U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: June 29, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d)
of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 0-17574
CODED COMMUNICATIONS CORPORATION
(Exact Name of Small Business Issuer as Specified in
its
Charter)
Delaware 33-0580412
(State of Incorporation) (I.R.S. Employer
Identification No.)
1939 Palomar Oaks Way, Carlsbad, California
92009
(Address of Principal Executive Offices)
(619) 431-1945
(Issuer's Telephone Number, Including Area Code)
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
As of July 30, 1996, there were 24,830,201 shares of
the Registrant's common stock outstanding.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-QSB QUARTERLY REPORT
QUARTER ENDED JUNE 29, 1996
INDEX
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 12
PART II. OTHER INFORMATION
ITEM 3.DEFAULTS UPON SENIOR SECURITIES 18
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K 18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $ 2,574,000 $ 2,302,000 $ 5,270,000 $ 4,526,000
Cost of sales 1,332,000 1,615,000 2,946,000 3,841,000
Gross margin 1,242,000 687,000 2,324,000 685,000
Operating expenses:
Selling and administrative
expense 671,000 845,000 1,308,000 1,941,000
Research and development 433,000 261,000 776,000 682,000
Total operating expenses 1,104,000 1,106,000 2,084,000 2,623,000
Income (loss) before interest,
income taxes and
extraordinary item 138,000 (419,000) 240,000 (1,938,000)
Interest expense 203,000 183,000 406,000 381,000
Provision for income taxes ......6,000 6,000 12,000 12,000
Loss before extraordinary
item (71,000) (608,000) (178,000) (2,331,000)
Extraordinary item -- gain on
extinguishment of debt..... 163,000 0 215,000 0
Net income (loss) $ 92,000 $ (608,000) $ 37,000 $ (2,331,000)
Net income (loss) per share:
Loss before extraordinary
item $ 0 $ (.04) $ (.01) $ (.18)
Extraordinary item .01 0 .01 0
Net income (loss) $ .01 $ (.04) $ 0 $ (.18)
Average shares
outstanding 14,735,000 14,058,000 14,712,000 13,313,000
</TABLE>
The accompanying notes are an integral part of the
unaudited financial statements.
<TABLE>
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
June 29, December 31,
1996 1995
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 250,000 $ 201,000
Accounts receivable, net 1,893,000 1,828,000
Unbilled costs and earnings
on contracts 108,000 817,000
Inventories 1,491,000 1,540,000
Prepaids and other
current assets 323,000 314,000
Total current assets 4,065,000 4,700,000
Property and equipment, net 743,000 821,000
Other assets 288,000 300,000
$ 5,096,000 $ 5,821,000
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of debt $ 6,200,000 $ 6,151,000
Accounts payable 1,605,000 2,437,000
Accrued payroll and
related benefits 535,000 431,000
Accrued interest 1,042,000 757,000
Accrued warran 264,000 246,000
Contract invoicing in
excess of revenue 0 270,000
Reserve for restructuring
costs 294,000 295,000
Deferred revenue and
progress payments 791,000 624,000
Other accrued liabilities 913,000 1,137,000
Total current liabilities 11,644,000 12,348,000
Long-term debt, net of
current portion 952,000 1,044,000
Commitments and contingencies 0 0
Shareholders' equity (deficit):
Common stock, $.01 par value,
14,758,201 shares outstanding
in 1996 and 14,566,201 shares
outstanding in 1995 148,000 146,000
Additional paid-in capital 23,362,000 23,330,000
Accumulated deficit (31,010,000) (31,047,000)
Total shareholders'
equity (deficit) (7,500,000) (7,571,000)
$ 5,096,000 $ 5,821,000
</TABLE>
The accompanying notes are an integral part of the unaudited
financial statements.
<TABLE>
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY (DEFICIT)
(UNAUDITED)
<CAPTION>
Common Stock
Additional Total
Paid-in Accumulated Shareholders'
Shares Par Value Capital Deficit Equity (Deficit)
<S> <C> <C> <C> <C> <C>
Balances, December
31, 1994 12,538,324 $ 125,000 $22,191,000 $(29,930,000) $(7,614,000)
Conversion of 13.5%
debentures 1,319,997 13,000 977,000 0 990,000
Issuance of common
stock for services 327,880 3,000 62,000 0 65,000
Net loss for period 0 0 0 (2,331,000) (2,331,000)
Balances, July 1,
1995 14,186,201 $ 141,000 $23,230,000 $(32,261,000) $(8,890,000)
Balances, December
31, 1995 14,566,201 $ 146,000 $23,330,000 $(31,047,000) $(7,571,000)
Issuance of common
stock for services 192,000 2,000 32,000 0 34,000
Net income for period 0 0 0 37,000 37,000
Balances, June
29, 1996 14,758,201 $ 148,000 $23,362,000 $(31,010,000) $(7,500,000)
</TABLE>
The accompanying notes are an integral part of the unaudited
financial statements.
