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: September 27, 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 October 27, 1997, there were 76,493,012 shares of the Registrant's
common stock outstanding.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-QSB QUARTERLY REPORT
QUARTER ENDED SEPTEMBER 27, 1997
INDEX
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $ 3,464,000 $ 3,405,000 $ 10,481,000 $ 8,675,000
Cost of sales 1,810,000 1,933,000 5,789,000 4,879,000
Gross margin 1,654,000 1,472,000 4,692,000 3,796,000
Operating expense:
Selling and administrative
expense 1,175,000 696,000 3,118,000 2,004,000
Research and development
expense 296,000 562,000 1,049,000 1,338,000
Total operating expense 1,471,000 1,258,000 4,167,000 3,342,000
Operating income 183,000 214,000 525,000 454,000
Interest expense 20,000 22,000 59,000 432,000
Interest and other income (11,000) (3,000) (44,000) (7,000)
Provision for income tax 6,000 6,000 18,000 18,000
Income before extraordinary item. 168,000 189,000 492,000 11,000
Extraordinary gain on extinguishment
of debt 2,000 643,000 13,000 858,000
Net income $ 170,000 $ 832,000 $ 505,000 $ 869,000
Net income per share:
Income before extraordinary
item. $ -- $ -- $ -- $ --
Extraordinary item -- .01 -- .02
Net income per share $ -- $ .01 $ -- $ .02
Average shares outstanding 77,456,000 74,761,000 76,798,000 34,728,000
</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>
September 27, December 31,
1997 1996
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,062,000 $ 963,000
Accounts receivable, Net 1,851,000 1,776,000
Unbilled costs and earnings on contracts -- 180,000
Inventories 1,485,000 1,480,000
Prepaids and other current assets 442,000 206,000
Total current assets 4,840,000 4,605,000
Property and equipment, net 738,000 730,000
Other assets -- 186,000
$ 5,578,000 $ 5,521,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt and creditors' note $ 670,000 $ 1,441,000
Accounts payable 1,107,000 979,000
Accrued payroll and related benefits 447,000 489,000
Deferred revenue and customer payments 432,000 748,000
Other accrued liabilities. 1,270,000 1,416,000
Total current liabilities 3,926,000 5,073,000
Long-term debt, net of current portion 600,000 --
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, $.01 par value, aggregate
liquidation preference of $5,367,000 in 1997
and $5,478,000 in 1996 1,000 1,000
Common stock, $.01 par value; 76,440,512 and
75,699,712 shares issued and outstanding in
1997 and 1996, respectively 764,000 757,000
Additional paid-in capital 30,021,000 29,929,000
Accumulated deficit (29,734,000) (30,239,000)
Total shareholders' equity 1,052,000 448,000
$ 5,578,000 $ 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>
Additional Total
Common Stock Preferred Stock Paid in Accumulated Shareholders'
Shares Par Value Par Value Capital Deficit Equity/Deficit
<S> <C> <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 264,000 3,000 -- 50,000 -- 53,000
Issuance of Series A preferred
stock in exchange for debt -- -- 1,000 799,000 -- 800,000
Issuance of common stock for cash
and other considerations 57,615,000 576,000 -- 926,000 -- 1,502,000
Net income for period -- -- -- -- 869,000 869,000
Balances, September 28, 1996 72,445,201 $ 725,000 $ 1,000 $25,105,000 $(30,178,000) $(4,347,000)
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 95,000 1,000 -- 19,000 -- 20,000
Conversion of Series A preferred
stock to common stock 333,300 3,000 -- (3,000) -- --
Net income for period -- -- -- -- 505,000 505,000
Balances, September 27, 1997 76,440,512 $ 764,000 $ 1,000 $ 30,021,000 $(29,734,000) $1,052,000
</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>
Nine Months Ended
September 27, September 28,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 505,000 $ 869,000
Extraordinary item - gain on extinguishment
of debt (13,000) (858,000)
Depreciation and amortization 273,000 278,000
Other 43,000 115,000
Change in assets and liabilities, net (277,000) (147,000)
Net cash provided by operating activities 531,000 257,000
Cash flows from investing activities:
Additions to property and equipment, net (281,000) (180,000)
Net cash used by investing activities (281,000) (180,000)
Cash flows from financing activities:
Sale of common stock 20,000 1,400,000
Payments on short-term and long-term debt (171,000 (802,000)
Net cash provided (used) by financing activities (151,000) 598,000
Net increase (decrease) in cash and equivalents 99,000 675,000
Cash and equivalents, beginning of period 963,000 201,000
Cash and equivalents, end of period $ 1,062,000 $ 876,000
Supplemental cash flow information:
Cash paid for interest $ 22,000 $ 105,000
Cash paid for income taxes 9,000 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
mobile communications equipment, systems and 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; and 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 then outstanding common
