<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 March 31, 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 Number 0-24303
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2162982
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
45085 UNIVERSITY DRIVE
ASHBURN, VIRGINIA 20147-2745
(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 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. [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 12, 1998:
Class Number of Shares Outstanding
Common Stock, Par Value $.01 Per Share 15,549,675 Shares
<PAGE> 2
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
PAGE
----
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
March 31, 1998 (Unaudited) and December 31, 1997.......................... 3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, 1998 and 1997................................ 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)......................... 5
Three Months Ended March 31, 1998 and 1997
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
<PAGE> 3
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $20,544 $18,331
Short term investments 8,068 7,849
Accounts receivable - trade, less allowances
($765-1998 and $547 -1997) 17,049 15,826
Inventories 3,479 2,846
Other current assets 1,791 1,315
------- -------
Total current assets 50,931 46,167
Property, plant and equipment
Building and leasehold improvements 328 328
Machinery and equipment 10,936 9,406
Furniture and fixtures 1,695 1,582
------- -------
12,959 11,316
Less accumulated depreciation 5,099 4,392
------- -------
7,860 6,924
Other long term assets 2,076 2,376
------- -------
Total Assets $60,867 $55,467
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,545 $ 1,002
Accrued expenses 3,338 4,494
Income taxes payable 4,183 2,315
------- -------
Total current liabilities 9,066 7,811
Non-current liabilities:
Deferred taxes 242 242
------- -------
Total liabilities 9,308 8,053
------- -------
Stockholders' equity:
Common stock, par value $.01 a share; authorized - 30,000,000
shares; issued and outstanding,15,543,000 shares - 1998
and 15,132,000 shares - 1997 155 153
Additional paid-in capital 12,729 12,291
Retained earnings (from December 31, 1993) 38,675 34,970
------- -------
Total stockholders' equity 51,559 47,414
------- -------
Total Liabilities and Stockholders' Equity $60,867 $55,467
======= =======
</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)
Three Months Ended
March 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales $ 19,267 $ 16,007
Cost of sales 7,335 5,499
-------- --------
Gross profit 11,932 10,508
-------- --------
Operating Expenses:
Selling 3,075 3,039
Product development and engineering 2,453 1,907
General and administrative 1,210 1,216
-------- --------
Total operating expenses 6,738 6,162
-------- --------
Operating Income 5,194 4,346
Interest income, net (420) (193)
-------- --------
Income before income taxes 5,614 4,539
Income tax expense 1,909 1,634
-------- --------
Net income $ 3,705 $ 2,905
======== ========
Net income per common share
Basic $ 0.24 $ 0.19
Diluted $ 0.24 $ 0.19
Weighted average common and dilutive potential common shares
Basic 15,489 15,140
Diluted 15,758 15,510
</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)
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,705 $ 2,905
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 764 459
Changes in working capital items:
Receivables (1,223) (2,484)
Inventories (633) 134
Other current assets and other assets (233) (53)
Accounts payable 543 35
Accrued expenses (1,156) (32)
Income taxes payable 1,868 1,259
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 3,635 2,223
-------- --------
INVESTING ACTIVITIES:
Purchase of short term investments, net (219) (90)
Expenditures for property, plant and equipment (1,643) (882)
-------- --------
CASH USED IN INVESTING ACTIVITIES (1,862) (972)
-------- --------
FINANCING ACTIVITIES:
Exercise of stock options 440 90
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 440 90
-------- --------
Increase in cash and cash equivalents 2,213 1,341
CASH AND CASH EQUIVALENTS- BEGINNING OF PERIOD 18,331 9,251
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 20,544 $ 10,592
======== ========
Supplemental disclosure of cash flow information
Cash paid for:
Interest $ -- $ --
Income taxes $ 69 $ 144
</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 March 31, 1998, the consolidated
statements of income for the three months ended March 31, 1998 and 1997,
and the consolidated statements of cash flows for the three months ended
March 31, 1998 and 1997 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, 1997.
