<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 1996 Commission File No. 0-24303
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COHERENT COMMUNICATIONS SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 11-2162982
- - ------------------------------ -----------------------------
(State of Incorporation of Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
</TABLE>
44084 Riverside Parkway Landsdowne Business Center, Leesburg, VA 22075
- - ------------------------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number Including Area Code: (703) 729-6400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve 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 ninety days.
Yes / X / No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 8, 1996:
<TABLE>
<CAPTION>
Class Number of Shares Outstanding
<S> <C>
Common Stock, Par Value $.01 Per Share 15,087,022 Shares
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</TABLE>
Note: This is Page 1 of a document consisting of 13 pages.
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COHERENT COMMUNICATIONS SYSTEMS CORPORATION
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30, 1996 (Unaudited) and December 31, 1995 ...................... 3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three and Nine Months Ended September 30, 1996 and 1995 ................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 1996 and 1995 ............................. 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ...................... 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........................... 7-9
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K .................................... 10
SIGNATURES .................................................................. 11
EXHIBIT 11-COMPUTATION OF NET INCOME PER SHARE .............................. 12
EXHIBIT 27-FINANCIAL DATA SCHEDULE .......................................... 13
</TABLE>
2
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COHERENT COMMUNICATIONS SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
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(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,383 $ 3,352
Accounts receivable - trade, less allowances
($611 -1996 and $449 -1995) 11,300 8,068
Notes receivable from related parties -- 7,125
Inventories 3,519 2,769
Other assets 1,208 1,670
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Total current assets 28,410 22,984
Property, plant and equipment, net 3,590 2,933
Goodwill 1,443 1,583
Other assets 1,133 1,116
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Total Assets $34,576 $28,616
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 920 $ 862
Accrued expenses 2,981 2,707
Notes payable to related party -- 1,000
Notes payable 700 949
Income taxes payable 1,998 1,473
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Total current liabilities 6,599 6,991
Non-current liabilities:
Notes payable to related party -- 1,000
Deferred taxes 177 177
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Total liabilities 6,776 8,168
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Stockholders' equity:
Common stock, par value $.01 a share; authorized - 100,000,000 shares;
issued and outstanding, 15,075,000 shares - 1996
and 14,733,000 shares - 1995 151 147
Additional paid-in capital 9,563 9,058
Retained earnings (from December 31, 1993) 18,086 11,243
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Total stockholders' equity 27,800 20,448
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Total Liabilities and Stockholders' Equity $34,576 $28,616
======= =======
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
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COHERENT COMMUNICATIONS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 14,102 $ 11,018 $ 38,376 $ 31,799
Cost of sales 5,228 4,406 14,119 12,521
-------- -------- -------- --------
Gross profit 8,874 6,612 24,257 19,278
-------- -------- -------- --------
Expenses:
Selling 2,209 1,624 5,969 4,765
Product development and engineering 1,741 1,179 4,645 3,667
General and administrative 1,208 834 3,263 2,414
Interest income, net (108) (132) (333) (443)
-------- -------- -------- --------
Total expenses 5,050 3,505 13,544 10,403
-------- -------- -------- --------
Pre-tax income 3,824 3,107 10,713 8,875
Income tax expense 1,379 1,243 3,870 3,550
-------- -------- -------- --------
Net income $ 2,445 $ 1,864 $ 6,843 $ 5,325
======== ======== ======== ========
Net income per common share $ 0.16 $ 0.12 $ 0.44 $ 0.34
======== ======== ======== ========
Average common shares outstanding 15,479 15,556 15,472 15,441
======== ======== ======== ========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
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COHERENT COMMUNICATIONS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income 6,843 5,325
Adjustments to reconcile net income
to cash from operating activities:
Depreciation and amortization 936 514
Changes provided by (used in) operating activities:
Receivables (3,232) (2,622)
Inventories (750) (636)
Other current assets and other assets 445 (15)
Accounts payable 58 549
Accrued expenses 274 720
Income taxes payable 525 947
-------- --------
Cash provided by operating activities 5,099 4,782
-------- --------
Investing activities:
Decrease (increase) in notes receivable from related parties, net 7,125 (1,980)
Notes receivable- long term (391)
Expenditures for property, plant and equipment (1,453) (1,026)
-------- --------
Cash provided by (used in) investing activities 5,672 (3,397)
-------- --------
Financing activities:
Exercise of stock options 509 862
Decrease in notes payable (2,249) (1,000)
-------- --------
Cash used in financing activities (1,740) (138)
-------- --------
Increase in cash and cash equivalents 9,031 1,247
Cash - beginning of period 3,352 2,473
-------- --------
Cash - end of period $ 12,383 $ 3,720
======== ========
Supplemental disclosure of cash flow information
Cash paid for:
Interest $ 61 $ 100
Income taxes $ 3,345 $ 2,604
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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COHERENT COMMUNICATIONS SYSTEMS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PRESENTATION
The consolidated balance sheet as of September 30, 1996, the
consolidated statements of income for the three and nine months ended
September 30, 1996 and 1995, and the consolidated statements of cash flows
for the nine months ended September 30, 1996 and 1995 have been prepared
in accordance with generally accepted accounting principles by the company
without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and changes in cash flows for
all periods presented have been made. Interim results are not necessarily
indicative of results expected for the full year.
