U.S. SECURITIES AND EXCHANGE COMMISSION PRIVATE
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: April 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)
(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 April 28, 1998, there were 76,568,112 shares of the Registrant's
common stock outstanding.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-QSB QUARTERLY REPORT
QUARTER ENDED APRIL 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 6. EXHIBITS AND REPORTS ON FORM 8-K 17
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
April 4, March 29,
1998 1997
<S> <C> <C>
Net sales...................... $ 2,104,000 $ 2,989,000
Cost of sales.................. 1,550,000 1,495,000
Gross margin................... 554,000 1,494,000
Operating expense:
Selling and administrative expense 1,214,000 971,000
Research and development expense........... 328,000 399,000
Other expense..................... 365,000 --
Total operating expense...................... 1,907,000 1,370,000
Operating income (loss)..................... (1,353,000) 124,000
Interest expense................................ 35,000 20,000
Interest and other income........................(5,000) (15,000)
Provision for income taxes....................... 6,000 6,000
Income (loss) before extraordinary item......(1,389,000) 113,000
Extraordinary item--gain on extinguishment
of debt....... -- 8,000
Net income (loss)...........................$(1,389,000) $ 121,000
Basic earnings (loss) per common share:
Income (loss) before extraordinary item. $ (.02) $ --
Extraordinary item..............................-- --
Net income (loss) per share............ $ (.02) $ --
Average common shares outstanding.............76,568,000 75,963,000
</TABLE>
The accompanying notes are an integral part of the unaudited
financial statements.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
April 4, December 31,
1998 1997
<CAPTION>
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................. $ 558,000 $ 351,000
Restricted cash....................... 200,000 200,000
Accounts receivable..................... 1,058,000 2,174,000
Unbilled costs and earnings on contracts...... 113,000 --
Inventories....................... 1,384,000 1,475,000
Prepaids and other current assets............... 489,000 420,000
Total current assets..................... 3,802,000 4,620,000
Property and equipment, net.................... 645,000 689,000
$ 4,447,000 $ 5,309,000
LIABILITIES AND SHAREHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Current portion of debt.....................$ 1,538,000 $ 613,000
Accounts payable ............................... 797,000 810,000
Accrued payroll and related benefits ............467,000 425,000
Deferred revenue and customer payments ..........755,000 773,000
Accrued loss on litigation.......................556,000 556,000
Other accrued liabilities. ....................1,114,000 929,000
Total current liabilities .................5,227,000 4,106,000
Long-term debt, net of current portion......... -- 600,000
Commitments and contingencies.................... -- --
Shareholders' equity (deficit):
Preferred stock, liquidation preference
$5,367,000 (Note 4).... 1,000 1,000
Common stock, $.01 par value; 76,568,112
shares issued and outstanding in 1998
and 1997, respectively.................. 765,000 765,000
Additional paid-in capital .................30,044,000 30,038,000
Accumulated deficit .......................(31,590,000) (30,201,000)
Total shareholders' equity (deficit)..... (780,000) 603,000
$ 4,447,000 $ 5,309,000
</TABLE>
The accompanying notes are an integral part of the unaudited financial
statements.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Total
Common Stock Par Value Additional Accumulated Shareholders'
Shares Par Value (Note 4) Paid-in Capital Deficit Equity (Deficit)
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996. 75,699,71 $ 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 ......... 210,000 2,000 -- 48,000 -- 50,000
Net income for period..... -- -- -- -- 121,000 121,000
Balances, March 29, 1997.. 76,022,212 $ 760,000 $ 1,000 $ 30,007,000 $(30,118,000) $ 650,000
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... -- -- -- 6,000 -- 6,000
Net loss for period........... .-- -- -- -- (1,389,000) ( 1,389,000)
Balances April 4, 1998... 76,568,112 $ 765,000 $ 1,000 $ 30,044,000 $(31,590,000) $ (780,000)
</TABLE>
The accompanying notes are an integral part of the unaudited financial
statements.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
April 4, March 29,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ (1,389,000) $ 121,000
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Extraordinary item-gain on extinguishment of debt. -- (8,000)
Depreciation and amortization..................... 90,000 94,000
Other............................................... 15,000 11,000
Change in assets and liabilities, net........... 1,212,000 1,598,000
Net cash provided (used) by operating
activities................. (72,000) 1,816,000
