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: July 4, 1998
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)
(760) 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 27, 1998, there were 78,724,134 shares of the Registrant's common
stock outstanding.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-QSB QUARTERLY REPORT
QUARTER ENDED JULY 4, 1998
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 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
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales.................. $ 921,000 $ 4,028,000 $ 3,025,000 $ 7,017,000
Cost of sales.............. 1,111,000 2,484,000 2,661,000 3,979,000
Gross margin................ (190,000) 1,544,000 364,000 3,038,000
Operating expense:
Selling and administrative expense 1,212,000 972,000 2,426,000 1,943,000
Research and development expense.. 507,000 354,000 835,000 753,000
Other expense..................... 60,000 -- 425,000 --
Total operating expenses............. 1,779,000 1,326,000 3,686,000 2,696,000
Operating income (loss).............. (1,969,000) 218,000 (3,322,000) 342,000
Interest expense.. .................. 36,000 19,000 71,000 39,000
Interest and other income............ (3,000) (18,000) (8,000) (33,000)
Provision for income taxes........... 6,000 6,000 12,000 12,000
Income (loss) before extraordinary
Gain.............................. (2,008,000) 211,000 (3,397,000) 324,000
Extraordinary gain on extinguishment
of debt............. -- 3,000 -- 11,000
Net income (loss)....................$(2,008,000) $ 214,000 $(3,397,000) $ 335,000
Basic earnings (loss) per common share:
Income (loss) before extraordinary
item.................. .......$ (.03) $ -- $ (.05) $ --
Extraordinary item................. -- -- -- --
Net income (loss) per share....... $ (.03) $ -- $ (.05) $ --
Weighted average common shares
outstanding..........................77,036,000 76,062,000 76,802,000 76,013,000
</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>
July 4, Deceember 31,
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 27,000 $ 351,000
Restricted cash....................... -- 200,000
Accounts receivable..................... 775,000 2,174,000
Unbilled costs and earnings on contracts..... -- --
Inventories.............................. 1,024,000 1,475,000
Prepaids and other current assets............ 432,000 420,000
Total current assets..................... 2,258,000 4,620,000
Property and equipment, net.................... 504,000 689,000
$ 2,762,000 $ $5,309,000
LIABILITIES AND SHAREHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Current portion of debt (Note 3)............ $ 1,547,000 $ 613,000
Accounts payable ................. ........ 947,000 810,000
Accrued payroll and related benefits ....... 429,000 425,000
Deferred revenue and customer payments ..... 716,000 773,000
Accrued loss on litigation................... 536,000 556,000
Other accrued liabilities. .................. 1,246,000 929,000
Total current liabilities ............ 5,421,000 4,106,000
Long-term debt, net of current portion........ -- 600,000
Commitments and contingencies................. -- --
Shareholders' equity (deficit):
Preferred stock, liquidation preference
$5,256,000 (Note 4)....................... 1,000 1,000
Common stock, $.01 par value; 78,724,134 and
76,568,112 shares issued and outstanding in
1998 in 1997, respectively......... 787,000 765,000
Additional paid-in capital ................. 30,151,000 30,038,000
Accumulated deficit ........................ (33,598,000) (30,201,000)
Total shareholders' equity (deficit)... (2,659,000) 603,000
$ 2,762,000 $ 5,309,000
</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>
Total
Preferred Stock Additional Accumulated Shareholders'
Common Stock Par Value Paid-in Capital Deficit Equity (Deficit)
Shares Par Value (Note 4)
<S> <C> <C> <C> <C> <C> <C>
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...... 112,500 1,000 -- 30,000 -- 31,000
Issuance of common stock
for cash .......... 250,000 3,000 -- 55,000 -- 58,000
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
Balances, December
31, 1997... 76,568,112 $765,000 $ 1,000 $ 30,038,000 $(30,201,000) $ 603,000
Issuance of common stock for
services..... 1,489,362 15,000 -- 36,000 -- 51,000
Conversion of Series A
preferred stock to
common stock....... 333,300 3,000 -- (3,000) -- --
