<PAGE> 1
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1997
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the transition period from __________________to________________.
Commission file no. 0-24303
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 11-2162982
(State of Incorporation or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation of Organization)
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 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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 8, 1997:
Class Number of Shares Outstanding
Common Stock, Par Value $.01 Per Share 15,272,522 Shares
<PAGE> 2
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
PAGE
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 30, 1997 (Unaudited) and December 31, 1996...................... 3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three and Six Months Ended June 30, 1997 and 1996...................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)...................... 5
Six Months Ended June 30, 1997 and 1996
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
2
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COHERENT COMMUNICATIONS SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
------- -------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $10,659 $ 9,251
Short term investments 7,699 7,518
Accounts receivable - trade, less allowances
($708-1997 and $684 -1996) 15,041 10,065
Inventories 3,256 3,301
Other current assets 1,204 1,109
------- -------
Total current assets 37,859 31,244
Property, plant and equipment
Building and leasehold improvements 411 314
Machinery and equipment 6,253 5,115
Furniture and fixtures 1,068 970
------- -------
7,732 6,399
Less accumulated depreciation 3,390 2,577
------- -------
4,342 3,822
Other long term assets 2,361 2,492
------- -------
Total Assets $44,562 $37,558
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,217 $ 733
Accrued expenses 2,755 2,675
Income taxes payable 2,181 2,184
------- -------
Total current liabilities 6,153 5,592
Non-current liabilities:
Deferred taxes 167 167
------- -------
Total liabilities 6,320 5,759
------- -------
Stockholders' equity:
Common stock, par value $.01 a share; authorized - 100,000,000
shares; issued and outstanding,15,243,000 shares - 1997
and 15,128,000 shares - 1996 152 151
Additional paid-in capital 11,064 10,657
Retained earnings (from December 31, 1993) 27,026 20,991
------- -------
Total stockholders' equity 38,242 31,799
------- -------
Total Liabilities and Stockholders' Equity $44,562 $37,558
======= =======
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE> 4
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 17,768 $ 13,165 $ 33,775 $ 24,274
Cost of sales 6,559 4,804 12,058 8,891
-------- -------- -------- --------
Gross profit 11,209 8,361 21,717 15,383
-------- -------- -------- --------
Expenses:
Selling 2,949 2,105 5,988 3,760
Product development and engineering 2,328 1,696 4,234 2,904
General and administrative 1,311 1,106 2,528 2,055
Interest income, net (270) (106) (463) (225)
-------- -------- -------- --------
Total expenses 6,318 4,801 12,287 8,494
-------- -------- -------- --------
Pre-tax income 4,891 3,560 9,430 6,889
Income tax expense 1,761 1,280 3,395 2,491
-------- -------- -------- --------
Net income $ 3,130 $ 2,280 $ 6,035 $ 4,398
======== ======== ======== ========
Net income per common share $ 0.20 $ 0.15 $ 0.39 $ 0.28
======== ======== ======== ========
Average common shares outstanding 15,520 15,478 15,515 15,466
======== ======== ======== ========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
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COHERENT COMMUNICATIONS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,035 $ 4,398
Adjustments to reconcile net income
to cash from operating activities:
Depreciation and amortization 935 567
Changes provided by (used in) operating activities:
Receivables (4,976) (3,173)
Inventories 45 (1,354)
Other current assets and other assets (86) 317
Accounts payable 484 (176)
Accrued expenses 80 (158)
Income taxes payable (3) (205)
-------- --------
Cash provided by operating activities 2,514 216
-------- --------
Investing activities:
Decrease in notes receivable from related parties, net -- 6,125
Purchase of short term investments (181)
Expenditures for property, plant and equipment (1,333) (1,009)
-------- --------
Cash provided by (used in) investing activities (1,514) 5,116
-------- --------
Financing activities:
Exercise of stock options 408 350
Decrease in notes payable -- (1,249)
-------- --------
Cash provided by (used in) financing activities 408 (899)
-------- --------
Increase in cash and cash equivalents 1,408 4,433
Cash and cash equivalents- beginning of period 9,251 3,352
-------- --------
Cash and cash equivalents - end of period $ 10,659 $ 7,785
======== ========
Supplemental disclosure of cash flow information
Cash paid for:
Interest $ -- $ 48
Income taxes $ 3,026 $ 2,726
</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 June 30, 1997, the consolidated
statements of income for the three and six months ended June 30, 1997 and
1996, and the consolidated statements of cash flows for the six months
ended June 30, 1997 and 1996 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, 1996.