shares of the Company (approximately 57% of common shares on a fully diluted
basis). 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
nine month periods ended September 27, 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
September 27, 1997 and December 31, 1996, the Company's reserve for doubtful
accounts was $201,000 and $208,000, respectively. Included in accounts
receivable at September 27, 1997 and December 31, 1996 were $278,000 and
$584,000, respectively, in receivables due from affiliates of ISA.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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:
<TABLE>
September 27, December 31,
<CAPTION> 1997 1996
<S> <C> <C>
Materials and supplies $ 539,000 $ 475,000
Work-in-process and finished goods 1,110,000 1,170,000
Less progress billings (164,000 (165,000)
$ 1,485,000 $ 1,480,000
</TABLE>
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 included (i) an increase of $118,000 in the value of the creditors' note
in exchange for the settlement of unsecured credit claims valued at $236,000,
(ii) the issuance of 8,000 shares of Series A preferred stock in settlement of
$800,000 of the principal amount of the Bridge Loan and (iii) the issuance of
264,000 shares of common stock in exchange for services valued at $53,000.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Net Income Per Share - Net income 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
9,703,654 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.
Accounting Pronouncements - The Financial Accounting Standards Board
(FASB) has issued several accounting pronouncements which the Company will be
required to adopt in future fiscal reporting periods.
FASB Statement No. 128 "Earnings per Share" establishes new guidelines
for the calculation of and disclosures regarding earnings per share. The
Company will adopt the provisions of Statement No. 128 during the fourth
quarter of 1997 and at that time will be required to present basic and diluted
earnings per share and to restate all prior periods. There will be no impact
on the calculation of basic earnings per share for the quarters ended
September 27, 1997 and September 28, 1997. Diluted earnings per share is not
expected to differ materially from basic earnings per share.
The Company will adopt FASB Statement No. 129 "Disclosure of Information
About Capital Structure" during the fourth quarter of 1997. The Company does
not expect that adoption of the disclosure requirements of this pronouncement
will have a material impact on its financial statements.
FASB Statement No. 130 "Reporting Comprehensive Income," which the
Company will adopt during the first quarter of 1998, establishes standards for
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income generally represents all changes in
shareholders' equity except those resulting from investments by or
distributions to shareholders. With the exception of net earnings, such
changes are generally not significant to the Company; and the adoption of
Statement No. 130, including the required comparative presentation for prior
periods, is not expected to have a material impact on its financial
statements.
FASB Statement No. 131 "Disclosures about Segments of an Enterprise and
Related Information" requires that a publicly-held company report financial
and descriptive information about its operating segments in financial
statements issued to shareholders for interim and annual periods. The
Statement also requires additional disclosures with respect to products and
services, geographic areas of operation, and major customers. The Company
expects to adopt Statement No. 131 in the first quarter of 1998.
2. Extraordinary Gain on Extinguishment of Debt:
In the nine month periods ended September 27, 1997 and September 28, 1996,
agreements were reached with certain unsecured creditors on the extinguishment
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
of debt resulting in gains of $13,000 and $858,000, 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 and Long-Term Debt:
<CAPTION>
Debt consisted of: September 27, December 31,
1997 1996
<S> <C> <C>
6% term notes, due March 1999 $ 600,000 $ 600,000
Creditors' note, due December 1997 670,000 837,000
Other obligations -- 4,000
1,270,000 1,441,000
Less long-term portion of debt (600,000) --
Short-term portion of debt $ 670,000 $ 1,441,000
</TABLE>
In September 1997, the Company reached an agreement with the holders of
the 6% term notes to extend the maturity of the 6% term notes to March 1,
1999. There were no other changes in the terms and conditions of the 6% term
notes.
4. Preferred Stock:
The Company is authorized to issue 2,000,000 shares of preferred stock.
At September 27, 1997 and December 31, 1996, there were 6,889 and 8,000
shares, respectively, of Series A preferred stock issued and outstanding.
