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 28, 1997
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 28, 1997, there were 76,067,212 shares of the Registrant's
common stock outstanding.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-QSB QUARTERLY REPORT
QUARTER ENDED JUNE 28, 1997
INDEX
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 10
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
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 28, June 29, June 28, June 29,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $ 4,028,000 $ 2,574,000 $ 7,017,000 $ 5,270,000
Cost of sales 2,484,000 1,332,000 3,979,000 2,946,000
Gross margin 1,544,000 1,242,000 3,038,000 2,324,000
Operating expense:
Selling and administrative
expense 972,000 671,000 1,943,000 1,308,000
Research and development
expense 354,000 433,000 753,000 776,000
Total operating expense 1,326,000 1,104,000 2,696,000 2,084,000
Operating income 218,000 138,000 342,000 240,000
Interest expense 19,000 206,000 39,000 410,000
Interest and other income (18,000) (3,000) (33,000) (4,000)
Provision for income taxes 6,000 6,000 12,000 12,000
Income (loss) before extraordinary
item 211,000 (71,000) 324,000 (178,000)
Extraordinary gain on extinguishment
of debt 3,000 163,000 11,000 215,000
Net income $ 214,000 $ 92,000 $ 335,000 $ 37,000
Net income (loss) per share:
Income (loss) before extraordinary
item $ -- $ -- $ -- $ (.01)
Extraordinary item -- .01 -- .01
Net income (loss) per share $ -- $ .01 $ -- $ --
Average shares outstanding 76,976,000 14,735,000 76,970,000 14,712,000
</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 28, December 31,
1997 1996
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,508,000 $ 963,000
Accounts receivable 1,920,000 1,776,000
Unbilled costs and earnings
on contracts 55,000 180,000
Inventories 1,465,000 1,480,000
Prepaids and other current assets 359,000 206,000
Total current assets 5,307,000 4,605,000
Property and equipment, net 702,000 730,000
Other assets 52,000 186,000
$ 6,061,000 $ 5,521,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt and creditors'
note $ 1,326,000 $ 1,441,000
Accounts payable 1,064,000 979,000
Accrued payroll and related benefits 458,000 489,000
Deferred revenue and customer payments 1,229,000 748,000
Other accrued liabilities 1,112,000 1,416,000
Total current liabilities 5,189,000 5,073,000
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized; issued
and outstanding 8,000 shares Series A
preferred stock, liquidation
preference $800,000; and 46,775 shares
Series B preferred stock, liquidation
preference $4,678,000 1,000 1,000
Common stock, $.01 par value; 76,062,212
and 75,699,712 shares issues and out-
standing in 1997 and 1996, respectively 761,000 757,000
Additional paid-in capital 30,014,000 29,929,000
Accumulated deficit (29,904,000) (30,239,000)
Total shareholders' equity 872,000 448,000
$ 6,061,000 $ 5,521,000
</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 Preferred Stock Additional Accumulated Shareholders'
Shares Par Value Par Value Paid-in Capital Deficit Equity (Deficit)
<S> <C> <C> <C> <C> <C>
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 -- 34,000
Net income for period -- -- -- -- 37,000 37,000
Balances, June 29, 1996 14,758,201 $ 148,000 -- $ 23,362,000 $ (31,010,000) $ (7,500,000)
Balances, December 31, 1996 75,699,712 $ 757,000 $ 1,000 $ 29,929,000 $ (30,239,000) $ 448,000
Issuance of common stock
for services 312,500 3,000 -- 76,000 -- 79,000
Issuance of common stock
for cash 50,000 1,000 -- 9,000 -- 10,000
Net income for period -- -- -- -- 335,000 335,000
Balances, June 28, 1997 76,062,212 $ 761,000 $ 1,000 $ 30,014,000 $ (29,904,000) $ 872,000
</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 28, June 29,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 335,000 $ 37,000
Extraordinary item-gain on extinguishment
of debt (11,000) (215,000)
Depreciation and amortization 184,000 185,000
Other 29,000 36,000
Change in assets and liabilities, net 279,000 156,000
Net cash provided by operating activities 816,000 199,000
Cash flows from investing activities:
Additions to property and equipment, net (156,000) (107,000)
Net cash used by investing activities (156,000) (107,000)
Cash flows from financing activities:
Additions to creditors' note -- 108,000
Additions to other debt -- 15,000
Payments on short-term and long-term debt (115,000) (166,000)
Net cash used by financing activities (115,000) (43,000)
Net increase (decrease) in cash and equivalents 545,000 49,000
Cash and equivalents, beginning of period 963,000 201,000
Cash and equivalents, end of period $ 1,508,000 $ 250,000
Supplemental cash flow information:
Cash paid for interest $ 18,000 $ 90,000
Cash paid for income taxes 8,000 18,000
</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. The Company and Summary of Significant Accounting Policies:
Company Operations Coded Communications Corporation and its wholly-owned
subsidiaries (the "Company") develop, manufacture and market wireless
communications equipment, systems and mobile networking connectivity software.