(B) INVENTORIES
Inventories are stated at the lower of standard cost, which
approximates actual cost (FIFO basis), or market, and consists of the
following:
<TABLE>
<CAPTION>
($000'S) MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Raw materials $3,242 $2,160
Work-in-progress 72 510
Finished goods 165 176
------ ------
$3,479 $2,846
====== ======
</TABLE>
6
<PAGE> 7
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PROPOSED MERGER
On February 16, 1998, the Company announced a merger agreement under
which the Company will become a subsidiary of Tellabs, Inc. All outstanding
shares of the Company stock will be exchanged at the ratio of .72 share of
Tellabs common stock for each share of Coherent common stock. Based on the
closing price of Tellabs common stock on May 13, 1998, the transaction is valued
at approximately $800 million. The transaction is expected to be accounted for
as a pooling of interests and to qualify as a tax-free reorganization. On May
12, 1998, the shareholders and the Board of Directors, by a majority vote,
approved the acquisition. The proposed merger is subject to review by the
Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of
1976. The Department of Justice has requested additional information and
Coherent and Tellabs are complying with that request. Currently that review is
underway. Prior to the closing of the merger, the Company has agreed to certain
restrictions including limitations on capital expenditures and dividends, among
others.
RESULTS OF OPERATIONS
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
MARCH 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
Net Sales 100% 100%
Cost of sales 38 34
---- ----
Gross Profit 62 66
Operating expenses
Selling and marketing 16 19
Product development and engineering 13 12
General and administrative 6 7
Interest income, net (2) (1)
---- ----
Total expenses 33 37
---- ----
Pre-tax income 29% 28%
==== ====
</TABLE>
Net sales for the quarter ended March 31, 1998 increased 20% compared to
the same period in 1997. Sales of transmission products increased by 22%
over the prior year. This increase was partially offset by a 23% decrease in
teleconferencing product's sales associated with the Company's decision to
move away from dealer-based distribution channels for its conferencing
products and pursue an OEM-based strategy. The Company's continuing growth
in sales and profits is driven by world-wide growth in telecommunications
infrastructure. With current sales in over 70 countries, the Company
benefits from this global trend. In the most recent quarter, Asian sales
were 5% of total sales, while Europe, North America and Latin America were
56%, 25% and 14% respectively. The European and Latin American regions
showed the strongest growth on a quarter to quarter comparison.
7
<PAGE> 8
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
Backlog as of March 31, 1998 was $6.0 million compared to December 31,
1997 of $4.7 million. Backlog may fluctuate since transmission products
represent capital purchases for the Company's customers and may be affected
by the scheduling of large orders by customers. The Company typically fills
orders for its products within 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 62% for the quarter ended
March 31, 1998, as compared to 66% for the quarter in 1997. Of the 4%
decline in gross profit, 3% is due to the reallocation of Global Technical
Services Center ("GTS") expenses from operating expenses to cost of sales.
This alignment more closely reflects the internal and external support of
the department. Despite price competition in both new and existing markets,
the increase in sales volumes and the reduction of product cost has enabled
the Company to maintain gross profit margins.
Selling and marketing expenses remained constant in terms of dollars,
but declined to 16% of net sales for the quarter ended March 31, 1998 as
compared to 19% for the three month period in 1997. Increases in selling and
marketing expenses associated with the continued growth in the Company were
offset by the reallocation of GTS expenses to cost of sales. Product
development expenses increased for the three months ended March 31, 1998 by
$546, while increasing as a percentage of net sales to 13% for the quarter
as compared to 12% for the same quarter ended in 1997. There has been
continued emphasis on product development and the increase in personnel to
support the development of new products. General and administrative expense
remained constant in nominal terms, however, decreasing to 6% of net sales
for the three months ended March 31, 1998 as compared to 7% for the same
period during 1997. An increase in the expenses associated with the growth
of the Company was offset by a decrease in administrative services fees and
savings in insurance premiums. Income taxes reflect an effective tax rate of
34% in 1998 as compared to 36% in 1997. The decrease in effective tax rate
was due in part to tax benefits recorded on export sales during 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has cash and short term investments totaling $28.6 million.
The Company continues to generate cash from operations to fund its working
capital needs and capital expenditures. The Company generated cash and short
term investments of $2.2 million for three months ended March 31, 1998 as
compared to an increase of $1.3 million for the three months during the same
period in 1997. The increase in net income is offset by increases in working
capital and capital expenditures related to the growth of the business.