Each share of Series A preferred stock is convertible, at the option of the
holder or the Company under certain terms and conditions, into 300 shares of
common stock (an aggregate of 2,066,700 common shares at September 27, 1997).
The Series A preferred stock has a dividend rate of 8% per annum and an
aggregate liquidation preference over common stock and the Series B preferred
stock of $688,900 and $800,000 at September 27, 1997 and December 31, 1996,
respectively. In September 1997, a total of 1,111 shares of Series A
preferred stock were converted into 333,300 shares of common stock.
At September 27, 1997 and December 31, 1996, there were 46,775 shares of
Series B preferred stock issued and outstanding. Each share of Series B
preferred stock is convertible, at the option of the holder or the Company
under certain defined terms and conditions, into 163.27 shares of common stock
(an aggregate of 7,636,954 common shares). The Series B preferred stock has a
dividend rate of 6% per annum and an aggregate liquidation preference of
$4,678,000 over common stock.
At September 27, 1997, there were approximately $64,000 and $210,000 in
undeclared dividends on Series A and Series B preferred stock, respectively.
_____________________________
Item 2. Management's Discussion and Analysis or Plan of Operation
Nine Months Ended September 27, 1997 ("1997") Compared to Nine Months Ended
September 28, 1996 ("1996")
Income (Loss) Before Extraordinary Gain
For the nine month period ended September 27, 1997 ("1997"), income
before extraordinary gain was $492,000, a sharp improvement over income of
$11,000 for the first nine months of 1996. The turnaround in operating
results was achieved primarily from a 21% increase in sales and a decrease in
net interest expense; offset by an increase in selling and administrative
expense. Net income in 1997 was $505,000 compared to net income of $869,000
in 1996. Net income in 1997 and 1996 included an extraordinary gain of
$13,000 and $858,000, respectively, from the extinguishment of debt.
<TABLE>
The following table summarizes, as a percentage of sales, certain income
data for 1997 and 1996:
<CAPTION>
Nine Months Ended Three Months Ended
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 55.2 56.2 52.3 56.8
Gross profit 44.8 43.8 47.7 43.2
Operating expense:
Selling and administrative
expense 29.8 23.1 33.9 20.4
Research and development 10.0 15.4 8.5 16.5
Operating income 5.0 5.3 5.3 6.3
Income before extraordinary
gain 4.7 -- 4.8 5.6
Extraordinary gain -- 10.0 0.1 18.8
Net income 4.7% 10.0% 4.9% 24.4%
</TABLE>
Sales and New Orders
Sales for the first nine months of 1997 were $10,481,000, an increase of
21% over sales of $8,675,000 in the same period last year. Sales of mobile
data communications products and systems in 1997 increased by 27% compared to
1996, while sales of Aerospace telemetry products increased by 7%. The
increase in sales of mobile data communications products resulted from export
sales to customers in Mexico, which increased $2,031,000 over the prior year.
New orders in 1997 increased by approximately 43% over orders in 1996.
Orders for mobile data communications products increased by 55%, with
approximately 90% of the increase resulting from new orders from export
customers. Orders from domestic customers for mobile data communications
systems increased by 8% compared to order levels in the prior year.
Aerospace product orders in 1997 increased approximately 15% over order levels
in 1996. The backlog of orders at September 27, 1997 was approximately
$5,277,000, up 13% compared to backlog at the end of the third quarter of
1996, and up 5% from backlog at December 31, 1996.
Gross Margin
Gross margin, as a percentage of sales, was approximately 45% in 1997
and 44% in 1996. Gross margin on mobile data communications products and
systems in 1997, 1997. as a percentage of sales, improved to approximately
49% from 39% of sales in 1996. 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 43% 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.
Operating Expenses, Interest Expense and Income Taxes
Selling and administrative expense was $3,118,000 in 1997, an increase of
$1,114,000 or 56% over expense in 1996. As a percentage of sales, selling and
administrative expense was 30% and 23% of sales in 1997 and 1996,
respectively. Approximately 56% 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 primarily from
higher administrative personnel cost.
Research and development expense in 1997 was $1,049,000, a decrease of
22% or $289,000 compared to 1996. The decrease in research and development
expense resulted from a decrease in spending on aerospace telemetry R&D
projects. As a percentage of sales, research and development expense was
approximately 10% 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 12% 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 and a decrease in research and
development spending for aerospace telemetry programs.