Conversion of debt to
Common stock...... 333,360 4,000 -- 80,000 -- 84,000
Net loss for Period...... -- -- -- -- (3,397,000) (3,397,000)
Balances July 4,
1998... 78,724,134 $ 787,000 $ 1,000 $ 30,151,000 $ (33,598,000) $(2,659,000)
</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
July 4, June 28,
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net income (loss)............................ $(3,397,000) $ 335,000
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Extraordinary item - gain on
extinguishment of debt............ -- (11,000)
Depreciation and amortization........ 180,000 84,000
Other.................................. 174,000 29,000
Change in assets and liabilities, net... 2,396,000 229,000
Net cash provided (used) by operating
activities.......................... (647,000) 766,000
Cash flows from investing activities:
Additions to property and equipment, net.. (95,000) (156,000)
Net cash used by investing activities..............(95,000) (156,000)
Cash flows from financing activities:
Advance from shareholder........................... 891,000 --
Borrowing on revolving credit line................ 100,000 --
Issuance of common stock for cash................. -- 50,000
Payments on short-term and long-term debt... (573,000) (115,000)
Net cash provided (used) by financing activities...418,000 (65,000)
Net increase in cash and equivalents............... (324,000) 545,000
Cash and equivalents, beginning of period... 351,000 963,000
Cash and equivalents, end of period............... $ 27,000 $1,508,000
Supplemental cash flow information:
Cash paid for interest............................. $ 50,000 $ 18,000
Cash paid for income taxes...................... 7,000 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. 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.
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 periods
presented are not necessarily indicative of results that can be expected for
the full year. See "Management's Discussion and Analysis or Plan of
Operations - Cautionary Statements." The unaudited condensed consolidated
balance sheet at December 31, 1997 has been derived from the Company's
audited consolidated balance sheet.
Accounts Receivable - The Company provides a reserve for doubtful accounts
where circumstances indicate that a reserve is necessary. As of July 4, 1998
and December 31, 1997, the Company's reserve for doubtful accounts was
$191,000 and $186,000, respectively. Included in accounts receivable at July
4, 1998 and December 31, 1997, were $261,000 and $525,000, respectively, in
receivables due from affiliates.
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>
July 4, December 31,
1998 1997
<CAPTION>
<S> <C> <C>
Materials and supplies..................... $ 343,000 $ 497,000
Work-in-process ........................... 647,000 1,098,000
Finished goods .......................... 34,000 44,000
Less progress billings..................... -- (164,000)
$ 1,024,000 $1,475,000
</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 1998, non-cash financing activities included the issuance of 1,489,362
shares of common stock for services valued at $45,000 and the conversion of
$84,000 in principal amount of 6% Term Notes into 333,360 shares of common
stock. In 1997 non-cash financing activities included the issuance of
112,500 shares of common stock for services valued at $31,000.
Basic Earnings Per Share Available to Common Shareholders. The Company
adopted the provisions of Statement of Financial Accounting Standards No.
128, Earnings Per Share ("SFAS 128") effective December 31, 1997. SFAS 128
requires the presentation of basic and diluted earnings per share. Basic EPS
is computed by dividing income available to common stockholders, adjusted for
any cumulative dividends on preferred stock earned during the year, by the
weighted average number of common shares outstanding for the period. Diluted
EPS is computed giving effect to all dilutive potential common shares that
were outstanding during the period. Dilutive potential common shares consist
of the incremental common shares issuable upon the conversion of convertible
preferred stock (using the "if converted" method), convertible debt and the
exercise of stock options for all periods. All prior period earnings per
share amounts have been restated to comply with SFAS 128.
