<PAGE> 1
CONFORMED COPY
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 June 30, 1996 Commission File No. 0-24303
--------------- -------
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 11-2162982
- - - ------------------------------------- -----------------------------------
(State of Incorporation of Other Jurisdiction ( I.R.S. Employer Identification No.)
of Incorporation or Organization)
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
44084 Riverside Parkway Landsdowne Business Center, Leesburg, VA 22075
- - - ------------------------------------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
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 August 5, 1996:
Class Number of Shares Outstanding
Common Stock, Par Value $.01 Per Share 14,996,422 Shares
--------------------
Note: This is Page 1 of a document consisting of 14 pages.
<PAGE> 2
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 30, 1996 (Unaudited) and December 31, 1995........................... 3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three and Six Months Ended June 30, 1996 and 1995......................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 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 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................10
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.....................................11
SIGNATURES...................................................................12
EXHIBIT 11-COMPUTATION OF NET INCOME PER SHARE...............................13
EXHIBIT 27-FINANCIAL DATA SCHEDULE...........................................14
2
<PAGE> 3
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1996 1995
-----------------------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,785 $ 3,352
Accounts receivable - trade, less allowances
($562 -1996 and $449 -1995) 11,241 8,068
Notes receivable from related parties 1,000 7,125
Inventories 4,123 2,769
Other assets 1,350 1,670
------- -------
Total current assets 25,499 22,984
Property, plant and equipment, net 3,431 2,933
Goodwill 1,527 1,583
Other assets 1,119 1,116
------- -------
Total Assets $31,576 $28,616
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 686 $ 862
Accrued expenses 2,549 2,707
Notes payable to related party 1,000 1,000
Notes payable 700 949
Income taxes payable 1,268 1,473
------- -------
Total current liabilities 6,203 6,991
Non-current liabilities:
Notes payable to related party -- 1,000
Deferred taxes 177 177
------- -------
Total liabilities 6,380 8,168
------- -------
Stockholders' equity:
Common stock, par value $.01 a share; authorized - 100,000,000
shares; issued and outstanding, 14,946,000 shares - 1996
and 14,733,000 shares - 1995 149 147
Additional paid-in capital 9,406 9,058
Retained earnings (from December 31, 1993) 15,641 11,243
------- -------
Total stockholders' equity 25,196 20,448
------- -------
Total Liabilities and Stockholders' Equity $31,576 $28,616
======= =======
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE> 4
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net sales $ 13,165 $ 11,001 $ 24,274 $ 20,781
Cost of sales 4,804 4,300 8,891 8,115
-------- -------- -------- --------
Gross profit 8,361 6,701 15,383 12,666
-------- -------- -------- --------
Expenses:
Selling 2,105 1,595 3,760 3,141
Product development and engineering 1,696 1,422 2,904 2,488
General and administrative 1,106 808 2,055 1,580
Interest income, net (106) (151) (225) (311)
-------- -------- -------- --------
Total expenses 4,801 3,674 8,494 6,898
-------- -------- -------- --------
Pre-tax income 3,560 3,027 6,889 5,768
Income tax expense 1,280 1,211 2,491 2,307
-------- -------- -------- --------
Net income $ 2,280 $ 1,816 $ 4,398 $ 3,461
======== ======== ======== ========
Net income per common share $ 0.15 $ 0.12 $ 0.28 $ 0.22
======== ======== ======== ========
Average common shares outstanding 15,478 15,549 15,466 15,394
======== ======== ======== ========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE> 5
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1995
------ ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income 4,398 3,461
Adjustments to reconcile net income to cash from operating activities:
Depreciation and amortization 567 339
Changes provided by (used in) operating activities:
Receivables (3,173) (1,110)
Inventories (1,354) (622)
Other current assets and other assets 317 (409)
Accounts payable (176) 28
Accrued expenses (158) 218
Income taxes payable (205) (235)
------- -------
Cash provided by operating activities 216 1,670
------- -------
Investing activities:
Decrease (increase) in notes receivable from related parties, net 6,125 (980)