<TABLE>
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six Months Ended
June 29, July 1,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 37,000 $(2,331,000)
Extraordinary item-gain on
extinguishment of debt (215,000) 0
Depreciation and amortization 185,000 294,000
Other 36,000 41,000
Change in assets and liabilities, net 156,000 1,306,000
Net cash provided (used) by operating
activities 199,000 (690,000)
Cash flows from investing activities:
Additions to property and equipment, net (107,000) 0
Net cash provided (used)
by investing activities (107,000) 0
Cash flows from financing activities:
Additions to creditors' note $ 108,000 $ 0
Additions to other debt 15,000 500,000
Payments on short-term and
long-term debt (166,000) (149,000)
Net cash provided (used)
by financing activities (43,000) 351,000
Net increase (decrease) in
cash and equivalents 49,000 (339,000)
Cash and equivalents, beginning
of period 201,000 460,000
Cash and equivalents, end of period $ 250,000 $ 121,000
Supplemental cash flow information:
Cash paid for interest $ 90,000 $ 21,000
Cash paid for income taxes 18,000 8,000
</TABLE>
The accompanying notes are an integral part of the unaudited
financial statements.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1. Summary of Significant Accounting Policies:
Basis of Presentation
Coded Communications Corporation and its wholly-
owned subsidiaries (the "Company") develop, manufacture
and market wireless digital transmitting, receiving and
processing equipment and systems for use in two primary
markets: mobile data communications and aerospace
telemetry. The Company's products employ similar
technologies and techniques to transmit, receive and
process digitized information transmitted over
conventional voice radio channels and satellite
communications links. The Company's mobile data
communications products and systems are marketed to
small and large operators of vehicle fleets and include
public safety, emergency medical services, utilities
and service fleets. The Company's aerospace telemetry
products and systems are marketed to the United States
and foreign governments and agencies, and to defense
prime contractors for use in research, development,
test and evaluation programs for aircraft, space and
weapons systems.
The financial information of the Company included
herein is unaudited; however, such information reflects
all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management,
necessary for a fair statement of financial position
and results of operations for the interim periods.
The unaudited condensed consolidated financial
statements do not include footnotes and certain
financial presentations normally required under
generally accepted accounting principles. It should be
understood that accounting measurement at interim dates
inherently involves greater reliance on estimates than
at year-end. The results of operations for the three
month and six month periods ended June 29, 1996 are not
necessarily indicative of results that can be expected
for the full year. The unaudited condensed
consolidated balance sheet at December 31, 1995 has
been derived from the Company's audited consolidated
balance sheet as of December 31, 1995.
The unaudited condensed consolidated financial
statements have been prepared in accordance with
generally accepted accounting principles applicable to
a going concern, which contemplate, among other things,
realization of assets and payment of liabilities in the
normal course of business. The unaudited condensed
consolidated financial statements do not include any
adjustments relating to the recoverability and
classification of asset carrying amounts or the amount
and classification of liabilities or the effects on
existing shareholders' deficit that may result from any
plans, arrangements or other actions arising from the
aforementioned events, or the inability to continue as
a going concern. See "Management's Discussion and
Analysis or Plan of Operation - Cautionary Statements"
and Note 3 "Investment by Grupo ISA and Restructuring
of Debt."
Revenue Recognition
Revenues on engineering and systems contracts
requiring contract performance prior to commencement of
deliveries are recorded using the percentage-of-
completion method, primarily based on contract costs
incurred to date compared to total estimated contract
costs. Losses, if any, are recorded when known. All
other revenue is recognized upon shipment of products
or performance of services. The Company has provided
loss reserves for certain contracts based on the
estimated cost to complete the contracts. Due to the
uncertainties inherent in the estimation process it is
at least reasonably possible that an increase in the
contract loss reserves could be required within the
next year.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
New Accounting Standard
In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation", effective for fiscal years
beginning after December 15, 1995. This Statement
encourages entities to use a fair value based method of
accounting for stock-based compensation plans. This
Statement also requires certain disclosures about
stock-based employee compensation arrangements
regardless of the method used to account for them. Pro
forma disclosures are required for entities that
continue to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". The pro forma amounts will
reflect the difference between compensation cost, if
any, included in net income and the related cost
measured by the fair value based method as defined in
this Statement, including tax effects, if any, that
would have been recognized in the income statement if
the fair value method had been used. The Company
adopted this Statement on a disclosure only basis on
January 1, 1996, as required.
Inventories
Inventories are valued at the lower of cost or
market, but not in excess of net realizable value. The
Company has provided estimated reserves for inventory
in excess of the Company's current needs and for
product obsolescence. Due to the uncertainties
inherent in the evaluation process it is at least
reasonably possible that reserves for excess and
obsolete inventories could be further revised within
the next year.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the
weighted average number of shares of common stock and
dilutive common stock equivalent shares outstanding.