Recent Accounting Pronouncements. The Company adopted Financial
Accounting Standards Board Statement No. 130, Reporting Comprehensive Income
("SFAS 130"), and Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131") in the first quarter of
1998. SFAS No. 130 establishes new standards for reporting and displaying
comprehensive income and its components. SFAS 131 requires disclosure of
certain information regarding operating segments, products and services,
geographic areas of operation and major customers; however, the disclosure
provisions of SFAS 131 do not apply to interim financial statements in the
initial year of its adoption and no such disclosures are included in these
interim unaudited condensed financial statements. The adoption of these
Statements did not have a material impact on the Company's consolidated
financial statements.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Extraordinary Gain on Extinguishment of Debt:
In the six month period ended June 28, 1997, agreements were reached
with certain unsecured creditors on the extinguishment of debt resulting in a
gain of $11,000. The gain on the extinguishment of debt is reflected as an
extraordinary item in the accompanying consolidated financial statements.
3. Short-Term and Long-Term Debt:
<TABLE>
<CAPTION>
Debt consisted of: July 4, December 31,
1998 1997
<S> <C> <C>
6% Term Notes, due March 1999....... . $ 516,000 $ 600,000
Revolving credit line with bank, due
September 1998........... 140,000 600,000
Note with bank....................... -- 13,000
Advance from shareholder............. 891,000 --
1,547,000 1,213,000
Less long-term portion of debt........ -- (600,000)
Short-term portion of debt........... $1,547,000 $ 613,000
</TABLE>
In December 1997, the Company entered into a revolving credit line loan
agreement with a bank which was subsequently modified in March and June 1998,
under which the Company can borrow up to the lesser of $350,000 or 75% of
eligible accounts receivables, as defined. Interest on the revolving credit
line is at the bank's referenced rate plus 2.5% percent (11% at July 4,
1998) and is payable monthly. The revolving credit line is collateralized by
a senior security interest in all of the Company's assets.
The revolving credit line loan agreement requires the Company to meet
certain financial covenants on a quarterly basis. At December 31, 1997 and
July 4, 1998, the Company did not meet the terms and conditions of the loan
agreement. In May 1998, the bank declared the revolving credit line in
default. In June 1998, the bank and the Company entered into a forbearance
agreement pursuant to which the bank agreed to continue the line of credit
with a maximum borrowing limit of $350,000, until September 30, 1998. As a
condition of the forbearance agreement, a certificate of deposit in the
amount of $200,000 collateralizing the credit line was closed and proceeds
used to repay a portion of the outstanding borrowings under the credit line.
The bank is under no obligation to extend the maturity of the credit line
beyond September 30, 1998; however, the Company believes that an extension of
the credit line can be negotiated under terms agreeable to the bank and the
Company.
From February 15, 1998 to July 4, 1998, the Company's majority shareholder
advanced $891,000 to the Company. The terms and conditions of the advance
are subject to negotiation.
The 6% Term Notes are convertible into shares of the Company's common
stock at a per share price of $.25 (an aggregate of 2,068,000 shares of
common stock), and the notes are collateralized by a subordinated security
interest in the assets of the Company. In the second quarter of 1998, a note
holder converted approximately $84,000 in principal amount of the 6% Term
Notes into 333,360 shares of common stock.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Preferred Stock:
The Company is authorized to issue 2,000,000 shares of preferred stock.
The Company has issued and outstanding 5,778 shares of $.01 par value
convertible Series A preferred stock. Each share of Series A preferred stock
is entitled to receive dividends on a cumulative basis at the annual rate of
$8.00 per share, when and as declared by the Board of Directors. Dividends
on the Series A preferred stock have preference over any distributions to the
holders of the Series B preferred stock and common stock. Undeclared
cumulative dividends on Series A preferred stock were approximately $69,000
at July 4, 1998. Each share of the Series A preferred stock is convertible
into 300 shares of common stock (an aggregate of 1,733,400 shares of common
stock), subject to certain anti-dilution provisions. Series A preferred
stock has a liquidation preference of $100.00 per share over any
distributions to holders of common stock and Series B preferred stock.
Holders of the Series A preferred stock have votes per share equivalent to
the number of shares of common stock to which the Series A preferred stock
may be converted, and such votes are combined with the votes of common and
Series B stockholders and voted as a single class. At December 31, 1997 and
July 4, 1998, the aggregate liquidation preference value of the Series A
preferred stock was approximately $689,000 and $578,000, respectively.