Expenditures for property, plant and equipment (1,009) (621)
------- -------
Cash provided by (used in) investing activities 5,116 (1,601)
------- -------
Financing activities:
Exercise of stock options 350 734
Decrease in notes payable (1,249) (1,000)
------- -------
Cash used in financing activities (899) (266)
------- -------
Increase (decrease) in cash and cash equivalents 4,433 (197)
Cash - beginning of period 3,352 2,473
------- -------
Cash - end of period $ 7,785 $ 2,276
======= =======
Supplemental disclosure of cash flow information
Cash paid for:
Interest $ 48 $ 73
Income taxes $ 2,726 $ 2,543
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PRESENTATION
The consolidated balance sheet as of June 30, 1996, the consolidated
statements of income for the three and six months ended June 30, 1996 and
1995, and the consolidated statements of cash flows for the six months
ended June 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:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
--------------------- -------------------
<S> <C> <C>
Raw materials $2,862 $1,924
Work-in-progress 1,108 738
Finished goods 153 107
--------------------- -------------------
$4,123 $2,769
===================== ===================
</TABLE>
(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%. Principal and unpaid interest are
payable within three business days of demand by the Company. At June 30,
1996 and December 31, 1995, the principal balance on this note was
$1,000,000 (equal to the amount payable to Safeguard on certain notes due
June 1997) and $2,000,000, respectively.
(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 June 30, 1997. The interest accrued on the $400,000
note, at 7%, is paid to the Company monthly. Coherent has a security
interest in Seattle Silicon's assets as security for its obligations for
the note.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the three and six months ended June 30, 1996 increased
20% and 17% respectively, compared to the same period in 1995. Net income
increased by 26% and 27%, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales
Echo canceller products 85% 88% 85% 87%
Teleconferencing products 15 12 15 13
---- ---- ---- ----
Total net sales 100 100 100 100
Cost of sales 36 39 37 39
---- ---- ---- ----
Gross Profit 64 61 63 61
Expenses
Selling 16 14 15 15
Product development & engineering 13 13 12 12
General and administrative 9 7 9 8
Interest income, net (1) (1) (1) (2)
---- ---- ---- ----
Total expenses 37 33 35 33
---- ---- ---- ----
Pre-tax income 27% 28% 28% 28%
==== ==== ==== ====
</TABLE>
Strong increases in sales of both transmission and teleconferencing
equipment in North America, Asia-Pacific, and Latin America were
partially offset by softness in Europe, when compared to prior year's
quarters. Some of the larger sales contributing to the second quarter's
financial result were from shipments to Telmex, KDD, Embratel (through
NEC) in the international carrier market segment; to AT&T Wireless,
Omnipoint, and Geotek in the wireless market segment; and to Nokia, NEC
Australia, Stratacom, Motorola and Lucent in the OEM market segment.
7
<PAGE> 8
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
Teleconferencing sales increased 47% and 30%, respectively, for the three
and six months ended June 30, 1996 compared to the same periods in 1995. The
sales volume of the Call Port increased from 7% of teleconferencing sales in
1995 to 36% of sales for the six month period June 1996. 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. While the backlog of orders at June 30, 1996 ($10.8
million) was double that at December 31, 1995 orders since then have slowed
during the vacation months. At the present time management believes this could
be a seasonal occurrence and not a trend. An initial order for Motorola's
CableComm wsa received during the quarter and is reflected in the backlog.
Most of the backlog is expected to be shipped during 1996.
Gross profit as a percentage of net sales for the three and six months ended
June 30 was 64% and 63% compared to 61% for the quarter and year to date 1995.
The increase in gross profit margin of 2% over last year is due primarily to
certain product component prices and the product mix of higher margin integrated
products and software integrated products partially offset by some lower margin
transmission sales.
Selling and marketing expenses increased for the three and six months ended
June 30, 1996 by $.5 million and $.6 million respectively, while increasing to
16% and 15% of sales for the three and six months ended June 30, 1996 compared
to 14% and 15% in the comparable period 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 product.