These financial statements do not include all disclosures associated
with annual financial statements. Accordingly, these statements should be
read in conjunction with the Company's financial statements and notes
thereto contained in the Company's Form 10-K for the year ended December
31, 1995.
(B) INVENTORIES
Inventories are stated at the lower of cost, on a FIFO basis, or market
and consist of the following:
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
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<S> <C> <C>
Raw materials $2,667 $1,924
Work-in-progress 788 738
Finished goods 64 107
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$3,519 $2,769
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(C) RELATED PARTY TRANSACTIONS
During 1993, Safeguard Scientifics, Inc. ("Safeguard") and the Company
entered into an agreement whereby the company would lend to Safeguard a
portion of its excess cash and receive a negotiated interest rate which
was higher than the rate the Company might realize by independently
investing the funds, but which was less than Safeguard's cost of funds.
Interest accrues on the unpaid principal balance at Safeguard's cost of
funds less 1%.. The balance of the note was paid in full as of September
30, 1996.
(D) OTHER ASSETS
In June 1996, the Company exercised its warrants to purchase 4,140,913
shares of Seattle Silicon, using a $1,000,000 note due from Seattle
Silicon to fund the purchase. The Company renegotiated the remaining
$400,000 note from Seattle Silicon (dated July 14,1994) to defer payment
until September 30, 1997. The interest accruing on the $400,000 note, at
7%, is paid to the Company monthly.
6
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COHERENT COMMUNICATIONS SYSTEMS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the three and nine months ended September 30, 1996
increased 28% and 21%, respectively, compared to the same period in 1995.
Net income increased by 31% and 29%, respectively, for the same periods,
primarily the result of higher sales and modestly higher margins.
The following table sets forth, for the periods indicated, selected
statements of income and expense data as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales
Transmission products 86% 82% 85% 85%
Teleconferencing products 14 18 15 15
---- ---- ---- ----
Total net sales 100 100 100 100
Cost of sales 37 40 37 39
---- ---- ---- ----
Gross Profit 63 60 63 61
Expenses
Selling 16 15 15 15
Product development & engineering 12 11 12 12
General and administrative 9 7 9 7
Interest income, net (1) (1) (1) (1)
---- ---- ---- ----
Total expenses 36 32 35 33
---- ---- ---- ----
Pre-tax income 27% 28% 28% 28%
==== ==== ==== ====
</TABLE>
The increase in transmission sales, as compared to prior year's quarter
ended September 30, were mostly from the North America and Asia-Pacific
regions. Some of the larger sales contributing to the third quarter's
financial results were from shipments to NEC for use in Brazil and ASCII
Corporation in the Asian market, and with Motorola, AT&T Wireless and DSC
Communications in the North American region.
7
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COHERENT COMMUNICATIONS SYSTEMS CORPORATION
Teleconferencing sales continue at about $2.0 million per quarter. The
Company anticipates continued price pressure on teleconferencing products
due to the highly competitive environment.
Backlog may fluctuate since echo canceller products represent capital
purchases for the Company's customers and may be affected by seasonal and
other business cycles and order cancellation. The Company typically fills
orders for its products within 7 to 60 days of the receipt of the
purchase order. Customers usually purchase products on an as-needed
basis, and accordingly, the Company generally has less than two months
net sales in backlog. Backlog consists of purchase orders received by the
Company with a schedule of deliveries within twelve months of the
purchase order date. Written commitments without delivery schedules are
not considered in calculating backlog. The Company charges a 20%
re-stocking fee for purchase order cancellation except in cases where the
cancellation request was made greater than 30 days prior to the scheduled
delivery date and no prior cancellation request had been delivered by the
prospective customer. The backlog of orders at September 30, 1996 was
approximately $10.0 million.
Gross profit as a percentage of net sales for the three and nine months
ended September 30, 1996 was 63% compared to 60% and 61% for the quarter
and year to date 1995. The increase in gross profit margin over last year
is due primarily to the product mix of hardware products with a lower
product cost, and software products augmented by favorable volume
variances from higher transmission sales.