Statements of Cash Flow
Non-cash financing activities in 1996 were related
to (i) an increase of $108,000 in the value of the
creditors' note in exchange for the settlement of
unsecured credit claims valued at $216,000 and (ii) the
issuance of 192,000 shares of common stock in exchange
for services valued at $34,000. Non-cash financing and
investing activities in 1995 were related to (i) the
issuance of 327,880 shares of common stock valued at
$65,000 for consulting services and (ii) the conversion
of $990,000 principal amount of 13.5% convertible
debentures into 1,319,997 shares of common stock.
2. Management's Plan for Future Operations and
Financing:
The Company has operated at a loss on a
consolidated basis since inception. At June 29, 1996,
there was a working capital deficit of $7,579,000 and a
shareholders' deficit of $7,500,000. The continuation
of operations of the Company is dependent upon its
ability to operate profitably over a sustained period
of time and to generate sufficient cash from operations
and other sources to meet working capital and other
ongoing cash requirements. Although the Company has
reported four consecutive quarters of operating income
before interest expense and income taxes, there is no
assurance the Company will continue to operate at a
profit. Further, continuation of operations is
dependent upon renegotiating payment terms on the
Company's senior secured debt (the 12% Convertible
Debentures and Bridge Loan) and reaching further
arrangements with unsecured creditors for restructuring
their debt. The Company may need additional equity or
debt financing in 1996 to continue its planned level of
operations. These issues raise substantial doubt about
the Company's ability to continue as a going concern.
See Note 3 to the condensed consolidated financial
statements regarding an agreement with secured
creditors for restructuring of their debt and
"Management's Discussion and Analysis or Plan of
Operation - Cautionary Statements."
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
3. Investment by Grupo ISA and Restructuring of Debt
On May 1, 1996 the Company, certain of its senior
secured creditors and Grupo Information, Satellites and
Advertising S.A. de C.V. ("ISA") entered into an
agreement (the "Investment Agreement") pursuant to
which ISA is to acquire a controlling common stock
ownership interest in the Company, and the Company's
senior secured debt holders are to restructure their
debt. The transaction is subject to, among other
things, the Company's shareholder approval of an
increase in the authorized number of common shares and
the authorization of a new class of preferred stock.
The Company has tentatively scheduled its annual
meeting of shareholders for September 10, 1996.
Under the terms of the Investment Agreement, ISA
is to receive approximately 49,009,000 shares of the
Company's common stock, or a common stock ownership
interest of approximately 67% (assuming the conversion
of Series A and B Preferred Stock into an aggregate of
9,744,100 shares of common stock), and the Company
received or is to receive (i) $400,000 in cash; (ii) a
guarantee that ISA will place not less than $10,000,000
in orders for the Company's products over an 18 month
period, secured by up to one-half of ISA's shares in
the Company; (iii) a working capital loan from ISA in
the amount of $1,000,000, with the working capital loan
convertible into common shares at a price of $.25 per
share; (iv) the immediate release by ISA to the Company
of orders for mobile data products valued at
approximately $1,000,000 together with a cash deposit
against these orders of $500,000; and (v) the agreement
of senior secured creditors for the restructuring of
their debt (as described below).
Holders of the Company's senior secured
$1,800,000 Bridge Loan, which was due on April 17,
1996, will cancel the Bridge Loan at the closing date
in exchange for a cash payment of $400,000; a new
$600,000 principal amount, 6% interest rate one-year
term loan, convertible into common shares at a price of
$.25 per share; and 8,000 shares of newly issued Series
A Preferred Stock. The Series A Preferred Stock has a
liquidation preference of $800,000, a dividend of 8%
per year, and is convertible into 2,400,000 shares of
common stock. Warrants to purchase 3,600,000 shares of
Common Stock issued to holders of the Bridge Loan in
1995, are to be canceled.
Renaissance Capital Partners II, holders of the
Company's secured $4,000,000 principal amount 12%
Convertible Debentures (the "12% Debentures") will
exchange their 12% Debentures and accrued interest
(approximately $786,000 in accrued interest at June 29,
1996) at the closing date for a new seven year,
$4,800,000 principal amount, 6% Debenture. The 6%
Debenture is convertible into a 48,000 shares of Series
B Preferred Stock. The Series B Preferred Stock will
have a liquidation preference of $4,800,000, a dividend
rate of 6% per year, and is convertible into
approximately 7,344,100 shares of common stock.
On July 17, 1996, ISA and the Company entered
into a second agreement pursuant to which (i) ISA
funded in advance the $1,000,000 principal amount
working capital loan required under the Investment
Agreement and immediately converted the working capital
loan into 4,000,000 shares of common stock; (ii) ISA
placed in advance product orders of approximately
$2,000,000, together with a cash deposit of
approximately $500,000 against these orders; and (iii)
the Company issued 6,000,000 shares of common stock to
ISA. Of the 6,000,000 shares of common stock issued to
ISA, 5,000,000 of the shares, or approximately 10% of
the shares to be issued to ISA under the Investment
Agreement, will be credited against the 49,009,000
shares of common stock to be issued to ISA pursuant to
the Investment Agreement. The balance of 1,000,000
shares of common stock were
issued to ISA in consideration for, among other things,
ISA's early funding of the working capital loan and the
immediate conversion of the loan into shares of common
stock, and the release in advance by ISA of $2,000,000
in product orders. Pursuant to the July 17, 1996
agreement, the $2,000,000 in orders placed by ISA are
to be credited against ISA's commitment under the
Investment Agreement to place $10,000,000 in orders for
the Company's products. To date in 1996, ISA has placed
with the Company orders totaling approximately
$3,000,000, or 30% of its total order commitment under
the Investment Agreement. At July 26, 1996, ISA held
10,000,000 shares of the Company's common stock, or
approximately 40% of outstanding common shares.