The Company has issued and outstanding 46,775 shares of $.01 par value
convertible Series B preferred stock. Each share of Series B preferred
stock is convertible into 163.27 shares of common stock (an aggregate of
7,636,954 shares of common stock) subject to certain anti-dilution
provisions, and each share of Series B preferred stock is entitled to receive
dividends on a cumulative basis at the annual rate of $6.00 per share, when
and as declared by the Board of Directors. Dividends on the Series B
preferred stock have preference over distributions to common stockholders and
are junior to any distributions to Series A preferred stockholders.
Undeclared cumulative dividends on Series B preferred stock were
approximately $421,000 at July 4, 1998. Series B preferred stock has a
liquidation preference of $100.00 per share over any distributions to holders
of common stock. The holder of the Series B preferred stock has votes per
share equivalent to the number of shares of common stock to which the Series
B preferred stock may be converted, and such votes are combined with the
votes of common and Series A stockholders and voted as a single class. At
December 31, 1997 and July 4, 1998, the aggregate liquidation preference
value of the Series B preferred stock was approximately $4,678,000.
5. Common Stock
In June 1998, the Company entered into an agreement with Azia Core, Ltd.
("Azia"), pursuant to which Azia is to provide financial consulting services
to the Company regarding the marketing of technology and strategic alliances
with organizations in Japan, Asia and Southeast Asia. In addition, Azia will
assist the Company in raising additional capital investment. In connection
with such services, the Company issued to Azia 1,489,362 shares of
unregistered common stock valued at $45,000 and paid Azia $30,000 in cash.
In May 1998, the Company's board of directors reset to $0.12 per share the
exercise price on all outstanding employee options to purchase shares of
common stock issued under the Company's 1992 Stock Option Plan. Prior to
the modification, the exercise price of outstanding options ranged from $.20
to $.40 per share. At July 4, 1998, there were employee options outstanding
to purchase approximately 7,400,000 shares of common stock.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Earnings Per Share (EPS):
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Numerator:
Income (loss) before extraordinary gain.. $(2,008,000) $ 211,000 $(3,397,000) $ 324,000
Less preferred stock dividends....... (81,000) (86,000) (162,000) (172,000)
Income (loss) available to common
shareholders............... (2,089,000) 125,000 (3,559,000) 152,000
Extraordinary gain........................ -- 3,000 -- 11,000
Net income (loss) available to common
shareholders.........................$ (2,089,000) $ 128,000 $(3,559,000) $ 163,000
Denominator:
Average common shares outstanding...... 77,036,000 76,062,000 76,802,000 76,013,000
Diluted Earnings Per Share:
Numerator:
Income (loss) before extraordinary gain...$ (2,008,000) $ 211,000 $ (3,397,000) $ 324,000
Add interest expense..................... 8,000 9,000 17,000 18,000
Income (loss) available to common
shareholders............................. (2,000,000) 220,000 (3,380,000) 342,000
Extraordinary gain........... -- 3,000 -- 11,000
Net income (loss) available to common
shareholders......................$ (2,000,000) $ 223,000 $ (3,380,000) $ 353,000
Denominator:
Denominator - Basic EPS.......... 77,036,000 76,062,000 76,802,000 76,013,000
Effect of dilutive securities:
Convertible preferred stock........ -- 10,037,000 -- 10,037,000
Convertible debt.................... -- 2,400,000 -- 2,400,000
Common stock options................ -- 733,000 -- 1,260,000
77,036,000 89,232,000 76,802,000 89,710,000
</TABLE>
_________________________
Item 2. Management's Discussion and Analysis or Plan of Operation
Six Months Ended July 4, 1998 ("1998") Compared to Six Months Ended June 28,
1997 ("1997")
Income (Loss) before Extraordinary Gain
For the six month period ended July 4, 1998, the Company reported a
loss before extraordinary gain of ($3,397,000) compared to income before
extraordinary gain of $324,000 in 1997. The loss resulted primarily from
significantly lower sales and gross margin on sales, and an increase in
operating expenses. The loss in 1998 also included $425,000 in other expense
related to employee terminations and separations.
