of the Registrant's Common
Stock, par value $.10 per share, outstanding.
<PAGE>
AM COMMUNICATIONS, INC.
FORM 10-QSB
FOR THE QUARTER ENDED DECEMBER 27, 1997
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- -------------------------------- --------
<S> <C>
Item 1. Financial Statements
Balance Sheets -- December 27 (Unaudited) and March 29, l997 3
Statements of Operations -- Three Month Periods and Nine Month 4
Periods Ended December 27, 1997 and December 28, 1996,
(Unaudited)
Statements of Cash Flows -- Nine Months Ended December 27, 1997
and December 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 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE>
Item 1. Financial Statements
AM COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 27, March 29,
1997 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 57,000 $ 620,000
Accounts Receivable 2,294,000 1,160,000
Inventory 2,730,000 2,106,000
Prepaid Expenses and Other 87,000 68,000
-------------- --------------
Total Current Assets 5,168,000 3,954,000
Equipment and Fixtures, Net 801,000 899,000
Other Assets 75,000 116,000
-------------- --------------
Total Assets $ 6,044,000 $ 4,969,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Line of Credit $ 400,000 $ --
Current Portion of Capital Lease Obligations 139,000 133,000
Accounts Payable 1,528,000 1,672,000
Advances 172,000 177,000
Accrued Expenses 742,000 652,000
-------------- --------------
Total Current Liabilities 2,981,000 2,634,000
-------------- --------------
Capital Lease Obligations - Long Term 42,000 149,000
-------------- --------------
Total Liabilities $ 3,023,000 $ 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 December 27 and
March 29, 1997 2,583,000 2,583,000
Common Stock, $.10 Par Value, Authorized 50,000,000
Shares at December 27 and March 29, 1997; Issued and
Outstanding 31,052,296 Shares at December 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 (33,933,000) (34,765,000)
-------------- ---------------
Stockholders' Equity 3,021,000 2,186,000
-------------- --------------
Total Liabilities and Stockholders' Equity $ 6,044,000 $ 4,969,000
============== ==============
</TABLE>
See Notes to Financial Statements
3
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- ------------------------------
December 27, December 28, December 27, December 28,
1997 1996 1997 1996
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 4,570,000 $ 3,245,000 $ 12,219,000 $ 8,293,000
Cost and Expenses:
Cost of Sales 2,658,000 1,519,000 6,622,000 4,394,000
Selling, General and Administrative 669,000 701,000 1,854,000 1,827,000
Research and Development 892,000 1,145,000 2,867,000 2,744,000
-------------- ------------- ------------- --------------
Operating Income (Loss) 351,000 (120,000) 876,000 (672,000)
Other Income (Expense) (16,000) 2,000 (34,000) 14,000
-------------- ------------- ------------- ------------
Income (Loss) Before Income Taxes 335,000 (118,000) 842,000 (658,000)
Income Tax Provision 10,000 -- 10,000 --
-------------- -------------- ------------- ------------
Net Income (Loss) $ 325,000 $ (118,000) $ 832,000 $ (658,000)
============== =============== ============= ============
Basic Net Income (Loss) Per Share $ 0.01 $ Nil $ 0.03 $ (0.02)
============== ============== ============= ============
Diluted Net Income (Loss) Per Share $ 0.01 $ Nil $ 0.02 $ (0.02)
============== ============== ============= ============
Shares Used in Computation of Basic
Net Income (Loss) Per Share 31,052,000 31,034,000 31,052,000 31,010,000
============== ============== ============= ============
Shares Used in Computation of
Diluted Net Income (Loss) Per Share 33,925,000 31,034,000 33,955,000 31,010,000
============== ============== ============= ============
</TABLE>
See Notes to Financial Statements
4
<PAGE>
AM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------
December 27, December 28,
1997 1996
---------------- ---------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $ 832,000 $ (658,000)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization 406,000 339,000
Changes in Assets and Liabilities Which
Provided (Used) Cash:
Accounts Receivable (1,134,000) (979,000)
Inventory (624,000) 585,000
Prepaid Expenses and Other (19,000) 49,000
Accounts Payable (144,000) 282,000
Advances (5,000) 352,000
Accrued and Other Expenses 90,000 34,000
---------------- -------------
Net Cash Provided By (Used In) Operating Activities (598,000) 4,000
Cash Flows From Investing Activities:
Purchase of Equipment and Intangible Assets (267,000) (362,000)
----------------- -------------
Net Cash Used In Investing Activities (267,000) (362,000)
Cash Flows from Financing Activities:
Net Proceeds from Borrowings Under Bank Line of Credit 400,000 --
Exercise of Warrants and Stock Options 3,000 29,000
Sale of Warrants -- 300,000
Payments Under Capital Lease Obligations (101,000) (57,000)
----------------- -------------
Net Cash Provided By Financing Activities 302,000 272,000
Net Decrease In Cash (563,000) (86,000)
Cash:
Beginning 620,000 664,000
---------------- -------------
Ending $ 57,000 $ 578,000
================ =============
Interest Paid $ 37,000 $ 17,000
================ =============
Income Taxes Paid $ -- $ --
================ =============
Non-Cash Financing Activities:
Equipment Purchased Under Capital Lease $ -- $ 195,000
================ =============
</TABLE>
See Notes to Financial Statements
5
<PAGE>
AM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
As of December 27, 1997 and for the 39 Week
Periods Ended December 27, 1997 and
December 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 December 27,
1997 and the related Statements of Operations and Statements of Cash Flows
for the quarters and nine months ended December 27, 1997 and December 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.