<TABLE>
Set out below is summarized condensed pro forma
financial information on the liabilities and capital of
the Company as of June 29, 1996, adjusted only to give
effect to the proposed Investment Agreement with ISA
and certain of the Company's senior secured creditors,
and the conversion of the working capital loan into
shares of common stock. For purposes of the table, the 6% Debenture is
discounted to reflect an effective annual interest rate of 10%.
<CAPTION>
June 29, 1996
Actual As Adjusted
<S> <C> <C>
Current liabilities:
Bridge Loan, due April 17, 1996 $ 1,800,000 $ 0
6% Term Loan 0 600,000
12% Debentures, including interest 4,786,000 0
Other current liabilities 5,058,000 5,058,000
Total current liabilities 11,644,000 5,658,000
Long-term debt, net of current portion:
6% Debenture (discount to 10% interest rate) 0 3,150,000
Creditors' note 952,000 952,000
Shareholders' deficit:
Series A preferred stock (8,000
shares outstanding as adjusted) 0 800,000
Common stock, 14,758,201 shares outstanding
(67,767,201 shares as adjusted) 23,510,000 26,546,000
Accumulated deficit, (31,010,000) (31,010,000)
Total shareholders' deficit (7,500,000) ( 3,664,000)
Total liabilities and
shareholders' deficit $ 5,906,000 $ 6,096,000
</TABLE>
4. Extraordinary Gain on Extinguishment of Debt:
In the three and six month periods ended June 29,
1996, agreements were reached with certain unsecured
creditors on the extinguishment of debt resulting in a
gain of $163,000 and $215,000, respectively, net of
expense. The gain on the extinguishment of debt is
reflected as an extraordinary item in the accompanying
consolidated financial statements. See Note 6 to the
condensed consolidated financial statements regarding
the agreement of certain unsecured creditors to
participate in a composition settlement plan.
<TABLE>
5. Inventories:
<CAPTION>
Inventories consisted of: June 29,1996 December 31,1995
<S> <C> <C>
Purchased parts, net $ 351,000 $ 548,000
Work in process 1,115,000 977,000
Finished goods 25,000 15,000
Total inventories $ 1,491,000 $ 1,540,000
</TABLE>
<TABLE>
6. Short-Term and Long-Term Debt:
<CAPTION>
Short-term and long-term debt consisted of:
June 29, December 31,
1996 1995
<S> <C> <C>
Bridge loan, due April
17, 1996 $ 1,800,000 $ 1,800,000
12% Debentures 4,000,000 4,000,000
Creditors' note 1,343,000 1,394,000
Other obligations 9,000 1,000
7,152,000 7,195,000
Less amount due within
one year (6,200,000) (6,151,000)
Long-term due after one
year $ 952,000 $ 1,044,000
</TABLE>
The Bridge Loan was due and payable on April 17,
1996. The Company has not made the scheduled principal
payment. See Note 3 to the condensed consolidated
financial statements regarding an agreement with the
holders of the Bridge Loan for the restructuring of
their debt. The Bridge Loan is collateralized by a
senior security interest in substantially all of the
Company's assets.
The 12% Debentures require monthly interest
payments, and mandatory monthly principal payments of
$40,000 beginning in October 1995, with the remaining
principal balance due in October 1999. The Company
made no interest and principal payments on the 12%
Debentures in 1995 and 1996. The 12% Debentures are
collateralized by a pledge of the common stock of the
Company's wholly-owned subsidiaries and a security
interest in substantially all of the Company's assets.
The pledge of the common stock of the subsidiaries and
the security interest in assets are subordinated to the
security interests collaterizing the Bridge Loan.
The Company is not in compliance with the
financial covenants of its 12% Debenture Loan
Agreement. At June 29, 1996 and December 31, 1995,
there was $786,000 and $646,000, respectively, in
accrued interest past due on the 12% Debentures. In
February 1995, the holder of the 12% Debentures
declared the debentures in default and accelerated the
payment of principal and interest. See Note 3 to the
condensed consolidated financial statements regarding
an agreement with the holder of the 12% Debentures for
the restructuring of its debt.
