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: October 3, 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 3-0580412
(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 November 13, 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 OCTOBER 3, 1998
INDEX
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales............ $ 961,000 $1,464,000 $3,986,000 $10,481,000
Cost of sales........ 816,000 1,810,000 3,477,000 5,789,000
Gross margin......... 145,000 1,654,000 509,000 4,692,000
Operating expense:
Selling and administrative
expense.......... 793,000 1,175,000 3,219,000 3,118,000
Research and development
expense... 385,000 296,000 1,220,000 1,049,000
Other expense........... 241,000 -- 666,000 --
Total operating expenses.. 1,419,000 1,471,000 5,105,000 4,167,000
Operating income (loss)... (1,274,000) 183,000 (4,596,000) 525,000
Interest expense......... 29,000 20,000 100,000 59,000
Interest and other income.. -- (11,000) (8,000) (44,000)
Provision for income taxes. 6,000 6,000 18,000 18,000
Income (loss) before
extraordinary gain..... (1,309,000) 168,000 (4,706,000) 492,000
Extraordinary gain on
extinguishment of debt -- 2,000 -- 13,000
Net income (loss)....... $(1,309,000) $ 170,000 $(4,706,000) $ 505,000
Basic earnings (loss)
per common share (Note 9):
Income (loss) before
extraordinary item $ (.02) $ -- $ (.06) $ --
Extraordinary item -- -- -- --
Net income (loss)per
Share $ (.02) $ -- $ (.06) $ --
Weighted average common
shares outstanding 78,724,000 76,186,000 77,443,000 76,057,000
</TABLE>
The accompanying notes are an integral part of the unaudited
financial Statements.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
October 3, December 31,
1998 1997
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents ............... $ 12,000 $ 351,000
Restricted cash........................... -- 200,000
Accounts receivable....................... 488,000 2,174,000
Unbilled costs and earnings on contracts.. -- --
Inventories............................... 822,000 1,475,000
Prepaids and other current assets......... 194,000 420,000
Total current assets................... 1,516,000 4,620,000
Property and equipment, net............... 410,000 689,000
$ 1,926,000 $5,309,000
LIABILITIES AND SHAREHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Current portion of debt (Note 5).......... $ 1,676,000 $ 613,000
Accounts payable.......................... 1,152,000 810,000
Accrued payroll and related benefits...... 470,000 425,000
Deferred revenue and customer payments.... 749,000 773,000
Accrued loss on litigation................ 536,000 556,000
Other accrued liabilities................. 1,311,000 929,000
Total current liabilities........... 5,894,000 4,106,000
Long-term debt, net of current portion (Note 5) -- 600,000
Commitments and contingencies (Note 2 and 8) -- --
Shareholders' equity (deficit):
Preferred stock, $.01 par value (Note 6).... 1,000 1,000
Common stock, $.01 par value; 78,724,134 and
76,568,112 shares issued and outstanding in
1998 and 1997, respectively................ 787,000 765,000
Additional paid-in capital................. 30,151,000 30,038,000
Accumulated deficit........................ (34,907,000) (30,201,000)
Total shareholders' equity(deficit)........ (3,968,000) 603,000
$ 1,926,000 $ 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 75,699,712 $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 295,000 3,000 -- 65,000 -- 68,000
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
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 -- -- -- -- (4,706,000) (4,706,000)
Balances October
3, 1998 78,724,134 $787,000 $ 1,000 $ 30,151,000 $ (34,907,000) $(3,968,000)
</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>
Nine Months Ended
October 3, September 7,
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (4,706,000) $ 505,000
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Extraordinary item-gain on extinguishment of debt -- (13,000)
Depreciation and amortization 270,000 273,000
Other 178,000 13,000
Change in assets and liabilities, net 3,464,000 (277,000)
Net cash provided (used) by operating activities (794,000) 501,000
Cash flows from investing activities:
Additions to property and equipment, net (91,000) (281,000)
Net cash used by investing activities (91,000) (281,000)
Cash flows from financing activities:
Advance from shareholder 1,000,000 --
Borrowing on revolving credit line 100,000 --
Issuance of common stock for cash -- 50,000
Payments on short-term and long-term debt (554,000) (171,000)
Net cash provided (used) by financing activities 546,000 (121,000)
Net increase in cash and equivalents (339,000) 99,000
Cash and equivalents, beginning of period 351,000 963,000
Cash and equivalents, end of period $ 12,000 $ 1,062,000
Supplemental cash flow information:
Cash paid for interest $ 56,000 $ 22,000
Cash paid for income taxes 7,000 9,000
</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." The unaudited condensed consolidated balance sheet at December
31, 1997 has been derived from the Company's audited consolidated balance
sheet.