Cash flows from investing activities:
Additions to property and equipment, net........... (46,000) (98,000)
Net cash used by investing activities............... (46,000) (98,000)
Cash flows from financing activities:
Advance from shareholder........................... 225,000 --
Borrowing on revolving credit line......... 100,000 --
Issuance of common stock for cash........... -- 50,000
Payments on short-term and long-term debt............ -- (58,000)
Net cash provided (used) by financing activities. 325,000 (8,000)
Net increase in cash and equivalents........... 207,000 1,710,000
Cash and equivalents, beginning of period............. 351,000 963,000
Cash and equivalents, end of period................ $ 558,000 $ 2,673,000
Supplemental cash flow information:
Cash paid for interest..............................$ 25,000 $ 9,000
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 April 4,
1998 and December 31, 1997, the Company's reserve for doubtful accounts was
$192,000 and $186,000, respectively. Included in accounts receivable at April
4, 1998 and December 31, 1997, were $223,000 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>
<CAPTION>
April 4, December 31,
1998 1997
<S> <C> <C>
Materials and supplies........ $ 430,000 $ 497,000
Work-in-process .............. 919,000 1,098,000
Finished goods ............. 35,000 44,000
Less progress billings........ -- (164,000)
$ 1,384,000 $ 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 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 three month period ended March 29, 1997, agreements were reached
with certain unsecured creditors on the extinguishment of debt resulting in a
gain of $8,000. The gain on the extinguishment of debt is reflected as an
extraordinary item in the accompanying consolidated financial statements.
<TABLE>
3. Short-Term and Long-Term Debt:
<CAPTION>
Debt consisted of: April 4, December 31,
1998 1997
<S> <C> <C>
6% Term Notes, due March 1999......... $ 600,000 $ 600,000
Revolving credit line with bank, due
January 1999......... 700,000 600,000
Note with bank, due May 1, 1998............ 13,000 13,000
Loan from shareholder................. 225,000 --
$ 1,538,000 $ 1,213,000
Less long-term portion of debt............. -- (600,000)
Short-term portion of debt.............$ 1,538,000 $ 613,000
</TABLE>
In December 1997, the Company entered into revolving credit line and note
agreements with a bank which were subsequently modified in March 1998, under
which the Company can borrow, on the revolving credit line, up to the lesser
of $1,000,000, or 80% of eligible accounts receivables, as defined. The
revolving credit line matures January 1, 1999 and may be extended solely at
the bank's option. Interest on the revolving credit line is at the bank's
referenced rate plus 2.5% percent (11% at April 4, 1998) and is payable
monthly. The revolving credit line is collateralized by a $200,000
certificate of deposit and a senior security interest in all of the Company's
assets.
The revolving credit line and revolving note agreements require the
Company to meet certain financial covenants on a quarterly basis. At
December 31, 1997 and April 4, 1998, the Company did not meet the terms and
conditions of the loan agreement, including the financial covenants for
minimum tangible effective net worth and debt coverage ratios, as defined.
As of December 31, 1997 and April 4, 1998, the bank had not waived compliance
with the financial covenants and had not declared the loan in default. The
Company and its bank are negotiating more restrictive modifications to the
loan agreement; however, there is no assurance that the Company and its bank
will reach agreement on new terms and conditions acceptable to the Company.
In the event the Company does not agree to such new modifications, the bank
may declare the loan in default and call all of its debt for repayment.
In February 1998, the Company's majority shareholder advanced $225,000 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 2,400,000 shares of
common stock), and the notes are collateralized by a subordinated security
interest in the assets of the Company.
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 6,889 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 $83,000
at April 4, 1998. Each share of the Series A preferred stock is convertible
into 300 shares of common stock (2,066,700 shares of common stock), subject
to certain anti-dilution provision and the 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 April 4, 1998, the
aggregate liquidation preference value of the Series A preferred stock was
$689,000.
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 (7,636,954 shares of
common stock) subject to certain anti-dilution provision, 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 $281,000 at April 4,
1998. 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 April 4, 1998, the aggregate liquidation preference value of the
Series B preferred stock was $4,678,000.