As a result of a decrease in the level of new orders for mobile data
and aerospace telemetry products experienced in the second half of 1997 and
the first half of 1998, sales in the third quarter and first nine months of
1998 will be significantly less than the sales in the same periods last year.
The Company expects that sales in the third quarter of 1998 will be
comparable to sales in the second quarter of 1998 and well below the level
necessary to operate at a profit.
The Company is in the process of evaluating its past marketing, sales
and product development strategies. The Company believes it can refocus its
efforts on niche segments within the public safety mobile workforce market
without significant changes in its technology or products. In these niche
segments, the Company believes it can capture increasing market share and
become a leading supplier of mobile data communications products and
solutions. The Company presently expects to implement its new marketing and
sales strategies in the third quarter of 1998, with the expectation of
generating higher levels of bookings and sales beginning in the fourth
quarter of 1998. However, there is no assurance that the Company's new
strategies will increase new order levels or sales by the fourth quarter of
1998.
<TABLE>
The following table summarizes, as a percentage of sales, certain
income data for 1998 and 1997:
<CAPTION>
1998 1997
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 88.0 56.7
Gross profit 12.0 43.3
Operating expense:
Selling and administrative expense 80.2 27.7
Research and development 27.6 10.7
Other expense 14.0 --
Total operating expense 121.8 38.4
Operating income (loss) (109.8) 4.9
Interest expense and income tax 2.5 0.3
Income (loss) before extraordinary gain (112.3) 4.6
Extraordinary gain -- 0.2
Net income (loss) (112.3)% 4.8%
</TABLE>
Sales and New Orders
Sales for the first six months of 1998 were $3,025,000, a decrease of
57% from sales of $7,017,000 in the same period in 1997. Sales of mobile
data products and systems in 1998 were $1,505,000, a decrease of 70% compared
to 1997. The decrease in mobile data sales resulted primarily from a
significant decrease in sales to customers in Mexico, as well as lower order
levels from domestic customers experienced over the last nine months. The
Company's initial contracts with customers in Mexico were substantially
completed by the end of 1997, and new orders from these customers are not
expected until the second half of 1998. Sales to customers in Mexico
represented approximately 16% and 70% of mobile data product sales in 1998
and 1997, respectively. Sales of aerospace telemetry products were
$1,520,000 in 1998, a decrease of 22% from sales in the prior year. The
decrease in aerospace telemetry sales resulted primarily from lower new order
levels experienced in the second quarter of 1998.
New orders in 1998 decreased 81% compared to 1997, primarily as a
result of a decrease in orders for mobile data products from export
customers. Orders for mobile data products from foreign customers
represented approximately 49% of mobile data orders in 1997. There were no
significant export orders for mobile data products in the six months of 1998.
New orders from domestic customers has also decreased, primarily as a result
of customer delays in the award of the new contracts. Based on the dollar
value of bids and proposals currently outstanding and the Company's
competitive position on these potential awards, new orders for mobile data
products from domestic and European customers are expected to increase in the
third quarter over order levels in the first six months of 1998. However,
the Company cannot predict with certainty the award of any specific contract
or the timing of the award. Accordingly, there can be no assurance that
order levels will increase. Aerospace orders in 1998 decreased 43% from
order levels in the first half of 1997.
The backlog of orders at July 4, 1998, was approximately $2,137,000, a
decrease of 47% compared to backlog at December 31, 1997; backlog at the end
of the second quarter of 1998 was down 69% from backlog at the end of the
second quarter in 1997.
Gross Margin
Gross margin, as a percentage of sales, was 12% in 1998 and 43% in
1997. The decrease in gross margin resulted primarily from sales levels that
were insufficient to cover fixed manufacturing and engineering costs. Gross
margin performance for the second half of 1998 may be adversely impacted by
sales levels that may not be sufficient to cover all fixed manufacturing and
engineering expense.