Capital expenditures for the three months ended March 31, 1998 were $1.6
million. Management anticipates that the Company will continue to expend
capital in product development, management information systems and
improvements related to its growth. The Company currently anticipates that
cash generated from operations, existing cash balances and amounts available
under an unused, uncommitted $10 million bank line of credit will be
sufficient to satisfy its operating cash needs through 1998. 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.
8
<PAGE> 9
COHERENT COMMUNICATIONS SYSTEMS CORPORATION
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 128, Earnings Per Share
(Statement 128). Statement 128 supersedes Accounting Principles Board
Opinion No. 15, Earnings Per Share (APB 15), and specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock.
Statement 128 replaces the presentation of primary and fully diluted EPS
with a presentation of basic and diluted EPS, respectively. Statement 128
which is effective for financial statements for both interim and annual
periods ending after December 15, 1997 was adopted in the financial
statements of the Company for the year ended December 31, 1997. The
calculation of EPS under APB and Statement 128 for the three months ended
March 31, 1998 and 1997 was:
<TABLE>
<CAPTION>
APB 15 Statement 128
------ -------------
Primary Fully Diluted Basic Diluted
------- ------------- ----- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Three months ended March 31, 1998 $.24 $.24 $.24 $.24
Three months ended March 31, 1997 $.19 $.19 $.19 $.19
</TABLE>
Also during 1997, the FASB issued pronouncements relating to the
presentation and disclosure of information related to the Company's capital
structure, comprehensive income, segment data, and pension disclosures. The
Company has adopted the provisions relating to capital structure for the
year ending December 31, 1997 and for comprehensive income in the first
quarter 1998. None of these pronouncements has had a material effect on the
financial statements of the Company. Provisions of the other pronouncements,
if applicable, are required to be adopted for the year ending December 31,
1998. The adoption of these pronouncements will not have an impact on the
Company's financial position and results of operations, but may change the
presentation of certain of the Company's financial statements and related
notes and data thereto.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position No. 97-2, "Software Revenue Recognition ("SOP 97-2")
that supercedes Statement of Position No. 91-1. "Software Revenue
Recognition". SOP 97-2 is effective for transactions entered into in fiscal
years beginning after December 15, 1997. Adoption of this statement in 1998
did not have a significant impact effect on the Company's financial position
or results of operation.
Except for the historical information contained herein, this discussion
contains forward-looking statements regarding the marketability of new
products and the gaining of new customers. The risks and uncertainties
associated with the continued acceptance of products, the timely
availability and pricing of new products, competition, market growth and, as
well as other risks detailed in the Company's SEC reports could cause actual
results to differ from those in the forward looking statements.
9
<PAGE> 10
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
Exhibit 27 - Financial Data Schedule
(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/ Melba G. Chan
------------------------------------------
Melba G. Chan
Vice-President and Chief Financial Officer
Date: May 15, 1998
11
<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
MARCH 31,
------------------------
1998 1997
------- -------
<S> <C> <C>
Net income available for
common stockholders $ 3,705 $ 2,905
======= =======
Average common shares outstanding 15,489 15,033
Average common share equivalents:
Options 269 477
------- -------
Average number of common and
common share equivalents outstanding 15,758 15,510
======= =======
Net income per common share
Basic 0.24 0.19
Diluted 0.24 0.19
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT MARCH 31, 1998
(UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,544
<SECURITIES> 8,068
<RECEIVABLES> 17,814
<ALLOWANCES> 765
<INVENTORY> 3,479
<CURRENT-ASSETS> 50,931
<PP&E> 12,959
<DEPRECIATION> 5,099
<TOTAL-ASSETS> 60,867
<CURRENT-LIABILITIES> 9,066
<BONDS> 0
0
0
<COMMON> 155
<OTHER-SE> 51,404
<TOTAL-LIABILITY-AND-EQUITY> 60,867
<SALES> 19,267
<TOTAL-REVENUES> 19,267
<CGS> 7,335
<TOTAL-COSTS> 7,335
<OTHER-EXPENSES> 6,318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,614
<INCOME-TAX> 1,909
<INCOME-CONTINUING> 3,705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,705
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