In 1995, the Company engaged the San Diego
Wholesale Credit Association to assist in the formation
of an out-of-court composition plan for the voluntary
settlement of unsecured creditors' claims. Under the
composition plan certain of the Company's unsecured
creditors accepted 50% of their credit claims in full
settlement of their claims (the "settlement value"),
with quarterly payments beginning in September 1995 at
a fixed rate of 5% of the settlement value. The unpaid
balance of the settlement value is to be paid in
December 1997. As of June 29, 1996, unsecured
creditors with original claims of approximately
$3,153,000 had agreed to participate in the composition
settlement plan. In the six month period ended June
29, 1996, creditors with original claims of
approximately $216,000 agreed to participate in the
composition settlement plan, accepting future payments
totaling approximately $108,000 in full settlement of
their claims. The Creditors' Note is collateralized by
a subordinated security interest in the assets of the
Company.
Item 2. Management's Discussion and Analysis or Plan
of Operation
Overview
The Company operates in a single industry - the
design, manufacture and integration of digital
communications products and systems used primarily in
terrestrial radio systems. The two principal markets in
which the Company competes are wireless mobile data
communications and aerospace telemetry systems.
The Company restructured its business operations
and management in the first quarter of 1995. These
actions included the closing of the Company's VSAT
product line and the international mobile data sales
organization. In addition, the Company's CEO resigned
and a number of management positions were eliminated to
streamline operations. As a result of the
restructuring, operating expenses in the year ended
December 31, 1995 were reduced by approximately
$8,383,000 compared to 1994.
<TABLE>
The Company, following the restructuring, reported
an operating profit before interest and income taxes of
approximately $250,000 in the last six months of 1995
and approximately $240,000 in the first six months of
1996. Although the Company has reported an operating
profit before interest and income taxes for the last
four consecutive quarters, there is no assurance the
Company will continue to operate at a profit in the
future. In addition, any comparison of sales and
operating expenses for the three and six month periods
in 1996 and 1995 may not represent a meaningful
analysis because of the business restructuring. Sales
by the Company's major product lines are presented
below.
<CAPTION>
Six Months Ended Three Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Mobile data communications
products $ 3,448,000 $ 2,847,000 $ 1,668,000 $ 1,277,000
Aerospace telemetry
products 1,822,000 1,679,000 906,000 1,025,000
$ 5,270,000 $ 4,526,000 $ 2,574,000 $ 2,302,000
</TABLE>
Six Months Ended June 29, 1996 ("1996") Compared to Six
Months Ended July 1, 1995 ("1995")
Sales and New Orders
Sales for the six months ended June 29, 1996 were
$5,270,000, an increase of 16% over sales of $4,526,000
in the comparable period in 1995. Sales of mobile data
communications products and systems increased by 21%
and sales of aerospace telemetry products and systems
increased by 9%, compared to sales in the same period
last year. The increase in sales of mobile data
products resulted primarily from export sales of
approximately $895,000 to ISA. Included in mobile data
sales in 1996 is $288,000 in revenue recognized from
the licensing of manufacturing rights of the Company's
MPT 1327 modem to GEC-Marconi Communications. The MPT
1327 modem is used in trunked radio systems in the
United Kingdom using the UK standard MPT 1327
transmission protocol. Under the license agreement,
the Company will receive future royalties for each MPT
1327 modem manufactured and sold by the licensee.
New order levels in 1996 decreased approximately
51% compared to order levels in the same period in
1995. The Company believes new orders for mobile data
communications systems in the second half of 1995 and
the first half of 1996 were adversely affected by the
Company's financial condition. However, order and bid
activity has recently improved, the Company believes,
as a result of the Company's improving financial
performance. New orders for aerospace telemetry
products increased by 29% over 1995. The Company's
business is generally concentrated in large, single
orders for communications systems, with contract
performance periods of up to 12 months or longer. As a
result, new order levels and sales can fluctuate
significantly on a quarter by quarter basis. The
backlog of orders for mobile data and aerospace
telemetry products and systems at June 29, 1996 was
approximately $3,451,000 compared to backlog of
$5,703,000 at December 31, 1995, and $9,266,000 at July
1, 1995.
Gross Margin
Gross margin, as a percentage of sales, improved
to 44% of sales in 1996 from 15% of sales in 1995.
Improved gross margin resulted primarily from a change
in product mix with a higher concentration of high-
margin standard products and license fees included in
the sales mix. Gross margin in the first six months of
1995 was adversely impacted by adjustments to major
contracts which resulted in contract losses of
approximately $395,000. Gross margin, as a percentage
of sales, can be expected to fluctuate from quarter-to-
quarter due to, among other factors, sales levels, the
sales mix of products and services and adjustments to
contracts reported under the percentage-of-completion
method of accounting.
Extraordinary Item - Gain on Extinguishment of
Debt
In the first six months of 1996, creditors with
unsecured claims of approximately $399,000 agreed to
settle their claims for payments of approximately
$146,000. The Company recognized a gain on
extinguishment of debt of $215,000, net of related
settlement expense.
Operating Expenses and Income Taxes
Operating expenses in the first six months of 1996
were $2,084,000, a decrease of $539,000 or 20% compared
to operating expense levels in the first half of 1995.
In the first half of 1995, the Company restructured
its business and significantly reduced operating
expenses. The restructuring efforts in 1995 included
reorganizing management, reducing personnel levels,
closing all international sales offices and the VSAT
earthstation product line, and focusing marketing and
selling activities on selected market segments.