The Company's wireless mobile communications systems and networking software
are marketed to customers with mobile workforces and include public safety
agencies, emergency medical services, utility 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.
In 1996, ISA Investments Corporation ("ISA") acquired 57,272,767 shares of
common stock or a 76% ownership interest in the Company. All of the common
stock of ISA is held by Mr. Hugo Camou and ISA Corporativo, S.A. de C.V. ("ISA
Corporativo"). Mr. Camou is the controlling shareholder of ISA Corporativo.
As a result of its common stock ownership interest and its ability to nominate
and elect a majority of the members of the Company's board of directors, the
Company is considered to be controlled by ISA.
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 and
six month periods ended June 28, 1997 are not necessarily indicative of
results that can be expected for the full year. The unaudited condensed
consolidated balance sheet at December 31, 1996 has been derived from the
Company's audited consolidated balance sheet as of December 31, 1996.
Accounts Receivable. The Company provides a reserve for doubtful accounts
where circumstances indicate that a reserve is necessary. As of June 28, 1997
and December 31, 1996, the Company's reserve for doubtful accounts was
$211,000 and $208,000, respectively. Included in accounts receivable at June
28, 1997 and December 31, 1996 were $467,000 and $584,000, respectively, in
receivables due from ISA.
<TABLE>
Inventories - Inventories are valued at the lower of cost or market, but
not in excess of net realizable value. Cost is determined by the first-in,
first-out method. The Company has provided estimated reserves for inventory
in excess of the Company's current needs and for technological 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. The components of inventory are as
follows:
<CAPTION>
June 28, December 31,
1997 1996
<S> <C> <C>
Materials and supplies $ 445,000 $ 475,000
Work-in-process and finished goods 1,048,000 1,170,000
Less progress billings (28,000) (165,000)
$ 1,465,000 $ 1,480,000
</TABLE>
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company has multiple sources of supplies for most of its purchased
parts and components. For a few components, there may be only a single source
of supply. Although the Company believes that other suppliers could provide
similar components, a change in suppliers could cause a delay in manufacturing
and customer delivery, and a possible loss of sales. A delay in or loss of
sales would adversely affect operating results.
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. Revenue recognized in excess of
amounts billed is classified as current or non-current under unbilled costs
and earnings on contracts on the basis of expected realization or payment
within or beyond one year. Contract invoicing in excess of revenue is
classified as a current liability. 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.
Statements of Cash Flows - For purposes of the Statements of Cash Flows,
cash and cash equivalents include cash deposits and money market accounts. In
1997, non-cash financing activities included the issuance of 312,500 shares of
common stock for services valued at $79,000. 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.
Net Income (Loss) Per Share - Net income (loss) per share is computed using
the weighted average number of common shares and dilutive common equivalent
shares outstanding during each period using the treasury method. The
calculation of the number of shares used in computing net income per common
share includes the conversion of Series A and Series B preferred stock into an
aggregate of 10,038,000 shares of common stock, as if the preferred shares
were converted into common stock as of their original date of issuance, only
if such inclusion would be dilutive.
2. Extraordinary Gain on Extinguishment of Debt:
In the six month periods ended June 28, 1997 and June 29, 1996,
agreements were reached with certain unsecured creditors on the extinguishment
of debt resulting in gains of $11,000 and $215,000, respectively, net of
expense. The gains on the extinguishment of debt are reflected as an
extraordinary item in the accompanying consolidated financial statements.
<TABLE>
3. Short-Term Debt:
<CAPTION>
Short-term debt consisted of: June 28, December 31,
1997 1996
<S> <C> <C>
6% term note, due September 1977 $ 600,000 $ 600,000
Creditors' note, due December 1997 726,000 837,000
Other obligations -- 4,000
$1,326,000 $1,441,000
</TABLE>
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Undeclared Dividends on Preferred Stock:
At June 28, 1997, there were approximately $48,000 and $140,000 in
undeclared dividends on Series A and Series B preferred stock, respectively.