The accompanying unaudited condensed consolidated financial statements have
been prepared based on the assumption the Company continues to operate as a
going concern; the unaudited condensed consolidated financial statements do
not include any adjustments that may be required as a result of the events
described in Note 2. "Continuation of Operations."
Accounts Receivable - The Company provides a reserve for doubtful accounts
where circumstances indicate that a reserve is necessary. As of October 3,
1998 and December 31, 1997, the Company's reserve for doubtful accounts was
$191,000 and $186,000, respectively. Included in accounts receivable at
October 3, 1998 and December 31, 1997, were $125,000 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:
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
October 3, December 31,
1998 1997
<S> <C> <C>
Materials and supplies............ $ 325,000 $ 497,000
Work-in-process ................. 442,000 1,098,000
Finished goods ............... 55,000 44,000
Less progress billings......... -- (164,000)
$ 822,000 $ 1,475,000
</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 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. See Note 9.
"Earnings Per Share (EPS)."
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
2. Continuation of Operations
As discussed in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997, the Company had a history of operating losses, an
accumulated deficit of $30,201,000 at December 31, 1997, and the Company
required additional capital in 1998 for operations and the repayment of debt.
In addition, it was noted that the Company expected to operate at a loss in
the first quarter of 1998, and there could be no assurance that the Company
would operate at a profit in the future.
In the first nine months of 1998, the Company operated at a net loss of
$4,706,000. At October 3, 1998, there was a shareholders' deficit of
$3,968,000. In 1998, the Company's net sales and gross margin on sales
decreased significantly from the prior year and new order levels from
domestic and export customers continued at severely depressed levels. As a
result of these and other factors, the Company was unable to raise capital in
the third quarter of 1998. The failure to secure additional financing left
the Company with insufficient cash resources to meet operating expenses,
current liabilities and working capital requirements. Unless the Company can
arrange sufficient financing under acceptable terms within thirty days, it is
likely that the Company will be unable to continue its operations in the
current form. In such event, the Company would consider a number of
alternatives that will have a materially adverse effect on its business and
shareholders' value, including a possible filing for bankruptcy, the sale of
assets at a value significantly less than book value, and the sale or
licensing of the Company's technology.
The Company is presently seeking potential investors and other sources
of financing. However, there can be no assurances that the Company can
secure financing sufficient to continue operations, in the time frame such
financing is required.
3. Proposed Merger with NetCore Technologies, Inc.
On September 9, 1998, the Company announced an agreement to acquire
NetCore Technologies, Inc. ("NetCore"), a privately held supplier of remote
network management and desktop support services. Under the terms of the
Agreement and Plan of Merger and Reorganization (the "Agreement") between the
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Company, NetCore, Azia Core Ltd. ("Azia Core") and ISA Investments
Corporation ("ISA"), NetCore was to exchange all of its assets, liabilities,
technologies and licenses for shares of the Company's common stock. In
connection with the acquisition, Steve Stevenson, a founder and chairman of
NetCore and president of NetCore's majority shareholder Azia Core, was
appointed the Company's interim president and chief executive officer; Bryan
Williams, president of NetCore and a director of Azia Core, was appointed the
Company's chief operating officer and senior vice president; and John Supan,
a director of Azia Core, was appointed the Company's interim executive vice
president of finance. The Company's former president, John Wiggins, left the
Company to pursue other business opportunities and the Company's former
executive vice president of finance, Fernando Pliego, was appointed to the
new position of executive vice president of administration. ISA is the
Company's majority shareholder, holding approximately 69% of the Company
issued and outstanding common shares.