Interest expense in 1997 was $59,000 compared to $432,000 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 and a portion of
the provision for California income taxes was offset by available tax credit
carryforward benefits. For federal income tax purposes at September 27, 1997,
the Company has estimated net operating loss carryforwards of $28,600,000 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 September 27, 1997 ("1997") Compared to Three Months Ended
September 28, 1996 ("1996")
Income (Loss) Before Extraordinary Gain
For the third quarter of 1997, income before extraordinary gain was
$168,000 compared to income of $189,000 for the same period in 1996. Net
income in the third quarter of 1997 was $170,000 compared to net income of
$832,000 in 1996. Included in net income in the third quarter of 1997 and
1996 was an extraordinary gain of $2,000 and $643,000, respectively, from the
extinguishment of debt.
Sales and New Orders
Sales for the third quarter of 1997 were $3,464,000, an increase of 2%
over sales of $3,405,000 in 1996. Sales of mobile data communications
products and systems in 1997 and 1996 were comparable and sales of aerospace
telemetry products increased by 6%. Sales of mobile data communications
products to public safety customers in Mexico were approximately $1,530,000 in
1997 and $2,156,000 in 1996.
New orders in the third quarter of 1997 decreased by 62% from orders in
the same quarter in 1996. Orders for mobile data communications products and
systems are generally concentrated in large orders from a relatively small
number of customers. As a result, order levels will fluctuate on a quarter-
to-quarter basis. The Company believes that a number of orders for mobile data
communications systems expected to be awarded by customers in the third
quarter of 1997 were delayed, and certain of these contracts are now expected
to be awarded in the last quarter of the year.
Gross Margin
Gross margin, as a percentage of sales, increased in the third quarter of
1997 to 48% of sales from 43% of sales in 1996. Gross margin was favorably
impacted by overall higher sales prices on mobile data communications products
and systems.
Operating Expenses, Interest Expense and Income Taxes
Selling and administrative expense was $1,175,000 in 1997, an increase of
$479,000 or 69% over expense in 1996. Selling and administrative expense as a
percentage of third quarter sales increased to 34% from 20% in 1996.
Approximately 50% 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 nine months ended September 27,
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 fiscal year ended 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 first nine months of 1997, cash requirements were met primarily from
$808,000 in cash flow from operations.
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
then outstanding common shares for, among other considerations which included
a guarantee of not less than $10,000,000 in orders for mobile data
communications products from customers in Latin America, a cash investment of
$1,400,000. Further, as a condition of the ISA investment, 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.
Primarily as a result of continued profitable operations in the first nine
months of 1997, shareholders' equity increased to $1,052,000 and net working
capital increased by $1,382,000, to $914,000 from a deficit of $468,000.
In 1997, accounts receivable increased by $75,000 from the end of 1996
due primarily to an increase in and the timing of sales in the third quarter
of 1997 compared to the last quarter of 1996. Unbilled costs and earnings on
contracts decreased by $180,000 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 $281,000 in 1997. At
September 27, 1997, the Company had no material commitments for the purchase
of capital equipment.
In 1997, payments on debt totaled $171,000. In September 1997, the
Company reached agreement with the holders of the 6% term notes to extend the
maturity of the notes to March 1, 1999 from September 27, 1997. There were no
other changes in the terms of the notes. In December 1997, a creditors' note
totaling $670,000 is scheduled for payment. The funds required to repay this
debt are expected to be provided from a combination of existing cash
resources, 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 over the next
twelve months may not be sufficient to meet ongoing cash requirements and
additional financing may be required to fund operations and working capital
requirements. 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. 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 income
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 $525,000 in the first
nine months 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 intent to keep the
Company a publicly-held and traded entity.
At September 27, 1997, the Company employed approximately 74 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 operations of the Company
would be adversely affected.
The market for the Company's 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 12%
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule as of September 27,
1997.
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated August 15,
1997, was filed by the Company to report the appointment of Mr. Miguel
Vildosola to, and the resignation of Mr. Fernando Pliego from the
Company's Board of Directors. Mr. Pliego continues to serve the Company
as its Director of International Sales.
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)
October 31, 1997 /s/ Gary L. Luick
Date Gary L. Luick
Chief Executive Officer
and President
Page 16 of 16
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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