Selling and marketing expenses for the three and nine months ended
September 30, 1996 increased by $.6 million and $1.2 million,
respectively, while increasing to 16% and 15% of net sales for the three
and nine months ended September 30, 1996 compared to 15% in the
comparable periods of 1995. The increased spending was primarily
attributable to additional sales and marketing positions to expand our
international presence and the marketing introduction of the
Consortium(TM) product. During the second quarter of 1996, the Company
enlarged its Technical Assistance Center. The Company will continue to
expand its sales presence geographically to support the Company's plans
for growth.
Product development and engineering expenses increased by $.6 million
and $1.0 million in the three and nine months ended September 30, 1996,
respectively, compared to the same periods in 1995. As a percentage of
sales, expenses were 12% for each of the three month period and nine
months ended September 30, 1996 compared to 11% and 12% in the comparable
periods in 1995. The increase in product development and engineering
expense was primarily a result of investments in voice enhancement
software products, and a new echo canceller in the transmission product
line and new software features for the Consortium(TM) Conference Bridge.
The Company will continue to make comparable investments in product
development to grow its business.
General and administrative expenses increased from 7% to 9% of sales
for the three and nine months ended September 30, 1996, as compared to
the same periods in 1995. The increased spending is attributable to
administrative costs required to support the Company's continued growth.
The decrease in the effective tax rate was due to tax benefits recorded
on export sales during 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to generate sufficient cash from operations to
fund its working capital needs and for capital expenditures. Days sales
outstanding in accounts receivable improved in the quarter as a result of
continued aggressive collection efforts. Inventory balance decreased
during the quarter by approximately $.6, improving the inventory turns
from 4.7 in June to 5.9 as of September 30, 1996.
Capital expenditures for the nine months ended September 30, 1996 were
$1.5 million. Management anticipates that capital expenditures for 1996
will approximate $2.5-$3.0 million dollars, primarily for the purchase of
product development and manufacturing equipment.
The Company has agreed to lease a new facility for its worldwide
headquarters. Construction of the facility commenced in September 1996
and is expected to be completed in September 1997. The Company's lease
will be for a term of 15 years, beginning upon the completion date of the
facility. Available space will be tripled.
8
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COHERENT COMMUNICATIONS SYSTEMS CORPORATION
The Company currently anticipates that cash generated from operations,
existing cash balances and amounts expected to be available on an unused,
uncommitted bank line of credit will be sufficient to satisfy its
operating cash needs through 1997. During 1996 the Company increased its
unused, uncommitted line of credit from $5,000,000 to $10,000,000.
Advances under this line are subject to approval by the bank prior to
disbursement. Should a need for cash arise, the Company would consider
using this line of credit, or could seek additional public or private
debt or equity financing to fund its growth opportunities.
9
<PAGE> 10
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
a.) Exhibits
Exhibit 11- Computation of net income per share page 12
Exhibit 27- Financial Data Schedule page 13
b.) Reports on Form 8-K
None.
No other applicable items.
10
<PAGE> 11
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COHERENT COMMUNICATIONS SYSTEMS
CORPORATION
By: /s/ Michael P. Gendron
--------------------------------------------
Michael P. Gendron
Vice President & Chief Financial Officer
Date: November 14, 1996
11
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COHERENT COMMUNICATIONS SYSTEMS CORPORATION
EXHIBIT 11 - COMPUTATION OF NET INCOME PER SHARE
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 2,445 $ 1,864 $ 6,843 $ 5,325
======= ======= ======= =======
Average common shares outstanding 15,002 14,614 14,925 14,499
Average common share equivalents:
Options 477 942 547 942
------- ------- ------- -------
Average number of common and
common share equivalents outstanding 15,479 15,556 15,472 15,441
======= ======= ======= =======
Net income per common share $ 0.16 $ 0.12 $ 0.44 $ 0.34
======= ======= ======= =======
</TABLE>
Earning per share calculation for each period are based on the weighted
average number of shares outstanding in each period. Therefore, the sum
of the quarters do not necessarily equal the year to date earnings per
share.
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at September 30, 1996
(unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 12,383
<SECURITIES> 0
<RECEIVABLES> 11,911
<ALLOWANCES> 611
<INVENTORY> 3,519
<CURRENT-ASSETS> 28,410
<PP&E> 5,855
<DEPRECIATION> 2,265
<TOTAL-ASSETS> 34,576
<CURRENT-LIABILITIES> 6,599
<BONDS> 0
0
0
<COMMON> 151
<OTHER-SE> 27,649
<TOTAL-LIABILITY-AND-EQUITY> 34,576
<SALES> 38,376
<TOTAL-REVENUES> 38,376
<CGS> 14,119
<TOTAL-COSTS> 14,119
<OTHER-EXPENSES> 13,877
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> 10,713
<INCOME-TAX> 3,870
<INCOME-CONTINUING> 6,843
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,843
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
</TABLE>