_____________________________
Item 2. Management's Discussion and Analysis or Plan of Operation
Six Months Ended June 28, 1997 ("1997") Compared to Six Months Ended June 29,
1996 ("1996")
Income (Loss) Before Extraordinary Gain
For the six month period ended June 28, 1997 ("1997"), income before
extraordinary gain was $324,000, a sharp improvement over a loss of $(178,000)
for the first six months of 1996. The turnaround in operating results was
achieved primarily from a 33% increase in sales and a decrease in net interest
expense; offset by an increase in selling and administrative expense. Net
income in 1997 was $335,000 compared to net income of $37,000 in 1996.
Included in net income in 1997 and 1996 is an extraordinary gain of $11,000
and $215,000, respectively, from the extinguishment of debt.
<TABLE>
The following table summarizes, as a percentage of sales, certain income
(loss) data for 1997 and 1996:
<CAPTION>
Six Months Ended Three Months Ended
June 28, June 29, June 28, June 29,
1997 1996 1997 1997
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 56.7 55.9 61.7% 51.7%
Gross profit 43.3 44.1 38.3 48.3
Operating expense:
Selling and administrative
expense 27.7 24.8 24.1 26.1
Research and development 10.7 14.7 8.8 16.8
Operating income 4.9 4.6 5.4 5.4
Income (loss) before
extraordinary gain 4.6 (3.4) 5.2 (2.8)
Extraordinary gain -- 4.1 0.1 6.3
Net income (loss) 4.6% 0.7% 5.3% 3.5%
</TABLE>
Sales and New Orders
Sales for the first half of 1997 were $7,017,000, an increase of 33%
over sales of $5,270,000 in the same period last year. Sales of mobile data
communications products and systems in 1997 increased by 47% and sales of
aerospace telemetry products increased by 7%, compared to 1996. The increase
in sales of mobile data communications products resulted from export sales to
customers in Mexico, which increased $2,657,000 over the prior year.
New orders in 1997 increased by approximately 210% over orders in 1996.
Orders for mobile data communications products increased by 381%, with
approximately 58% of the increase resulting from new orders from export
customers. Orders from domestic customers for mobile data communications
systems increased by over 200% compared to order levels in the prior year.
Aerospace product orders in 1997 decreased approximately 9% from order levels
in 1996. The backlog of orders at June 28, 1997 was approximately $6,948,000,
up 101% compared to backlog at the end of the second quarter in 1996, and up
37% from backlog at December 31, 1996.
Gross Margin
Gross margin, as a percentage of sales, was comparable in 1997 and 1996.
Gross margin on mobile data communications products and systems in 1997, as a
percentage of sales, improved to approximately 50% from 40% of sales. Mobile
data product gross margin improved primarily as a result of a change in
product mix, with a higher percentage of sales concentrated in software and
standard products. Software and standard products typically yield better
margins than systems and special products. Mobile data product gross margin
was also favorably impacted by overall higher sales prices on mobile data
communications products and systems. Aerospace telemetry product gross margin
in 1997 decreased by approximately 50% compared to the prior year, primarily
due to a loss incurred on a single contract for a customized telemetry
product. The contract was substantially completed in the second quarter, and
no further losses are expected on the contract. Gross margin, as a percentage
of sales in the second half of 1997, is expected to be comparable to the
margins generated in the first half of 1997.
Operating Expenses, Interest Expense and Income Taxes
Selling and administrative expense was $1,943,000 in 1997, an increase
of $635,000 or 49% over expense in 1996. As a percentage of sales, selling
and administrative expense was 28% and 25% of sales for the first half of 1997
and 1996, respectively. Approximately 60% of the increase in expense resulted
from increased staff and related costs for mobile data marketing and sales
activities, with the remaining increase in expense resulting from higher
administrative personnel costs. The Company presently plans to increase total
selling and administrative expense in the second half of 1997 compared to the
first half of 1997, in order to expand sales activities for mobile data
communications products. However, selling and administrative expense, as a
percentage of sales for the 1997 fiscal year, is expected to decrease compared
to 1996.
Research and development expense in 1997 was $753,000, a decrease of 3%
or $23,000 compared to 1996. As a percentage of sales, research and
development expense was approximately 11% in 1997 and 15% in 1996. The Company
anticipates continuing its investments in new product development and in the
enhancement of existing products at approximately 11% to 14% of sales in 1997,
down from approximately 16% of sales for the 1996 year, primarily as a result
of an anticipated increase in sales in 1997 compared to 1996.
Interest expense in 1997 was $39,000 compared to $410,000 in 1996. The
decrease in interest expense resulted primarily from the conversion of
$4,800,000 in secured debt to preferred stock in the last quarter of 1996.