Selling and marketing expense in the first half of
1996 was approximately 17% less than the expense level
in the same period in 1995, primarily as a result of
reductions in personnel costs and discretionary selling
expenses such as travel, advertising and trade show
expense. General and administrative expenses were
approximately 54% less than the expense levels in 1995,
primarily as a result of a reduction in personnel
expense and overhead costs incurred in 1995 to support
international operations and higher projected sales
levels. For the balance of 1996, the Company believes
operating expenses will continue at the present levels.
Research and development expense in 1996 increased
by $94,000 or 14% compared to 1995. The increase in
research and development resulted from investments in
mobile data communications system software. For the
balance of 1996, the Company believes that research and
development expense will continue at its present level.
The Company has net operating loss carryforward
tax benefits to offset future federal taxable income.
Income tax expense in 1996 and 1995 represents a
provision for state income tax expense.
Three Months Ended June 29, 1996 ("1996") Compared to
Three Months Ended July 1, 1995 ("1995")
Sales and New Orders
Sales in the second quarter of 1996 were
$2,574,000, an increase of 12% over sales of $2,302,000
in the same period in 1995. Sales of mobile data
products in 1996 increased by 31% or $391,000 over
1995, as a result of export sales to ISA. Sales of
mobile data products and systems in 1996, to customers
other than ISA, decreased by 35% compared to 1995,
primarily as a result of a reduction in new order
activity experienced in the last half of 1995 and the
first quarter of 1996. Aerospace telemetry sales in
1996 decreased by $119,000 or 12% compared to 1995,
primarily as a result of the timing of new orders in
the first half of 1996.
New orders in the second quarter of 1996
increased significantly over orders in the first
quarter of 1996, primarily as a result of orders for
mobile data products from ISA. The Company believes
orders for mobile data products in the third quarter of
1996 should show improvement over the first two
quarters of 1996, based on additional orders from ISA
and outstanding bid and proposal activity. Orders for
aerospace telemetry products in the second quarter of
1996 increased by 21% over the first quarter of 1996.
Gross Margin
Gross margin, as a percentage of sales, increased
to 48% from 30% in 1995. The increase in gross margin
resulted primarily from a change in product mix to a
higher concentration of sales in high-margin standard
products, a reduction in manufacturing costs due to
higher production volumes of standard product, and
royalty fees for the Company's MPT 1327 modem licensed
to GEC-Marconi. Royalties fees of approximately
$168,000 were recorded in the second quarter of 1996.
Gross margin, as a percentage of sales, can be expected
to fluctuate from quarter-to-quarter due to, among
other factors, sales volume, the mix of products and
services and adjustments to contracts recorded under
the percentage-of-completion method of accounting.
Operating Expenses and Income Tax
See results of operations for the six months
ended June 29, 1996 for a discussion of operating
expenses.
Liquidity and Capital
Since its inception, the Company has financed
its net losses, investments in new product development
and met its working capital requirements through the
sale of common stock, convertible debentures and other
financing. In the first six months of 1996, cash
requirements were met from $199,000 in cash flow from
operating activities and existing cash resources.
At June 29, 1996 and December 31, 1995, the
Company had a shareholders' deficit of $7,500,000 and
$7,571,000, respectively, and a working capital
deficit of $7,579,000 and $7,648,000, respectively.
Included in current liabilities at June 29, 1996 was
$1,800,000 in past due principal on the Bridge Loan,
$4,786,000 in principal and accrued interest on the
12% Debentures and approximately $1,100,000 in trade
credit and other unsecured obligations, including
disputed claims, that were past due and not paid in
accordance with their applicable credit terms. The
continuation of operations of the Company is dependent
upon the restructuring of existing secured and
unsecured debt, additional financing for working
capital, the ability to operate profitably over a
sustained period of time, and the generation of
sufficient cash from operations and other sources to
meet working capital and other ongoing cash needs in
the time frame required.
The Bridge Loan, in the principal amount of
$1,800,000, was scheduled for repayment on April 17,
1996. The Bridge Loan is collateralized by a security
interest in substantially all of the Company's assets.
See Note 3 to the condensed consolidated financial
statements regarding an agreement with the holders of
the Bridge Loan for the restructuring of their debt.
In February 1995, the $4,000,000 principal
amount 12% Debentures were declared in default and the
payment of principal and interest was accelerated. At
June 29, 1996 there was approximately $786,000 in
interest payable on the 12% Debentures. The 12%
Debentures are collateralized by a second position
security interest in substantially all of the assets
of the Company. See Note 3 to the condensed
consolidated financial statements regarding an
agreement with the holder of the 12% Debentures for
the restructuring of its debt.