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
April 4, March 29,
1998 1997
Basic Earnings Per Share:
<S> <C> <C>
Numerator:
Income (loss) before extraordinary gain $ (1,389,000) $ 113,000
Less preferred stock dividends (83,000) (86,000)
Income (loss) available to common shareholders (1,472,000) 27,000
Extraordinary gain -- 8,000
Net income (loss) available to common shareholders $ (1,472,000) $ 35,000
Denominator:
Average common shares outstanding 76,568,000 75,963,000
Diluted Earnings Per Share:
Numerator:
Income (loss) before extraordinary gain $ (1,389,000) $ 113,000
Add interest expense 9,000 9,000
Income (loss) available to common shareholders (1,380,000) 122,000
Extraordinary gain -- 8,000
Net income (loss) available to common shareholders $ (1,380,000) $ 130,000
Denominator:
Denominator - Basic EPS 76,568,000 75,963,000
Effect of dilutive securities:
Convertible preferred stock 9,704,000 10,037,000
Convertible debt 2,400,000 2,400,000
Common stock options -- 1,787,000
88,672,000 90,187,000
</TABLE>
____________________
Item 2. Management's Discussion and Analysis or Plan of Operation
Three Months Ended April 4, 1998 ("1998") Compared to Three Months Ended
March 29, 1997 ("1997")
Income (Loss) Before Extraordinary Gain
For the three month period ended April 4, 1998, the Company reported a
loss before extraordinary gain of $1,389,000 compared to income before
extraordinary gain of $113,000 in 1997. The loss resulted primarily from
lower sales, lower gross margin on sales, an increase in selling and
administrative expenses, and non-recurring other expenses.
As a result of a drop in the level of new orders for mobile data
products experienced in the second half of 1997, sales in the first six
months of 1998 will be less than the sales in the same period last year. The
Company expects that second quarter sales will be comparable to or slightly
higher than sales in the first quarter of 1998 and below the level necessary
to operate at a profit. The Company is in the process of reviewing its
operations to bring expense levels in line with sales levels by the end of
its second 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 73.7 50.0
Gross profit 26.3 50.0
Operating expense:
Selling and administrative expense 57.7 32.5
Research and development 15.6 13.3
Other expense 17.3 --
Total operating expense 90.6 45.8
Operating income (loss) (64.3) 4.2
Interest expense and income tax 1.7 0.4
Income (loss) before extraordinary gain (66.0) 3.8
Extraordinary gain -- 0.3
Net income (loss) (66.0)% 4.1%
</TABLE>
Sales and New Orders
Sales for the first quarter of 1998 were $2,104,000, a decrease of 30%
from sales of $2,989,000 in the same period in 1997. Sales of mobile data
products and systems in 1998 were $1,210,000, a decrease of 43% compared to
1997. The decrease in mobile data sales result from a significant drop in
sales to customers in Mexico. In 1997, sales to customers in Mexico
represented approximately 71% of mobile data product sales. Mobile data
product sales to domestic customers increased 64% in 1998 compared to 1997.
The trend in mobile data product sales, from export sales to domestic sales,
is expected to continue through the year, as the Company's initial contracts
with customers in Mexico were completed in 1997. Sales of aerospace
telemetry products were $894,000 in 1998, an increase of 3% over sales in the
prior year.
New orders in 1998 decreased 75% 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 94% of mobile data orders in 1997. There were no
significant export orders for mobile data products in the first quarter of
1998. 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
significantly increase over order levels in the prior nine months. 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 were comparable to the
previous year.
The backlog of orders at April 4, 1998, was approximately $2,495,000 or
down 26% compared to backlog at December 31, 1997; backlog at the end of the
first quarter of 1998 was down 63% from backlog in the same period last year.
Gross Margin
Gross margin, as a percentage of sales, was 26% in 1998 and 50% in
1997. The decrease in gross margin resulted primarily from sales and
operating levels that were insufficient to cover fixed manufacturing and
engineering costs. Overall operating levels in the second quarter of 1998 are
not expected to cover all fixed costs and, as a result, gross margins will be
adversely impacted in the quarter. The Company presently expects gross
margin to return to historical levels in the second half of 1998, as a result
of a projected increase in sales and overall lower operating expenses.