Operating Expenses, Interest Expense and Income Taxes
Selling and administrative expense was $2,426,000 in 1998, a net
increase of $483,000 or 25% over 1997. As a percentage of sales, selling and
administrative expense was 80% in 1998 and 28% in 1997. Approximately 49% of
the net increase in expense resulted from the expansion of the Company's
mobile data products direct sales force, and related selling expenses such as
advertising, travel and trade show expense. The balance of the increase in
expense related primarily to an increase in general and administration
personnel and consulting cost. Selling and administrative expense in the
third quarter of 1998 is expected to be comparable to the second quarter of
1998. For the year ended December 31, 1997, selling and administrative
expense was 31% of sales.
In 1998, the Company incurred non-operating other expense of $425,000,
which included a charge of $225,000 to cover the termination and settlement
of the employment contract of the Company's former CEO and $200,000 for
employee separation expense.
Research and development expense in 1998 was $835,000, an increase of
11% or $82,000 compared to 1997. The increase in research and development
expense resulted from an increase in expense for development of mobile data
communications products, offset by a decrease in spending on aerospace
telemetry projects. As a percentage of sales, research and development
expense was approximately 28% in 1998 and 11% in 1997. The Company
presently anticipates maintaining the current expense level of R&D in the
second half of 1998.
Interest expense in 1998 was $71,000 compared to $39,000 in 1997. The
increase in interest expense resulted from an increase in bank borrowing.
The provision for income taxes in 1998 and 1997 represents an expense
for state income taxes. The provision for federal income taxes in 1997 was
offset by available tax credit carryforward benefits. For federal income tax
purposes at December 31, 1997, the Company had estimated net operating loss
carryforwards of $28,800,000 and tax credit carryforwards of $518,000 which
expire in the years 1998 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 July 4, 1998 ("1998") Compared to Three Months Ended June
28, 1997 ("1997")
Income (Loss) before Extraordinary Gain
For the second quarter of 1998 ended July 4, 1998 ("1998"), the loss
before extraordinary gain was $2,008,000, compared to income before
extraordinary gain of $211,000 for the same period in 1997. The significant
reversal in income resulted primarily from a decrease in sales and gross
margin on sales, and an increase in selling and administration expense. The
decrease in sales levels resulted primarily from a decrease in new orders for
mobile data products experienced over the last nine months.
Sales and New Orders
Sales for the second quarter of 1998 were $921,000, a decrease of 77%
from sales of $4,028,000 in the second quarter of 1997; and a decrease of 56%
from sales of $2,104,000 in the first quarter of 1998. Sales of mobile data
communications products and systems decreased by 90% or $2,649,000 from 1997,
and sales of aerospace telemetry products decreased by 42% compared to the
second quarter of 1997. The decrease in sales of mobile data communications
products resulted from a decrease of approximately $1,986,000 in export sales
to public safety customers in Mexico.
New orders in the second quarter of 1998 decreased by 87% from order
levels in 1997. See the discussion above for year-to-date operating results
for a discussion of the factors impacting order levels.
Gross Margin
A deficit in gross margin in the second quarter of 1998 of $190,000
resulted primarily from a sales level that did not cover fixed manufacturing
and engineering costs, and the recognition of approximately $152,000 in
contract loss reserves on two mobile data contracts in the second quarter of
1998. Gross margin, as a percentage of sales, was 38% in 1997.
Operating Expenses, Interest Expense and Income Taxes
Selling and administrative expense was $1,212,000 in 1998, an increase
of $240,000 or 25% over expense in 1997. Selling and administrative expense,
as a percentage of second quarter sales, was 132% and 24% in 1998 and 1997,
respectively. Approximately 49% of the dollar increase in expense resulted
from increased staff and related costs for marketing, sales and contract
activities. The balance of the expense increase resulted primarily from
increased administrative expenses, including the consulting fees and expenses
of professional advisors.