December 27, March 29,
1997 1997
---------------- ---------------
(Unaudited)
2. Inventory Comprises:
Raw Material $ 1,943,000 $ 2,106,000
Work in Process 1,648,000 749,000
Finished Goods 414,000 391,000
--------------- ---------------
4,005,000 3,246,000
Inventory Reserves (1,275,000) (1,140,000)
----------------- ---------------
Net Inventory $ 2,730,000 $ 2,106,000
=============== ===============
3. Accrued Expenses Comprise:
Accrued Compensation $ 304,000 $ 291,000
Accrued Professional Fees 35,000 47,000
Accrued Rent 172,000 98,000
Warranty Reserve 55,000 55,000
Accrued Taxes 12,000 2,000
Accrued Real Estate Taxes 33,000 27,000
Other 131,000 132,000
--------------- ---------------
$ 742,000 $ 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:
Nine Months Ended
-----------------------------------
December 27, December 28,
1997 1996
---------------- -------------
Current Income Taxes $ 10,000 $ --
Deferred Income Taxes (99,000) (242,000)
Change in Valuation Allowance 99,000 242,000
------------- -------------
Net $ 10,000 $ --
============= =============
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>
Nine Months Ended
------------------------------------
December 27, December 28,
1997 1996
------------- -------------
<S> <C> <C>
Federal Income Tax Provision (Benefit) at
Statutory Rate $ 286,000 $ (224,000)
State Income Taxes, Net of Federal Benefit 56,000 (44,000)
Research and Development Credits (38,000) (75,000)
Permanent Differences 3,000 3,000
Change in Valuation Allowance (99,000) 242,000
Expiration (Utilization) of NOL Carryforwards (198,000) 98,000
------------- -------------
Income Tax Provision $ 10,000 $ --
============== =============
</TABLE>
The components of the net deferred tax asset as of December 27 and March
29, 1997 were as follows:
December 27, March 29,
1997 1997
------------- ------------
Deferred Tax Items:
Inventory $ 477,000 $ 463,000
Accrued Expenses and Reserves 123,000 123,000
Net Operating Loss Carryforwards 7,841,000 7,811,000
Tax Credit Carryforwards 730,000 675,000
Valuation Allowance (9,171,000) (9,072,000)
------------- ------------
Net Deferred Tax Assets $ -- $ --
============= ============
The Company has total net operating loss carryforwards available to offset
future taxable income of approximately $25 million expiring at various times
from 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.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Operation
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 shipments 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(TM) System
in the marketplace and the support of the industry leading OEMs (original
equipment manufacturers). Accordingly, the Company continues to invest heavily
in research and development and support of its OEM relationships.
Revenues
Revenues for the third quarter ended December 27, 1997 were $4.6 million,
up 41% from the $3.2 million for the third quarter of fiscal 1997. Revenues for
the first nine months of fiscal 1998 totaled $12.2 million, up 47% 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 $68,000 and $1.5
million in the third quarter and first nine months of fiscal 1997, respectively,
ended in fiscal 1997 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.
The Company's backlog at December 27, 1997 was $5.2 million compared to
$4.3 million a year ago, however dropped to $3.5 million as of January 27, 1998.
As discussed above, the Company has commenced delivery of initial versions of
its OmniStat(TM) System which is responsible for generating much of the
Company's new business opportunities. As this is a complex new system, the
Company continues to make enhancements and improvements to the system. During
the recent third quarter, the Company experienced implementation delays in
certain customer locations including Comcast, which resulted in delays in
current shipments against open purchase orders and the placing of new orders.
The Company believes the issues related to the system have substantially been
resolved and related product shipments commenced in January of 1998. In
addition, the Company's present backlog is impacted as its business is cyclical
with order activity generally at lower levels during the present period and by
lower OEM sales activities, primarily in new international opportunities. The
Company has increased its sales staff and expanded its marketing efforts
subsequent to December 1997.
8
<PAGE>
A significant portion of the Company's present business is dependent on
several large customers including Comcast and Scientific-Atlanta. Revenues from
these two customers comprised 67% of the total third quarter revenues and
comprise 66% of the backlog as of December 27, 1997.