Operating Expenses, Interest Expense and Income Taxes
Selling and administrative expense was $1,214,000 in 1998, a net
increase of $243,000 or 25% over 1997. As a percentage of sales, selling and
administrative expense was 58% in 1998 and 33% in 1997. Approximately 69% 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 cost. Selling and administrative expense in the second quarter of
1998, as a percentage of sales, is expected to be comparable to the first
quarter of 1998. Selling and administrative expense in the second half of
the year, as a percentage of sales, is expected to drop to a range of 30% to
32% of sales, based on the Company's expectations of higher sales and a
reduction in expense. 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 $365,000,
which included a charge of $225,000 to cover the separation and settlement of
the employment contract of the Company's former CEO.
Research and development expense in 1998 was $328,000, a decrease of
18% or $71,000 compared to 1997. 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 16% in 1998 and 13% in 1997. The Company anticipates continuing
its investments in new product development and in the enhancement of existing
products at approximately 10% of sales in 1998.
Interest expense in 1998 was $35,000 compared to $20,000 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 has 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.
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 $325,000 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 $1,116,000 from the prior year,
due primarily to the timing and level of sales in the first quarter of 1998
compared to the last quarter of 1997. Unbilled costs and earnings on
contracts increased by $113,000 in 1998. The increase 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.
Inventories in 1998 and 1997 were comparable.
Investments in property and equipment were approximately $46,000 in 1998.
At April 4, 1998, the Company had no material commitments for the purchase of
capital equipment. In 1997, the Company entered into a ten year agreement
for the lease of a new 45,000 square foot headquarters and operations
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 July 1998.
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 1998, the Company can borrow up to the lesser of $1,000,000 or 80%
of eligible accounts receivable (as defined). At December 31, 1997 and April
4, 1998, there was $600,000 and $700,000, respectively, outstanding under the
revolving credit line. The credit line is collateralized by a security
interest in all of the Company's assets and a $200,000 certificate of
deposit. The revolving credit line expires in January 1999, at which time
the credit line may be extended solely at the option of the bank.
The revolving credit line with the bank requires the Company to meet
various financial covenants on a quarterly basis. At December 31, 1997 and
April 4, 1998, the Company did not meet the financial covenants of the loan
agreement. As of December 31, 1997 and April 4, 1998, the bank had not
waived compliance with the financial covenants. In the event the Company
does not meet these or other loan covenants in the future, the bank may call
all of its debt for repayment and additional financing would be required to
retire the bank debt. As a result of the Company's net loss for the first
quarter of 1998, the Company and its bank are negotiating modified and more
restrictive terms and conditions for the loan agreement.
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 terms and conditions of payment are subject to on-going
discussion and negotiation. The cash required to meet this obligation is
expected to be provided by cash flow from operations and additional
financing.
Financing will be required for working capital and operations in 1998.
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 will be available in 1998 under terms and conditions that are
acceptable to the Company. Additional capital in 1998 is likely to be
provided or arranged by the Company's controlling shareholder, ISA. 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 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 $31,590,000 at April 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.
Although the Company had established a recent trend of operating
profitability, the Company incurred a significant operating loss in the first
quarter of 1998 and expects to operate at a loss in the second quarter of
1998. There is no assurance that the Company will operate at a profit in the
future. Further, continuation of the Company's operations is dependent upon
the availability of additional capital and financing.
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'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; however, recent efforts to expand the
Company's sales force and broaden its product line are expected to lead to an
increase in the Company's customer base. The inability of the Company to
continue to secure and maintain a sufficient number of large contracts would
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 71% of the Company's current outstanding shares of common
stock are held by a single shareholder, 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule as of April 4, 1998.
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated February 13, 1997, was
filed by the Company to report the appointment of the Company's new chief
executive officer and president.
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)
May 11, 1998 /s/ Hugo R. Camou
Date Hugo R. Camou
Chief Executive Officer
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> APR-4-1998
<CASH> 558,000
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<RECEIVABLES> 1,250,000
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