In November 1998, the Company formally terminated the Agreement based
on its belief that Azia Core and NetCore had breached various provisions of
the Agreement. Under the terms and conditions of the Agreement, the Company
can terminate the Agreement and would be entitled to be reimbursed for merger
related expenses and receive a common stock interest in NetCore equal to 20%
of the outstanding common stock of NetCore. In the event the Company wrongly
terminated the Agreement, then NetCore may be entitled to be reimbursed for
merger related expenses and receive a common stock interest in the Company
equal to 20% of the
Company's outstanding common stock. The accompanying unaudited
consolidated financial statements do not include any adjustments for the
reimbursement of merger expenses or the receipt of a 20% common stock
interest in NetCore; or the reimbursement of the merger expenses of NetCore
and the issuance to NetCore of a 20% common stock interest in the Company.
On October 16, 1998, the Company's board of directors removed Messrs.
Stevenson, Williams and Supan as officers of the Company. As of November 5,
1998, the board of directors had not appointed a new interim president, chief
executive officer or executive vice president of finance.
4. Extraordinary Gain on Extinguishment of Debt:
In the nine month period ended September 27, 1997, agreements were
reached with certain unsecured creditors on the extinguishment of debt
resulting in a gain of $13,000. The gain on the extinguishment of debt is
reflected as an extraordinary item in the accompanying consolidated financial
statements.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
5. Short-Term and Long-Term Debt:
Debt consisted of: October 3, 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........................ 160,000 600,000
Note with bank.......................... -- 13,000
Advance from shareholder................ 1,000,000 --
1,676,000 1,213,000
Less long-term portion of debt........... -- (600,000)
Short-term portion of debt.............. $1,676,000 $ 613,000
</TABLE>
In December 1997, the Company entered into a revolving credit line loan
agreement with a bank, which was subsequently modified and amended in 1998,
under which the Company can borrow up to the lesser of $250,000 or 65% of
eligible accounts receivables, as defined. Interest on the revolving credit
line is at the bank's referenced rate plus 2.5% percent (10.75% at October
3, 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
October 3, 1998, the Company did not meet the financial covenants 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
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. Subsequent to October 3, 1998, the bank
notified the Company it would not extend new advances under the credit line.
The Company and the bank are in discussions regarding the extension of the
forbearance agreement under significantly more restrictive terms and
conditions. There can be no assurance that the Company and the bank will
reach agreement on an extension of the forbearance agreement.
From February 15, 1998 to October 3, 1998, the Company's majority
shareholder advanced $1,000,000 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 approximately 2,068,000
shares of common stock), and the 6% Term 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
6. 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 $92,000
at October 3, 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
October 3, 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 October 3, 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 October 3, 1998, the aggregate liquidation preference
value of the Series B preferred stock was approximately $4,678,000. See Note
8. "Litigation."
7. Common Stock
In June 1998, the Company entered into an agreement with Azia Core,
pursuant to which Azia Core was 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 Core
was to assist the Company in raising additional capital investment. In
connection with such services, the Company issued to Azia Core 1,489,362
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
shares of unregistered common stock valued at $45,000 and paid Azia Core
$30,000 in cash. In October 1998, the financial services consulting
agreement was terminated. See Note 3. "Proposed Merger with NetCore
Technologies, Inc."
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 October 3, 1998, there were employee options
outstanding to purchase approximately 7,400,000 shares of common stock.
8. Litigation
On October 19, 1998, the liquidating trustee for Renaissance Capital
Partners II, Ltd. ("RenCap") filed suit in the District Court of Dallas
County, Texas, against the Company; its directors Hugo Camou, Miguel
Vildosola and Fernando Molina; and the Company's majority shareholder ISA
Investments Corporation. RenCap is the holder of all of the issued and
outstanding shares of the Company's Series B preferred stock, which was
issued to RenCap in December 1996 upon the forced conversion of the Company's
$4,800,000 principal amount 6% Convertible Debenture held by RenCap, into
Series B preferred stock. The suit alleges, among other claims, fraud and
misrepresentations by the defendants and officers and employees of the
Company with respect to the forced conversion of the 6% Convertible Debenture
into Series B preferred stock. The suit asks for the rescission of the
conversion of the 6% Convertible Debenture into Series B preferred stock,
reinstatement of the 6% Convertible Debenture, and other damages and expenses
that may be awarded by the court. The Company denies the allegations and
believes the suit is without merit. The Company intends to vigorously defend
its position.