In 1995, the Company engaged the San Diego
Wholesale Credit Association to assist in the
formation of an unsecured creditors' committee and an
out-of-court composition plan for the settlement of
unsecured creditors' claims. Under the composition
plan implemented by the Company, certain unsecured
creditors accepted 50% of their credit claims in full
settlement of their claims (the "settlement value"),
with quarterly repayments beginning September 30, 1995
at a fixed rate of 5% of the settlement value. The
unpaid balance of the settlement value is to be paid
in December 1997. As of June 29, 1996, unsecured
creditors with original claims of approximately
$3,153,000 had agreed to participate in the
composition settlement plan. The balance of the
Creditors' Note was $1,343,000 at June 29, 1996, and
requires quarterly payments of approximately $80,000.
At June 29, 1996, there were additional unsecured
claims of approximately $1,100,000 outstanding,
including disputed claims, that have not been paid in
accordance with their respective credit terms. A
significant portion of these obligations were incurred
prior to March 1995. Discussions are continuing with
the major unsecured creditors and the Company is of
the opinion that satisfactory arrangements can be
reached with a majority of these creditors for the
settlement of their claims. However, there is no
assurance that unsecured creditors will agree to any
settlement of their claims or that creditors will not
take legal action against the Company.
In 1996, accounts receivable decreased by $65,000
from 1995 primarily as a result of lower sales in the
second quarter of 1996 compared with the level of
sales in the last quarter of 1995. Unbilled costs and
earnings on contracts, net of related contract
invoicing in excess of revenue, decreased by $439,000
in 1996 to $108,000 from $547,000 in 1995. The
decrease is a result of the difference in the timing
of revenue recognition for financial statement
purposes and actual contract invoicing which is
typically determined by contract terms. Inventories
in 1996 decreased by $49,000, from $1,540,000 to
$1,491,000, primarily as a result of a reduction in
parts inventories.
Accounts payable in 1996 decreased by $832,000
compared to 1995, primarily as a result of the
settlement of unsecured creditors claims with a value
of $400,000. The Company at times throughout 1995 was
unable to make timely payments to its trade and other
creditors. In the second half of 1995 and in the first
six months of 1996, substantially all vendors required
cash on delivery as their terms of sale and the
Company was generally meeting its obligations in a
timely manner.
As a result of the Company's inability to meet
its obligations to suppliers in accordance with their
respective credit terms and the closing of its VSAT
earthstation product line, the Company is a party to
legal actions and creditor judgments. In the event
the Company does not have the funds required to defend
against these claims or is unable to settle the legal
actions on terms and conditions favorable to the
Company, the Company's operations could be adversely
affected. At June 29, 1996, the Company was of the
opinion that legal actions existing as of that date
did not represent an immediate and significant risk to
the Company's business.
See Note 1. "Summary of Significant Accounting
Policies -- Basis of Presentation" and Note 2.
"Management's Plan for Future Operations and
Financing" to the condensed consolidated financial
statements.
Cautionary Statements
In the interest of providing the Company's
shareholders and potential investors with certain
Company information, including management's assessment
of the Company's future potential, certain statements
set forth herein contain or are based on projections of
revenue, income, earnings per share and other financial
items or relate to management's future plans and
objectives or to the Company's future economic
performance. Such statements are "forward-looking
statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and in Section 21E
of the Securities Exchange Act of 1934, as amended.
Although any forward-looking statements contained
herein or otherwise expressed by or on behalf of the
Company are to the knowledge and in the judgment of the
management of the Company, expected to prove true and
to come to pass, management is not able to predict the
future with absolute certainty. Accordingly,
shareholders and potential investors are hereby
cautioned that certain events or circumstances could
cause actual results to differ materially from those
projected or predicted herein. In addition, the
forward-looking statements herein are based on
management's knowledge and judgment as of the date
hereof, and the Company does not intend to update any
forward-looking statements to reflect events occurring
or circumstances existing hereafter.
In particular, the Company believes that the
following factors could impact forward-looking
statements made herein or in future written or oral
releases and by hindsight, prove such statements to be
overly optimistic and unachievable:
The Company has operated at a loss on a
consolidated basis since inception. Although the
Company has improved its operating results and
reported four consecutive quarters of operating profit
before interest and income taxes, there is no
assurance that the Company will report profitable
operations in the future. The continuation of
operations of the Company is dependent upon its
ability to operate profitably over a sustained period
of time and to generate sufficient cash from
operations and other sources to meet working capital
and other ongoing cash requirements.
The Company's common stock is subject to
significant volatility in both market price and
trading volume. Factors such as new product
announcements and contract awards by the Company or
its competitors; fluctuations in operating results,
new orders and backlog levels; and general market
conditions may have an immediate and significant
impact on the market price and trading volume of the
Company's common stock.
The Company entered into an Investment Agreement
with ISA and certain senior secured creditors pursuant
to which ISA is to acquire a controlling common stock
ownership interest in the Company, and the secured
creditors are to restructure their existing debt on
terms and conditions favorable to the Company Certain
provisions of the Investment Agreement require
shareholder approval. In the event shareholders do
not approve such provisions of the Investment
Agreement, or in the event ISA elects not to
consummate the Investment Agreement, then the 12%
Debentures and Bridge Loan will continue in default.