The provision for income taxes in 1997 and 1996 represents an expense
for state income taxes. The provision for federal income taxes in 1997 is
offset by available tax credit carryforward benefits. For federal income tax
purposes, the Company has estimated net operating loss carryforwards of
$28,900,000 and tax credit carryforwards of $500,000 which expire in the years
1997 through 2010. These tax benefits have not been recognized for financial
statement purposes. The Company's future annual use of federal net operating
loss carryforwards and tax credit carryforwards, if any, will be limited
because of changes in 1993 and 1996 in the Company's common share ownership as
determined under the federal tax code.
Three Months Ended June 28, 1997 ("1997") Compared to Three Months Ended June
29, 1996 ("1996")
Income (Loss) Before Extraordinary Gain
For the second quarter of 1997 ended June 28, 1997 ('1997'), income
before extraordinary gain was $211,000, compared to a loss of $(71,000) for
the same period in 1996. The improvement in operating results was achieved
primarily from an increase of 57% in sales and a decrease in net interest
expense; offset by lower gross margin on sales and an increase in selling and
administrative expense. Net income in the second quarter of 1997 was $214,000
compared to net income of $92,000 in 1996. Included in net income in the
second quarter of 1997 and 1996 was an extraordinary gain of $3,000 and
$163,000, respectively, from the extinguishment of debt.
Sales and New Orders
Sales for the second quarter of 1997 were $4,028,000, an increase of 57%
over sales of $2,574,000 in 1996; and an increase of 35% over sales of
$2,989,000 in the first quarter of 1997. Sales of mobile data communications
products and systems increased by 77% or approximately $1,300,000 and sales of
aerospace telemetry products increased by 19%, compared to the second quarter
of 1996. The increase in sales of mobile data communications products
resulted from an increase of nearly $1,400,000 in export sales to public
safety customers in Mexico.
New orders in the second quarter of 1997 increased by 75% over orders in
1996. Orders for mobile data communications products increased 100% over
order levels in the previous year on the strength of orders placed by domestic
customers. Aerospace product orders in 1997 increased by 12% over order
levels in 1996.
Gross Margin
Gross margin, as a percentage of sales, decreased in the second quarter
of 1997 to 38% of sales from 48% of sales in 1996. Gross margin on mobile
data communications sales improved to 50% from 42%. Mobile data gross margin
was favorably impacted by overall higher sales prices on mobile data
communications products and systems. Gross margin on aerospace product sales
decreased significantly as a result of a loss on a single contract for a
customized telemetry product
Operating Expenses, Interest Expense and Income Taxes
Selling and administrative expense was $972,000 in 1997, an increase of
$301,000 or 45% over expense in 1996. Selling and administrative expense as a
percentage of second quarter sales, however, decreased to 24% from 26% in
1996. Approximately 75% of the increase in expense resulted from increased
personnel and related costs for mobile data marketing and sales activities.
The increase in administrative expense resulted from higher personnel costs.
Refer to the discussion above for the six months ended June 28, 1997,
for the factors impacting research and development expense, interest expense
and income taxes.
Liquidity and Capital
Since its inception, the Company has financed its operations, investments
in new product development and met its working capital requirements primarily
through the sale of common stock, convertible debentures and other financings.
In the first half of 1997, cash requirements were met primarily from $537,000
in cash flow from operations and approximately $800,000 in cash deposits from
customers for contracts awarded in the first quarter. In fiscal 1996, cash
requirements were met by $273,000 in cash flow from operations and proceeds of
$1,430,000 from the sale of common stock.
In the third quarter of 1996, the Company completed a series of
transactions with ISA and certain of the Company's secured creditors. Through
these transactions, ISA acquired a 76% ownership interest in the Company's
outstanding common shares for a cash investment of $1,400,000, and secured
creditors holding debt in the amount of $6,600,000 restructured their debt on
terms considered by the Company to be favorable.
As a result of the ISA transaction and the restructuring of the
Company's secured debt, profitable operations and the settlement of creditor
debt at a discount, in the year ended December 31, 1996 debt and other
liabilities were reduced by $8,319,000; a shareholders' deficit of $7,571,000
was eliminated; and a working capital deficit was decreased from $7,648,000 to
$468,000. As a result of continued profitable operations in the first half of
1997, shareholders' equity increased to $872,000 and the net working capital
deficit was eliminated.