(B) INVENTORIES
Inventories are stated at the lower of cost, on a FIFO basis, or
market and consist of the following:
<TABLE>
<CAPTION>
($000's) JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Raw materials $2,235 $2,263
Work-in-progress 487 786
Finished goods 534 252
------ ------
$3,256 $3,301
====== ======
</TABLE>
(C) OTHER ASSETS
In June 1996, the Company exercised its Warrants to purchase 1,380,304
(as adjusted for stock split) preferred shares of Seattle Silicon, using a
$1,000,000 note due from Seattle Silicon to fund the purchase. The Company
re-negotiated the remaining $400,000 note from Seattle Silicon (dated July 14,
1994) to defer payment until December 31, 1997. The interest accrued 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 RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net sales for the quarter ended June 30, 1997 increased 35% compared to
the same period in 1996. Net income increased by 37%, primarily the result of
higher sales which have been partially offset with increased operating expenses.
While operating expenses increased overall, they remained relatively flat as a
percentage of revenue.
The following table sets forth, for the periods indicated, selected statements
of income data as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales
Transmission products 94% 85% 93% 85%
Teleconferencing products 6 15 7 15
---- ---- ---- ----
Total net sales 100 100 100 100
Cost of sales 37 36 36 37
---- ---- ---- ----
Gross Profit 63 64 64 63
Operating expenses
Selling 17 16 18 15
Product development and engineering 13 13 13 12
General and administrative 7 9 7 9
Interest income, net (1) (1) (1) (1)
---- ---- ---- ----
Total expenses 36 37 36 35
---- ---- ---- ----
Pre-tax income 28% 27% 28% 28%
==== ==== ==== ====
</TABLE>
Sales of transmission products increased by 49% over the prior year for
the quarter and 52% for the six month period. The majority of the
transmission product increases came from the integrated and EC-6000 product
lines, which together, increased 53% over the prior year for the quarter and
67% for the six month period. Sales growth was particularly strong in the
Europe, Pacific Rim and North America. The revenue increases were
attributable to large shipments to several large customers in Europe and
North America.
Teleconferencing sales decreased from the second quarter of 1996 by 44%
and 36% for the six month period. Sales declined 39% and 43% for the quarter
and six month period for the Conference Master, and there was a 90% and 68%
decline in Callport sales for the quarter and six month period,
respectively. These were partially offset by a 33% and 36% increase in
Voicecrafter sales for the same periods. Sales declines for these product
lines were primarily due to increased competition in this marketplace.
7
<PAGE> 8
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
Backlog as of June 30, 1997 was $10.0 million compared to December 31,
1996 of $5.7 million. Backlog may fluctuate since transmission 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.
Gross profit as a percentage of net sales was 63% and 64% for the quarter
and the six month period ended June 30, 1997, respectively, as compared to
64% for the quarter and 63% for the comparable six month period in 1996.
Despite price competition and the introduction of the product in new
territories the increase of integrated and software products has enabled the
Company to maintain its margins.
Selling and marketing expenses increased for the three and six months
ended June 30, 1997 by $844 and $2,228, respectively, at 17% of net sales
for the quarter and 18% for the six months ended June 30, 1997 compared to
16% and 15% of net sales in the comparable periods in 1996. The increase in
selling and marketing expenses was a result of the acceleration in hiring in
China, Singapore and Japan. There was also additional hiring related to the
Technical Assistance Center and the addition of product managers as compared
to last year.
Product development expenses increased for the three and six months ended
June 30, 1997 by $632 and $1,330, while increasing as a percentage of net
sales to 13% for the quarter and six month period as compared to 12% for the
quarter ended and six month period in 1996. Most of this increase was due to
the continued investment in the Consortium(TM) product, new product
development and the hiring of consultants. Recruitment activities have
increased significantly as the Company has added experienced personnel to
the department.
General and administrative expense increased for the three and six months
ended June 30, 1997 by $205 and $473, respectively, at 7% of net sales for
the three and six months ended June 30, 1997 compared to 9% in the
comparable periods in 1996. There has been an increase in general and
administrative personnel to support the overall Company growth, including
Investor Relations, Director of Mergers and Acquisitions and additional MIS
personnel.
In light of the anticipated development of new wireless service markets,
the Company will increase its operating expenses to position the Company for
future growth, especially in the United States, Latin America and Asia. The
Company intends to increase expenses in personnel and related operating
expenses only to the extent that it is able to maintain the current return
on sales. The Company's forward looking statements of expected growth
revenue are subject to various risks, such as an unanticipated general
decline in infrastructure investment in developing countries or worldwide
reductions in telecommunications expenditures.
LIQUIDITY AND CAPITAL RESOURCES
The Company has cash and short term investments totaling $18.4 million.
Short term investments are generally limited to obligations of the U.S.
Government and its agencies with a maturity of less than one year. The
Company continues to generate sufficient cash from operations to fund its
working capital needs and capital expenditures. The Company generated $1.4
million for six months ended June 30, 1997 as compared to generating cash of
$4.4 million for the six months during the same period in 1996. The increase
in net income and slightly lower levels of inventory were offset by
increased accounts receivable levels and capital expenditures. Days
outstanding in accounts receivable increased from approximately 40 days at
December 31, 1996 to 58 days for the quarter ended June 30, 1997 due to
various administrative processing delays in collections from several major
customers. As of July 31, 1997 days outstanding decreased to 52 days.