Cost of Sales
Cost of sales includes manufacturing costs of the Company's hardware
products. Cost of sales represented 58% of revenues in the third quarter of
fiscal 1998 compared to 47% in the comparable period in fiscal 1997. Cost of
sales represented 54% and 53% for the first nine months of fiscal 1998 and 1997,
respectively. The Company's margins are generally dependent on product and
customer mix, with sales to OEM customers generally having a lower profit
margin. Cost of sales has increased as a percentage of revenues due to the
production ramp-up of a high volume, but lower margin, OEM product and the
transition of the Company's product line to newer surface mount type products
which require the Company to use more costly outside contract assembly compared
to older products which utilize in-house manufacturing resources. The Company
has worked and continues to work to achieve operational efficiencies in its
manufacturing operations which has also resulted in the expansion of capacity
during the recent third quarter.
Selling, General and Administrative
Selling, general and administrative (S,G&A) expenses were $669,000, or 15%
of revenues, in the third quarter of fiscal 1998 compared to $701,000, or 22% of
revenues, in the third quarter of fiscal 1997. S,G&A expenses were $1.9 million,
or 15% of revenues, in the first nine months of fiscal 1998 compared to $1.8
million, or 22% of revenues, in the first nine months of fiscal 1997. 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 $892,000, or 20% of revenues, in
the third quarter of fiscal 1998 compared to $1.1 million, or 35% of revenues,
in the third quarter of fiscal 1997. Research and development expenses were $2.9
million, or 23% of revenues, in the first nine months of fiscal 1998 compared to
$2.7 million, or 33% of revenues, in the first nine months of fiscal 1997.
Expenses declined in the third quarter of fiscal 1998 as the Company limited its
use of more costly contract engineering services by expanding its internal
staff. The Company expects 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
income tax expense until such time as the net operating loss carry-forwards are
utilized or expire, or 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
carry-forwards may not be available or may expire before being utilized. The
Company recorded $10,000 in current income tax expense for the third quarter of
fiscal 1998 to reflect federal alternative minimum tax.
9
<PAGE>
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 the CATV and
telecommunications industries including governmental regulations, competing
distribution technologies, and significant capital costs.
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 nine months of fiscal 1998, the Company's activities used net
cash of $598,000 compared to cash generated of $4,000 in the first nine 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 $400,000 as of December 27, 1997.
Capital expenditures totaled $267,000 and $362,000 in the first nine months
of fiscal 1998 and 1997, respectively, which includes computers, and
manufacturing assembly and test equipment.
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
carry-forwards and the new line of credit commitment will satisfy the Company's
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 4. Submission of Matters to a Vote of Security Holders
(a) Registrant's Annual Meeting of Stockholders was held on October 17,
1997.
(b) Directors elected at the Annual Meeting:
<TABLE>
<CAPTION>
Number of Votes
For Against Abstain
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Henry I. Boreen 25,815,442 1,900 93,115
Keith D. Schneck 25,816,345 1,000 93,115
Herman O. Benninghoff, II 25,816,445 1,000 93,115
R. Barry Borden 25,816,345 1,000 93,115
Alvin Hoffman 25,815,445 1,900 93,115
Burt Hoffman 25,816,145 1,200 93,115
Hal Krisbergh 25,816,145 1,200 93,115
Lemuel A. Tarshis, Ph.D. 25,816,345 1,000 93,115
</TABLE>
(c) Other matters voted upon favorably at the meeting:
(i) 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 5,000,000 to 6,000,000 shares.
Number of Votes
For Against Abstain
------------------------------------------------
24,696,106 1,136,286 77,968
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.
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 5, 1998 By: /s/ Keith D. Schneck
------------------- --------------------
Keith D. Schneck
President and Chief Financial
Officer
11
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 3-MOS
<PERIOD-START> SEP-28-1997
<PERIOD-END> DEC-27-1997
<CASH> 57,000
<SECURITIES> 0
<RECEIVABLES> 2,294,000
<ALLOWANCES> 0
<INVENTORY> 2,730,000
<CURRENT-ASSETS> 5,168,000
<PP&E> 4,259,000
<DEPRECIATION> 3,458,000
<TOTAL-ASSETS> 6,044,000
<CURRENT-LIABILITIES> 2,981,000
<BONDS> 0
0
2,583,000
<COMMON> 3,105,000
<OTHER-SE> 31,266,000
<TOTAL-LIABILITY-AND-EQUITY> 6,044,000
<SALES> 4,570,000
<TOTAL-REVENUES> 4,570,000
<CGS> 2,658,000
<TOTAL-COSTS> 4,219,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,000
<INCOME-PRETAX> 335,000
<INCOME-TAX> 10,000
<INCOME-CONTINUING> 325,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 325,000
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