In the event the Investment Agreement is not
consummated, there is no assurance that the Company
can negotiate a restructuring of the secured debt on
terms acceptable to the Company, or that the senior
secured credit holders will not take action to enforce
collection, including action to foreclose on the
Company's assets.
The Investment Agreement, if consummated, will
result in substantial dilution in the current
shareholders' ownership interest in the Company. At
June 29, 1996 there were 14,758,201 common shares
outstanding. Pursuant to the Investment Agreement, ISA
is to receive approximately 49,009,000 shares of common
stock and the senior secured creditors are to receive
securities that are convertible into approximately
9,744,100 shares of common stock. Subsequent to June
29, 1996, ISA funded the $1,000,000 working capital
loan required by the Investment Agreement and
immediately converted the working capital loan into
4,000,000 shares of common stock. Assuming the
Investment Agreement is consummated, and the securities
issued to secured creditors under the Investment
Agreement are eventually converted into common stock
(the 6% Debenture converted first into Series B
Preferred Stock and then the conversion of Series A and
Series B Preferred Stock into approximately 9,744,100
shares of common stock), there would be approximately
77,512,000 shares of common stock outstanding.
The Investment Agreement, if consummated, will
result in ISA having the right to appoint a majority of
the Company's board of directors; and ISA will hold a
majority of the outstanding shares of common stock. As
a result of its control of the Board of Directors and
its common stock ownership, ISA will control the
Company. Accordingly, ISA will have the ability to
approve significant transactions without the approval
of the other minority shareholders, such as a sale of
all the Company's assets or transactions designed to
take the Company private. ISA has stated its present
intent to keep the Company a publicly-held and traded
entity, and ISA has no present intent to take the
Company private.
At June 29, 1996, the Company employed
approximately 66 personnel, all of whom were located
in the United States. A number of employees are
considered by the Company to be highly skilled and
critical to particular aspects of its business.
Primarily as a result of the Company's financial
condition, the Company may be unable to retain
personnel with the experience and skills that are
critical to its operations, or hire qualified and
experienced replacements in the time frame required.
In the event key personnel leave the employment of the
Company and cannot be replaced in the time frame
required, the operations of the Company would be
adversely affected.
The Company generally competes for large, special
order contracts for mobile data and aerospace
telemetry systems. As a result of the Company's
financial condition and limited working capital, the
Company believes that certain customers awarded
contracts in 1995 and the first half of 1996, that
would have otherwise been awarded to the Company, to
other competitors with substantially greater financial
resources. The Company believes its financial
condition has caused delays in and the loss of
customer contracts in the past twelve months, and
continuing delays in or the loss of contract awards
will adversely affect the operations of the Company.
The market for the Company's mobile data
communications and aerospace telemetry products are
characterized by rapid change driven by advancements
in digital signal processing technology, the
miniaturization of electronic components and the
construction of new wireless terrestrial and satellite
communications systems. The Company's ability to
compete successfully depends, in part, on its
knowledge of the wireless mobile communications and
aerospace telemetry markets, its ability to anticipate
and react to such changes, and its ability to
implement technological advancements in new products
and software to meet customer requirements. The
Company intends to spend approximately 10% to 12% of
consolidated sales on research and development in
1996. The Company believes this level of investment
should be sufficient to maintain the competitive
position of the Company's present core technologies in
the near term. However, higher investment rates could
be required thereafter to maintain the competitive
position of the Company's products and technology. In
the event the Company's cash flow or award of new
business is less than anticipated, the Company may be
required to significantly reduce its investment in
research and development.
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
In February 1995, the holder of the $4,000,000
principal amount 12% Convertible Debenture declared the
securities in default and accelerated the payment of
principal because the Company failed to pay interest
when due and it was not in compliance with the
financial covenants of the 12% Convertible Debenture
Loan Agreement. At June 29, 1996, the accrued and
unpaid interest on the 12% Convertible Debentures was
approximately $786,000. The 12% Debentures are
collateralized by a second position security interest
in substantially all of the Company's assets.
On April 17, 1996, the Company did not retire
$1,800,000 in principal scheduled for repayment on the
Bridge Loan. The Bridge Loan is collateralized by a
senior security interest in substantially all of the
Company's assets.
See Note 3 to the condensed consolidated financial
statements regarding the pending agreement with the
holders of the 12% Convertible Debentures and holders
of the Bridge Loan for the restructuring of their
debts. As a condition of the Investment Agreement,
holders of the 12% Convertible Debentures and the
Bridge Loan have not taken any action to initiate
foreclosure on the Company's assets; however, there is
no assurance the holders will not take action in the
future to enforce collection, including actions to
foreclosure on the Company's assets, in the event the
Investment Agreement is not consummated.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K
dated May 1, 1996 to report the Investment Agreement
with ISA and certain senior secured debt holders.
SIGNATURES
In accordance with the requirements of the
Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
CODED COMMUNICATIONS CORPORATION
(Registrant)
August 12, 1996 /s/ John A. Robinson, Jr.
Date John A. Robinson, Jr.
Chief Executive Officer
and President
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