Inventory turns improved to approximately 8.
Capital expenditures for the quarter ended June 30, 1997 were $0.5
million. Year to date expenses have been $1.3 million. Management
anticipates that capital expenditures for 1997 will approximate three to
five million dollars, predominantly for the investment in product
development, management information systems and improvements related to the
new facility, as described below.
8
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COHERENT COMMUNICATIONS SYSTEMS CORPORATION
The Company has agreed to lease a new facility for its worldwide
headquarters in Leesburg, Virginia. 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. The Company has terminated the lease of
the existing Virginia headquarters in accordance with the lease provision
and is not subject to significant cancellation costs.
The Company currently anticipates that cash generated from operations,
existing cash balances and amounts available under an unused, uncommitted
$10,000,000 bank line of credit will be sufficient to satisfy its operating
cash needs through 1997. Should the business progress more rapidly than
expected, the Company believes that additional bank credit would be
available to fund operating and capital requirements. In addition, the
Company could consider additional public or private debt or equity
financing to fund future growth opportunities.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This statement establishes standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. This Statement is effective for
financial statements issued for periods ending after December 15, 1997,
earlier application is not permitted. This Statement requires restatement
of all prior-period EPS data presented. The Company is currently evaluating
the impact, if any, adoption of SFAS No. 128 will have on its financial
statements.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure." The Company is required to adopt the
provisions of this statement for the year ending December 31,1998. This
statement continues the previous requirements to disclose certain
information about an entity's capital structure found in APB Opinions No.
10, "Omnibus Opinion-1996," No. 15, "Earnings per Share." And FASB
Statement No. 47, "Disclosure of Long Term Obligations," for entities that
were subject to the requirements of those standards. As the Company has
been subject to the requirements of each of those standards, adoption of
SFAS No. 129 will have no impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display
of comprehensive income and its components in the financial statements. The
Company is required to adopt the provisions of the statement for the year
ending December 31,1998. Earlier application is permitted; however, upon
adoption the Company will be required to reclassify previously reported
annual and interim financial statements. The Company is currently
evaluating the impact, if any, adoption of SFAS No. 130 will have on its
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires the Company
to present certain information about operating segments and related
information, including geographic and major customer data, in its annual
financial statements and in condensed financial statements for the interim
periods. The Company is required to adopt the provisions of the statement
for the year ending December 31, 1998. Earlier application is permitted;
however, upon adoption the Company will be required to restate previously
reported annual segment and related information in accordance with the
provisions of SFAS No. 131. The Company is currently evaluating the impact,
if any, adoption of SFAS No. 131 will have on its financial statements.
9
<PAGE> 10
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1- Contract Amendment to Value Added Reseller Agreement
No. H7810/92 dated April 3,1997 between Nokia Telecommunications Oy
and the Company*
Exhibit 11 - Computation of net income per share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
No other applicable items.
* Confidential portions of the exhibit have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
10
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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/Joan E. Cominski
---------------------------------------
Joan E. Cominski
Principal Financial Officer
Date: August 12, 1997
11
<PAGE> 12
EXHIBIT INDEX
Exhibit 10.1- Contract Amendment to Value Added Reseller Agreement
No. H7810/92 dated April 3,1997 between Nokia Telecommunications Oy
and the Company*
Exhibit 11 - Computation of net income per share
Exhibit 27 - Financial Data Schedule
No other applicable items.
* Confidential portions of the exhibit have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
<PAGE> 1
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
NET INCOME PER COMMON SHARE- EXHIBIT 11
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income available for
common stockholders $ 3,130 $ 2,280 $ 6,035 $ 4,398
======= ======= ======= =======
Average common shares outstanding 15,188 14,928 15,165 14,887
Average common share equivalents:
Options 332 550 350 579
------- ------- ------- -------
Average number of common and
common share equivalents outstanding 15,520 15,478 15,515 15,466
======= ======= ======= =======
Net income per common share 0.20 0.15 0.39 0.28
------- ------- ------- -------
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT JUNE 30, 1997
(UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 10,659
<SECURITIES> 7,699
<RECEIVABLES> 15,749
<ALLOWANCES> 708
<INVENTORY> 3,256
<CURRENT-ASSETS> 37,859
<PP&E> 7,732
<DEPRECIATION> 3,390
<TOTAL-ASSETS> 44,562
<CURRENT-LIABILITIES> 6,153
<BONDS> 0
152
0
<COMMON> 0
<OTHER-SE> 38,090
<TOTAL-LIABILITY-AND-EQUITY> 44,562
<SALES> 33,775
<TOTAL-REVENUES> 33,775
<CGS> 12,058
<TOTAL-COSTS> 12,058
<OTHER-EXPENSES> 12,287
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,430
<INCOME-TAX> 3,395
<INCOME-CONTINUING> 6,035
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,035
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