During the second quarter of 1996 the Company established a Technical Assistance
Center, a new customer service and support area. The Company will continue to
expand its sales and marketing functions to support the Company's plans for
growth of its echo canceller and teleconference products.
Product development and engineering expenses increased 19% and 17% in the
three and six months ended June 30, 1996 compared to the same periods in 1995.
As a percentage of sales, expenses were 13% for the three month period and 12%
for the six months ended June 30, 1996 compared to 13% 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
associated with the Consortium teleconference bridge. The Company will continue
to make comparable investments in product development to remain competitive in
the telecommunications market.
General and administrative expenses increased slightly as a percentage of
sales for the three and six months ended June 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 the
first half of 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 aggressive
collection efforts. Inventories increased to support the higher levels of sales.
Capital expenditures for the six months ended June 30, 1996 were $1.0
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.
8
<PAGE> 9
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
The Company currently anticipates that cash generated from operations,
existing cash balances and amounts expected to be available on a unused,
uncommitted bank line of credit will be sufficient to satisfy its operating cash
needs through 1996. During the quarter ended June 30, 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 the business progress more rapidly than expected, the Company would
consider using this line of credit or seek additional public or private debt or
equity financing to fund future growth opportunities.
9
<PAGE> 10
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. An annual meeting of shareholders was held on May 16, 1996 at the
corporate offices in Landsdowne, Virginia.
b. The meeting involved the election of six directors to hold office until
the next Annual Meeting of Stockholders and until their successors are
elected and qualified, or until their status as directors is terminated
as provided in the Company's bylaws. Those elected are:
1. Mr. Charles A. Root
2. Mr. Daniel L. McGinnis
3. Mr. Lawrence J. Gallick
4. Mr. Delbert W. Johnson
5. Mr. Warren V. Musser
6. Mr. Charles M. Skibo
c. The matters voted upon and the results of the voting were as follows:
1) An amendment of the Certificate of Incorporation to increase the
number of authorized shares of common stock from 30,000,000 to
100,000,000 was approved by the stockholders in the Annual Meeting on May
16,1996. A Certificate of Amendment was filed with the State of Delaware
on August 9, 1996. The number of shares voting in favor of the increase
were 10,793,666 shares, while 2,632,643 shares were voted against the
proposal, and 26,441 shares abstained.
10
<PAGE> 11
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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.
11
<PAGE> 12
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: August 14, 1996
12
<PAGE> 13
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
11 COMPUTATION OF NET INCOME PER SHARE
27 FINANCIAL DATA SCHEDULE
<PAGE> 1
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
EXHIBIT 11 - COMPUTATION OF NET INCOME PER SHARE
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 2,280 $ 1,816 $ 4,398 $ 3,461
======= ======= ======= =======
Average common shares outstanding 14,928 14,584 14,887 14,429
Average common share equivalents:
Options 550 965 579 965
------- ------- ------- -------
Average number of common and
common share equivalents outstanding 15,478 15,549 15,466 15,394
======= ======= ======= =======
Net income per common share $ 0.15 $ 0.12 $ 0.28 $ 0.22
======= ======= ======= =======
</TABLE>
Average common shares outstanding for the quarter and six months ended
June 30,1995 have been restated to reflect the effect of the stock split
June 9,1995.
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.
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT JUNE 30, 1996
(UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,785
<SECURITIES> 1,000
<RECEIVABLES> 11,803
<ALLOWANCES> 562
<INVENTORY> 4,123
<CURRENT-ASSETS> 25,499
<PP&E> 5,411
<DEPRECIATION> 1,980
<TOTAL-ASSETS> 31,576
<CURRENT-LIABILITIES> 6,203
<BONDS> 0
0
0
<COMMON> 149
<OTHER-SE> 25,047
<TOTAL-LIABILITY-AND-EQUITY> 31,576
<SALES> 24,274
<TOTAL-REVENUES> 24,274
<CGS> 8,891
<TOTAL-COSTS> 8,891
<OTHER-EXPENSES> 8,719
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> 6,889
<INCOME-TAX> 2,491
<INCOME-CONTINUING> 4,398
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,398
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