On March 9, 1998, a suit against the Company was filed in the Superior
Court of California, County of San Diego, by PDG Carlsbad 59, Ltd, alleging
breach of a contract to lease a building in Carlsbad, California. In
September 1998, the Company terminated the lease. The plaintiff alleges the
Company could not terminate the agreement, and is claiming damages of not
less than $250,000. The Company believes it properly exercised its right to
terminate the lease and intends to vigorously defend its position.
CODED COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Earnings Per Share (EPS):
<TABLE>
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:
<CAPTION>
Three Months Ended Nine Months Ended
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Numerator:
Income (loss) before extraordinary
Gain $ (1,309,000) $ 168,000 $(4,607,000) $ 492,000
Less preferred stock dividends (82,000) (84,000) (246,000) (252,000)
Income (loss) available to common
Shareholders (1,391,000) 84,000 (4,853,000) 240,000
Extraordinary gain -- 2,000 -- 13,000
Net income (loss) available to
common shareholders $ (1,391,000) $ 86,000 $(4,853,000) $ 253,000
Denominator:
Average common shares outstanding 78,724,000 76,186,000 77,443,000 76,057,000
Diluted Earnings Per Share:
Numerator:
Income (loss) before extraordinary
Gain $ (1,309,000) $ 168,000 $(4,607,000) $ 492,000
Add interest expense 8,000 9,000 25,000 27,000
Income (loss) available to common
shareholders (1,301,000) 177,000 (4,582,000) 519,000
Extraordinary gain -- 2,000 -- 13,000
Net income (loss) available to
Common shareholders $ (1,301,000) $ 179,000 $(4,582,000) $ 532,000
Denominator:
Denominator - Basic EPS 78,724,000 76,186,000 77,443,000 76,057,000
Effect of dilutive securities:
Convertible preferred stock -- 9,704,000 -- 9,926,000
Convertible debt -- 2,400,000 -- 2,400,000
Common stock options -- 733,000 -- 1,084,000
78,724,000 89,023,000 77,443,000 89,467,000
</TABLE>
_________________________
Item 2. Management's Discussion and Analysis or Plan of Operation
Nine Months Ended October 3, 1998 ("1998") Compared to Nine Months Ended
September 27, 1997 ("1997")
Income (Loss) before Extraordinary Gain
For the nine month period ended October 3, 1998, the Company reported a
loss before extraordinary gain of ($4,706,000) compared to income before
extraordinary gain of $492,000 in 1997. The loss resulted primarily from
significantly lower sales and gross margin on sales, an increase in research
and development expense, and other expenses which included charges for
employee separations and the termination of a lease agreement for a new
headquarters facility.
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 nine months of 1998, sales in fiscal 1998 will be significantly
less than the sales and order levels in fiscal 1997. The Company expects
that sales in the fourth quarter of 1998 will be comparable to sales in the
second and third quarters of 1998, and will continue to be 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 market share and become a
competitive supplier of mobile data communications products and solutions.
The Company presently expects to implement new marketing and sales strategies
in the first quarter of 1999. However, the Company's plans to initiate sales
programs will be delayed in the event the Company is unsuccessful in its
efforts to secure new capital. There is no assurance that the Company's new
strategies will increase order levels or sales in fiscal 1999.