In 1997, accounts receivable increased by $144,000 from the end of 1996
due to an increase in and the timing of sales in the second quarter of 1997
compared to the last quarter of 1996. Included in accounts receivable at June
28, 1997 and December 31, 1996 were $467,000 and $584,000, respectively, in
receivables due from ISA. Unbilled costs and earnings on contracts decreased
by $125,000 in 1997. The decrease was a result of the difference in the
timing of revenue recognition for financial statement purposes and actual
contract invoicing which is determined by contract terms. Investments in
property and equipment were approximately $156,000 in 1997. At June 28, 1997,
the Company had no material commitments for the purchase of capital equipment.
In 1997, payments on debt totaled $115,000, and approximately $1,326,000
in debt outstanding at June 28, 1997 is scheduled for retirement in 1997. The
funds required to repay this debt are expected to be provided from a
combination of cash flow from operations, if any, and new debt or equity
financing.
Although the Company has established a recent trend of profitable
operations, prior to 1996 the Company had a history of operating losses.
Accordingly, there can be no assurances that the Company will operate at a
profit in the future. Further, the Company's new orders and sales are
typically concentrated in a few large single orders from a small base of
customers, and cash flow from operating activities may vary significantly from
quarter-to-quarter. As a result, cash flow from operations may not be
sufficient to meet ongoing cash requirements and additional financing may be
required to fund operations and working capital requirements in 1997. The
Company believes that continuing improvements in operating results and
increasing new order rates will allow the Company to finance its cash
requirements from new short-term and long-term financing, the sale of common
or preferred stock, or a combination of debt and equity. If additional
capital is required in 1997, it may be provided or arranged by the Company's
controlling shareholder ISA. However, the Company believes short-term
financing collateralized by accounts receivable and other assets is available
from third party lenders at terms acceptable to the Company.
In the event financing is not available in the time frame required, then
the Company would be forced to reduce its rate of sales growth, if any, reduce
operating expenses and reschedule research and development projects. In
addition, the Company might be required to sell certain of its assets or
license its technologies to others. These actions, while necessary for the
continuance of operations during a period of cash constraints and a shortage
of working capital, could adversely effect the Company's long-term business
and shareholder value.
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 or
elsewhere in the condensed unaudited consolidated financial statements,
contain or are based on projections of the timing and amount of new orders,
sales, gross margin, operating expenses, the realization of assets 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 factors described in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1996,
as well as 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:
Prior to the Company's restructuring of its business operations and
management in the first quarter of 1995, the Company had operated at a loss
since its inception. Although the Company achieved marginal operating profits
before interest expense and income taxes of $250,000 in the second half of
1995, $345,000 for the year ended December 31, 1996 and $342,000 in the first
half of 1997, there is no assurance that the Company will operate at a profit
in the future.
The Company's common stock is subject to significant volatility in both
market price per share 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.
As a result of ISA's controlling common stock interest in the Company
and its right to nominate and elect a majority of the members of the Board of
Directors, ISA controls the Company. Accordingly, ISA has 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. In addition, as a result of ISA's
ownership control of the Company, it may be difficult to obtain debt or equity
financing from third party investors and lenders. To the extent that ISA does
not or cannot provide financing for the Company's working capital
requirements, when needed, the Company's operations would be adversely
affected.
At June 28, 1997, the Company employed approximately 73 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. The current market for experienced and skilled
technical personnel is highly competitive, and the Company may be unable to
retain personnel with the experience and skills that are critical to its
operations, or hire qualified and experienced personnel 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 operation of the Company
would be adversely affected.
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, computer technology and the construction
of new wireless terrestrial and satellite communications systems. The Company
intends to spend approximately 11% to 14% of consolidated sales on research
and development in 1997. The Company believes this level of investment should
be sufficient in the near term to maintain the competitive position of the
Company's present core technologies. 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 the award of
new business is less than anticipated, the Company may be required to
significantly reduce its investment in research and development.
The Company faces intense competitive in its markets, and its primary
competitors have substantially greater financial and technical resources. In
addition, the Company's business is concentrated in large, special order
contracts from a small base of customers. The timing and amount of contract
awards cannot be predicted with certainty; as a result, sales levels, gross
margins and operating profits, if any, can be expected to fluctuate on a
quarter to quarter basis.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of shareholders was held May 23, 1997.
At the meeting, shareholders elected Messrs. Hugo Camou; Gary L. Luick;
Fernando Molina and Fernando Pliego as the Company's directors. In addition,
shareholders ratified the appointment of Coopers & Lybrand, LLP as independent
auditors for the year ending December 31, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule as of June 28, 1997.
(b) Reports on Form 8-K
None
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)
July 30, 1997 /s/ Gary L. Luick
Date Gary L. Luick
Chief Executive Officer and President
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