Refer to the discussion for the six months ended July 4, 1998, above
for a discussion of 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 through
the sale of common stock, convertible debentures and other financings. In
1998, cash requirements were met by a reduction in working capital and an
increase of $418,000 in debt. In the year ended December 31, 1997, cash
requirements were met primarily with $512,000 in cash flow from operations
and borrowings of $613,000 under new bank credit lines.
In 1998, accounts receivable decreased by $1,399,000 from the prior year,
due primarily to a lower level of sales in the second quarter of 1998
compared to the last quarter of 1997. Inventories in 1998 decreased by
$451,000 primarily as a result of a decrease in work-in-process inventory
resulting from a reduction in the number of contracts that are in progress.
Accounts payable increased by $137,000 as the Company delayed payments to
creditors to conserve cash.
Investments in property and equipment were approximately $95,000 in 1998.
At July 4, 1998, the Company had no material commitments for the purchase of
capital equipment, except that the Company is required to fund approximately
$125,000 in tenant improvements under the lease agreement for a new corporate
headquarters and operations facility. In 1997, the Company entered into a
ten year agreement for the lease of a new 45,000 square foot facility in
Carlsbad, California. The annual lease payments under the non-cancelable
lease for the first year are approximately $451,000, with annual payments
thereafter subject to a 4% per year escalation factor. The Company
anticipates relocating its operations to the new facility in September 1998.
The Company has provided a lease guarantee bond in an amount of $235,000 to
collateralize its obligations under the new lease. In the event the Company
defaults on the lease agreement or elects not to relocate to the new
facility, the lessor may proceed against the bond and the Company to recover
damages.
In December 1997, the Company entered into a new revolving credit
arrangement with a bank. Under the revolving credit line, which was modified
in March and June 1998, the Company can borrow up to the lesser of $350,000
or 75% of eligible accounts receivable (as defined). At December 31, 1997
and July 4, 1998, there was $600,000 and $140,000, respectively, outstanding
under the revolving credit line. The credit line is collateralized by a
security interest in all of the Company's assets.
The revolving credit line loan agreement requires the Company to meet
various financial covenants on a quarterly basis. At December 31, 1997 and
July 4, 1998, the Company did not meet the financial covenants of the loan
agreement. In May 1998, the bank declared the loan agreement in default. In
June 1998, the bank and the Company entered into a forbearance agreement
pursuant to which the bank agreed to continue the line of credit with a
maximum borrowing limit of $350,000, until September 30, 1998. As a
condition of the forbearance agreement, a certificate of deposit in the
amount of $200,000 collateralizing the credit line was closed and proceeds
used to repay a portion of the outstanding borrowings under the credit line.
The bank is under no obligation to extend the maturity of the credit line
beyond September 30, 1998; however, the Company believes that an extension of
the credit line can be negotiated under terms agreeable to the bank and the
Company.
As a result of an adverse decision in litigation, the Company is required
to pay approximately $556,000 in damages, which includes legal fees, to two
plaintiffs. The Company and plaintiffs entered into an agreement providing
for the payment of the obligation over an eighteen month period. The Company
has not made all of the required payments under the agreement. The Company
and the plaintiff are continuing discussions regarding the Company's ability
to bring $65,000 in past due payments at July 4, 1998, current. The
obligation is collateralized by a lien against the assets of the Company.
Financing is required in 1998 for working capital, operations, and the
repayment of debt and other current obligations. The Company believes that
additional financing, in the form of short-term and long-term debt, preferred
and common stock, or a combination of debt and equity to be provided or
arranged by the Company's major shareholder will be available in 1998 under
terms and conditions that are acceptable to the Company. The Company has
engaged special consultants to assist the Company in raising and structuring
new financing. In the event financing is not available in the time frame
required, then the Company would be forced to significantly 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. In the event financing is not available, there can
be no assurance that the Company's business will continue in its current
form.