<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 87.2 55.2
Gross profit 12.8 44.8
Operating expense:
Selling and administrative expense 80.8 29.8
Research and development 30.6 10.0
Other expense 16.7 --
Total operating expense 128.1 39.8
Operating income (loss) (115.3) 5.0
Interest expense and income tax 2.8 0.3
Income (loss) before extraordinary gain (118.1) 4.7
Extraordinary gain -- 0.1
Net income (loss) (118.1)% 4.8%
</TABLE>
Sales and New Orders
Sales for the first nine months of 1998 were $3,986,000, a decrease of
62% from sales of $10,481,000 in the same period in 1997. Sales of mobile
data products and systems in 1998 were $1,901,000, a decrease of 76% 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 twelve months. The
Company's initial contracts with customers in Mexico were substantially
completed by the end of 1997, and new orders from these customers, which were
initially expected to be awarded in the last quarter of 1998, are now
expected to be awarded in the first half of 1999. Sales to customers in
Mexico represented approximately 14% and 65% of mobile data product sales in
1998 and 1997, respectively. Sales of aerospace telemetry products were
$2,085,000 in 1998, a decrease of 23% from sales in the prior year. The
decrease in aerospace telemetry sales resulted primarily from declining new
order levels experienced in the second and third quarters of 1998.
New orders in 1998 decreased 80% 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 first nine months
of 1998. New orders from domestic customers has also decreased, primarily as
a result of customer delays in the award of certain new contracts and awards
of contracts to other competitors. Based on the Company's competitive
position on certain potential new contracts awards, new orders for mobile
data products may increase in the last quarter of 1998 or first quarter of
1999. 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 67% from order levels in 1997.
The backlog of orders at October 3, 1998, was approximately $1,656,000,
a decrease of 51% compared to backlog at December 31, 1997; backlog at the
end of the third quarter of 1998 was down 69% from backlog of approximately
$5,277,000 at the end of the third quarter in 1997.
Gross Margin
Gross margin, as a percentage of sales, was 13% in 1998 and 45% in
1997. The decrease in gross margin resulted primarily from sales levels that
were insufficient to cover fixed manufacturing and engineering costs, as well
as cost overruns on certain contracts completed in 1998. Gross margin
performance in the last quarter in 1998 may be adversely impacted by sales
levels that are not sufficient to cover all fixed manufacturing and
engineering expense.
Operating Expenses, Interest Expense and Income Taxes
Selling and administrative expense was $3,219,000 in 1998, a net
increase of $101,000 or 3% over 1997. As a percentage of sales, selling and
administrative expense was 81% in 1998 and 30% in 1997. Selling expense in
the third quarter of 1998 decreased by 23% from the second quarter of 1998,
as the Company reduced staff levels and discretionary selling expenses such
as advertising and travel. Administrative expense in the third quarter was
also reduced, primarily reflecting lower staffing costs. Selling and
administrative expense in the last quarter of 1998, as compared to the third
quarter of 1998, is expected to be reduced further as a result of lower
staffing levels and cost controls. For the year ended December 31, 1997,
selling and administrative expense was 31% of sales.
In 1998, the Company incurred other expense of $666,000, which included
a charge of $225,000 for the termination and settlement of the employment
contract of the Company's former CEO; $200,000 for employee separation
expense; and a reserve of $151,000 against capitalized costs and deposits
relating to the termination of an agreement to lease a new corporate
headquarters.
Research and development expense in 1998 was $1,220,000, an increase of
16% or $171,000 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 31% in 1998 and 10% in 1997. The Company
presently anticipates reducing the level of R&D expenditures in the last
quarter of 1998.
Interest expense in 1998 was $100,000 compared to $59,000 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 October 3, 1998 ("1998") Compared to Three Months Ended
September 27, 1997 ("1997")
Income (Loss) before Extraordinary Gain
For the third quarter of 1998 ended October 3, 1998 ("1998"), the loss
before extraordinary gain was $(1,309,000), compared to income before
extraordinary gain of $168,000 for the same period in 1997. The reversal in
income resulted primarily from a decrease in sales and gross margin on sales.
The decrease in sales levels resulted primarily from a decrease in new orders
for mobile data and aerospace telemetry products experienced over the last
twelve months.
Sales and New Orders
Sales for the third quarter of 1998 were $961,000, a decrease of 72%
from sales of $3,464,000 in the third quarter of 1997; and an increase of 4%
over sales of $921,000 in the second quarter of 1998. Sales of mobile data
communications products and systems decreased by 85% or $2,328,000 from 1997,
and sales of aerospace telemetry products decreased by $175,000 or 23%
compared to the third quarter of 1997. The decrease in sales of mobile data
communications products resulted from a decrease of approximately $1,513,000
in export sales to public safety customers in Mexico.