Year 2000 Compliance
The Company is in the process of completing its assessment of the impact
of Year 2000 on its management information systems and believes that it is
Year 2000 compliant with respect to substantially all of its systems. The
Company does not expect any material future expenditures relating to Year
2000 compliance for its management information systems. The Company is in
the process of assessing the impact of the Year 2000 on its systems and
product software.
The Company has not completed a review of the impact of Year 2000 on its
operations relating to Year 2000 compliance problems encountered by its
suppliers and customers.
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 and in
the Company's Annual Report on Form 10-KSB and the 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 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 elsewhere
herein and in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997, 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.
The Company has a history of operating losses, with an accumulated deficit
of $33,598,000 at July 4, 1998. Following a restructuring of its business
operations and management in the first quarter of 1995, the Company had
reported marginal operating profitability. The Company reported income
before litigation settlement, interest and income tax of approximately
$250,000 in the second half of fiscal 1995; $345,000 for the year ended
December 31, 1996; and $592,000 for the year ended December 31, 1997.
However, the Company operated at a loss in each of the first two quarters in
1998, and will operate at a loss in the third quarter of 1998. Accordingly,
there is no assurance that the Company will operate at a profit in the
future. Further, the continuation of the Company's operations is dependent
upon the availability of near-term capital to meet existing cash requirements
and a return to operating profitably.
The Company's results of operations, new order rates and backlog have
fluctuated in the past and are likely to fluctuate from period to period
depending on a number of factors, including the timing and receipt of
significant orders, the timing of the completion of contracts, increased
competition, changes in the demand for the Company's products, changes in the
sales mix of products and general economic conditions. The effects of these
factors can have a material impact on quarterly results of operations and
cash flow. The Company has experienced a significant decrease in new orders
over the last nine months which has adversely affected sales and operating
income. There is no assurance that new order levels will improve in the near
term to the level necessary to achieve profitability.
The Company's revenue is dependent, in part, on significant contracts from
a limited number of customers. The Company believes that revenue derived from
large orders from current and future customers will continue to represent a
significant portion of its revenue. The inability of the Company to secure
and maintain a sufficient number of large contracts has and can continue to
have a material adverse effect on the Company's business operating results
and financial position.
The purchase of a wireless mobile data communications networking and
information system is often a large-scale purchase by the customer and,
accordingly, requires the Company to engage in sales efforts over an extended
period of time which can range from several months to several years.
Further, sales of the Company's mobile data communications networking systems
are concentrated in public safety customers whose purchases are generally
made under highly competitive public requests for proposal. As a result, the
Company will make a considerable investment in a potential contract award
with no certainty that the Company's bid will be successful.
The Company supplies complex wireless mobile data communications systems,
which include its own proprietary products and software, as well as products,
software and services of other third party suppliers. From time to time, the
Company may encounter problems with its products and software or the products
and software of third party suppliers. Such problems could result in loss of
or delay in market acceptance of the Company's products, contract cost over-
runs, or a delay in payments from customers. All of these factors could have
a material adverse effect on the Company's business operations and financial
position.
Approximately 70% of the Company's current outstanding shares of common
stock are held by a single shareholder, ISA Investments Corporation ("ISA").
As a result of its controlling ownership interest in common stock, ISA has
the ability to nominate and elect a majority of the members of the board of
directors, and to approve significant transactions.
At the present time, the only trading market for the Company's common
stock is the United States over-the-counter market. The price per share and
trading volume of 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 order and backlog levels;
the terms and conditions of new financing; and general market and economic
conditions could have an immediate and significant impact on the market price
of shares of common stock.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
In June 1998, the Company entered into an agreement with Azia Core,
Ltd. ("AZIA"), pursuant to which Azia is to provide financial consulting
services to the Company regarding the marketing of technology and strategic
alliances with organizations in Japan, Asia and Southeast Asia. In addition,
Azia will assist the Company in raising additional capital investment. In
connection with such services, the Company issued to Azia 1,489,362 shares of
unregistered common stock valued at $45,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule as of July 4, 1998.
(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)
August 17, 1998 /s/Hugo R. Camou
Date Hugo R. Camou
Chief Executive Officer
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