New orders in the third quarter of 1998 decreased by 76% from order
levels in 1997. See the year-to-date operating results discussed above for
the factors impacting order levels.
Gross Margin
Gross margin in the third quarter of 1998 was 15% compared to 48% in
the same quarter in 1997. The decrease in gross margin resulted primarily
from a sales level that did not cover fixed manufacturing and engineering
costs.
Operating Expenses, Interest Expense and Income Taxes
Selling and administrative expense was $793,000 in 1998, a decrease of
$382,000 or 32% compared to selling and administrative expense in 1997. The
decrease in expense resulted primarily from a reduction in personnel expense.
Refer to the discussion for the nine months ended October 3, 1998,
above 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 through the sale of common stock, convertible debentures and
other financings. In 1998, cash requirements have been met by a reduction in
accounts receivable and inventory totaling $2,339,000 and a net increase of
$463,000 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 a bank credit line.
In the first nine months of 1998, the Company operated at a net loss of
$4,706,000. At October 3, 1998, there was a shareholders' deficit of
$3,968,000. In 1998, the Company's net sales and gross margin on sales
decreased significantly from the prior year and new order levels from
domestic and export customers continued at severely depressed levels compared
to 1997. As a result of these and other factors, the Company was unable to
raise capital in the third quarter of 1998. The failure to secure additional
financing left the Company with insufficient cash resources to meet operating
expenses, current liabilities and working capital requirements. Unless the
Company can arrange sufficient financing under acceptable terms within thirty
days, it is likely the Company will be unable to continue its operations in
the current form. In such event, the Company would consider a number of
alternatives that will have a materially adverse effect on its business and
shareholders' value, including a possible filing for bankruptcy, the sale of
assets at a value significantly less than book value, and the sale or
licensing of the Company's technology.
In 1998, accounts receivable decreased by $1,686,000 from the prior
year, due primarily to a lower level of sales in the third quarter of 1998
compared to the last quarter of 1997. Inventories in 1998 decreased by
$653,000 primarily as a result of a decrease in work-in-process inventory
resulting from a reduction in the number of contracts in progress. Accounts
payable increased by $342,000 as the Company delayed payments to creditors to
conserve cash. Beginning in the third quarter of 1998, the Company was
unable to meet its current obligations in a timely manner, and substantially
all of the Company's suppliers require COD or cash-in-advance terms of sale.
The investment in property and equipment was approximately $91,000 in
1998. At October 3, 1998, the Company had no material commitments for the
purchase of capital equipment.
In December 1997, the Company entered into a new revolving credit
arrangement with a bank. Under the revolving credit line, which was modified
and amended in 1998, the Company can borrow up to the lesser of $250,000 or
65% of eligible accounts receivable. At December 31, 1997 and October 3,
1998, there was $600,000 and $160,000, respectively, outstanding under the
revolving credit line. The credit line is collateralized by a security
interest in all of the Company's assets.
The loan agreement requires the Company to meet various financial
covenants on a quarterly basis. At December 31, 1997 and October 3, 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 $250,000, until September 30, 1998. Subsequent to October 3, 1998, the
bank notified the Company it would not extend new advances under the credit
line. The Company and the bank are in discussions regarding the extension of
the forbearance agreement under significantly more restrictive terms and
conditions. There can be no assurance that the Company and the bank will
reach agreement on an extension of the forbearance agreement.
As a result of an adverse decision in 1998 for litigation originating in
1995, the Company is required to pay approximately $556,000 in damages,
which includes legal fees, to two plaintiffs. In June 1998, 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 plaintiffs have declared the
agreement in default; the Company and the plaintiffs are continuing
discussions regarding the Company's ability to bring current $100,000 in past
due payments at October 3, 1998. The obligation is subject to a judgment
lien against the assets of the Company.
The Company is subject to litigation, which is more fully described in
the footnotes to the unaudited condensed consolidated financial statements.
In the event these suits are decided against the Company, the financial
position and operations of the Company could be materially and adversely
effected.
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 internal
information 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 products, 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 assumptions regarding access to
financing; projections of the timing and amount of new orders, sales, gross
margin, operating expenses, the realization of assets and other financial
items; and assumptions and expectations relating 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 $34,907,000 at October 3, 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 significant loss in each of the first
three quarters of 1998, and will operate at a loss in the last quarter of
1998. Moreover, the continuation of the Company's operations is dependent on
completing an agreement for new financing within thirty days. Accordingly,
there is no assurance the Company can or will continue its operations in the
current form.
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 twelve months which has adversely affected sales and operating
income. There is no assurance that new order levels will improve 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. In addition, contracts for mobile
data communications systems awarded by public safety agencies generally
require the Company to provide bid and/or performance bonds issued by a
corporate surety. At the present time the Company does not have a commitment
from a corporate surety to provide contract bid and/or performance bonds. In
the event the Company cannot secure a commitment for bid and performance
bonds, its business will be adversely effected.
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 69% 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, including the terms and
conditions of new financing agreements.
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 1. Legal Proceedings
On October 19, 1998, the liquidating trustee for Renaissance Capital
Partners II, Ltd. ("RenCap") filed suit in the District Court of Dallas
County, Texas, against the Company; its directors Hugo Camou, Miguel
Vildosola and Fernando Molina; and the Company's majority shareholder ISA
Investments Corporation. RenCap is the holder of all of the issued and
outstanding shares of the Company's Series B preferred stock, which was
issued to RenCap in December 1996 upon the forced conversion of the Company's
$4,800,000 principal amount 6% Convertible Debenture held by RenCap, into
Series B preferred stock. The suit alleges, among other claims, fraud and
misrepresentations by the defendants and officers and employees of the
Company with respect to the forced conversion of the 6% Convertible Debenture
into Series B preferred stock. The suit asks for the rescission of the
conversion of the 6% Convertible Debenture into Series B preferred stock,
reinstatement of the 6% Convertible Debenture, and other damages and expenses
that may be awarded by the court. The Company denies the allegations and
believes the suit is without merit. The Company intends to vigorously defend
its position.
On March 9, 1998, a suit against the Company was filed in the Superior
Court of California, County of San Diego, by PDG Carlsbad 59, Ltd, alleging
breach of a contract to lease a building in Carlsbad, California. In
September 1998, the Company terminated the lease. The plaintiff alleges the
Company could not terminate the agreement, and is claiming damages of not
less than $250,000. The Company believes it properly exercised its right to
terminate the lease and intends to vigorously defend its position.
Item 2. Changes in Securities and Use of Proceeds
In June 1998, the Company entered into an agreement with Azia Core,
Ltd. ("Azia Core"), pursuant to which Azia Core 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 Core will assist the Company in raising additional capital
investment. In connection with such services, the Company issued to Azia
Core 1,489,362 shares of unregistered common stock valued at $45,000. The
financial consulting service contract was terminated in October 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule as of October 3, 1998.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated September 9, 1998 was
filed during the quarter ended October 3, 1998.
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)
November 15, 1998 _______________________________
Date Steven Borgardt
Vice President Finance
_______________________________
Fernando Pliego
Executive Vice President Administration
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> OCT-03-1998
<CASH> 12,000
<SECURITIES> 0
<RECEIVABLES> 679,000
<ALLOWANCES> (191,000)
<INVENTORY> 822,000
<CURRENT-ASSETS> 1,516,000
<PP&E> 4,132,000
<DEPRECIATION> (3,722,000)
<TOTAL-ASSETS> 1,926,000
<CURRENT-LIABILITIES> 5,894,000
<BONDS> 1,676,000
0
5,256,000
<COMMON> 25,683,000
<OTHER-SE> (34,907,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,926,000
<SALES> 3,986,000
<TOTAL-REVENUES> 3,986,000
<CGS> 3,477,000
<TOTAL-COSTS> 5,105,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,000
<INCOME-PRETAX> (4,688,000)
<INCOME-TAX> 18,000
<INCOME-CONTINUING> (4,706,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,706,000)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
