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, 1994
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 1-7960
TIE/COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0872068
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8500 W. 110th Street, Overland Park, Kansas 66210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (913) 344-0400
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 by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Date Class Shares Outstanding
March 31, 1994 Common Stock, par 3,981,338
value $.10 per share
TIE/communications, Inc. and Subsidiaries
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1994 and
December 31, 1993 3 - 4
Consolidated Statements of Operations -
Three Months Ended March 31, 1994 and 1993 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1994 and 1993 6 - 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9 - 11
PART II. OTHER INFORMATION 11
Part I. FINANCIAL INFORMATION
The condensed financial statements included herein have been provided by
Registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, however, Registrant believes that the
disclosures are adequate to make the information presented not misleading.
These condensed financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
The condensed interim financial statements included herein, which are unaudited,
include, in the opinion of management, all adjustments (consisting primarily of
normal recurring accruals) necessary to present fairly the consolidated
financial position and consolidated results of operations of the Registrant and
its subsidiaries (hereinafter sometimes collectively referred to as the
"Company") for the periods presented. The December 31, 1993 financial
statements are derived from the audited financial statements presented in the
Registrant's Annual Report on Form 10-K.
ITEM 1. FINANCIAL STATEMENTS
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1994 1993
----------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 4,494,000 $ 8,133,000
Notes and accounts receivable, net
of allowance for doubtful accounts:
March 31, 1994 - $1,553,000
December 31, 1993 - $1,528,000 13,402,000 12,941,000
Inventories 15,665,000 14,223,000
Restricted cash equivalents 290,000 290,000
Current portion of long-term notes
receivable 275,000 276,000
Current deferred tax assets, net 232,000 232,000
Prepaid expenses 1,218,000 1,053,000
Miscellaneous 2,198,000 2,154,000
----------- ------------
Total current assets 37,774,000 39,302,000
Property, net 1,921,000 1,874,000
Intangible assets, net 19,241,000 19,655,000
Long-term deferred tax assets, net 1,465,000 1,805,000
Long-term notes receivable 410,000 473,000
Other assets 157,000 157,000
----------- ------------
Total assets $60,968,000 $63,266,000
----------- ------------
----------- ------------
See accompanying Notes to Consolidated Financial Statements.
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1994 1993
----------- -------------
(Unaudited)
Current liabilities:
Notes payable and current
maturities of long-term debt $ 1,000,000 $ 1,424,000
Accounts payable 5,215,000 7,796,000
Accrued expenses 11,618,000 10,626,000
Restructuring reserves 637,000 777,000
Deferred service revenue 10,227,000 10,207,000
Income taxes payable 2,368,000 2,353,000
----------- -----------
Total current liabilities 31,065,000 33,183,000
Other non-current liabilities 575,000 739,000
Long-term tax liability 4,370,000 4,370,000
Minority interest 1,675,000 1,735,000
----------- -----------
Total liabilities 37,685,000 40,027,000
----------- -----------
Stockholders' equity:
Common stock, par value $0.10 399,000 399,000
Authorized - 10,000,000 shares
Issued - 3,988,392 shares
Outstanding - 3,981,338 shares
Additional paid-in capital 19,217,000 19,217,000
Retained earnings 3,021,000 2,725,000
Common stock in treasury, at cost (60,000) (60,000)
----------- -----------
22,577,000 22,281,000
Cumulative currency translation adjustment 706,000 958,000
----------- -----------
Total stockholders' equity 23,283,000 23,239,000
----------- -----------
Total liabilities and stockholders' equity $60,968,000 $63,266,000
----------- -----------
----------- -----------
See accompanying Notes to Consolidated Financial Statements.
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
-------------------------------
1994 1993
------------- ----------------
Net revenue:
Equipment sales $ 22,843,000 $ 17,641,000
Services provided 7,412,000 6,108,000
------------- -------------
30,255,000 23,749,000
------------- -------------
Cost of sales:
Equipment sales 12,234,000 9,615,000
Services provided 3,282,000 1,990,000
------------- -------------
15,516,000 11,605,000
------------- -------------
Gross margin:
Equipment sales 10,609,000 8,026,000
Services provided 4,130,000 4,118,000
------------- -------------
14,739,000 12,144,000
------------- -------------
48.7% 51.1%
Operating expenses 14,418,000 12,073,000
------------- -------------
Operating income from
consolidated operations 321,000 71,000
Interest income 67,000 239,000
Interest expense (61,000) (192,000)
Other income, net 364,000 301,000
------------- -------------
Pretax income 691,000 419,000
Provision for income taxes 361,000 154,000
------------- -------------
Income before minority interest 330,000 265,000
Minority interest 35,000 26,000
------------- -------------
Net income $ 295,000 $ 239,000
------------- -------------
------------- -------------
Primary and fully diluted income
per share $ 0.07 $ 0.06
------------- -------------
------------- -------------
Average shares outstanding 3,981,338 3,981,338
See accompanying Notes to Consolidated Financial Statements.
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1994 1993
---- ----
Cash flows from operating activities:
Net income $ 295,000 $ 239,000
Adjustments to reconcile net income
to cash flows from operating activities:
Depreciation and amortization 684,000 504,000
Deferred income (19,000) (14,000)
Minority interest 79,000 26,000
Deferred income taxes 340,000 190,000
Changes in working capital, net of
acquisitions and divestitures:
Accounts receivable (598,000) (228,000)
Inventories (1,617,000) (552,000)
Restricted cash equivalents -- 897,000
Other receivables 157,000 2,000
Prepaid expenses and miscellaneous
current assets (205,000) 120,000
Accounts payable (2,527,000) (2,129,000)
Accrued expenses 994,000 13,000
Restructuring reserves (137,000) (426,000)
Deferred service revenue 102,000 140,000
Taxes payable 22,000 28,000
---------- ----------
Cash flows used for operating activities (2,430,000) (1,190,000)
Cash flows from investment activities:
Capital expenditures, net of disposals (264,000) (105,000)
Assets of businesses acquired (1) (181,000) (280,000)
Other -- 6,000
---------- ----------
Cash flows used for investment activities (445,000) (379,000)
(Continued)
See accompanying Notes to Consolidated Financial Statements.
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Three Months Ended March 31,
----------------------------
1994 1993
---------- -------------
Cash flows from financing activities:
Long-term and short-term debt repayments $ (424,000) $ (404,000)
Other (146,000) (104,000)
---------- ----------
Cash flows used for financing activities (570,000) (508,000)
Impact of changes in foreign currency
translation (194,000) 20,000
---------- ----------
Decrease in cash and cash equivalents (3,639,000) (2,057,000)
Cash and cash equivalents at the
beginning of period 8,133,000 14,052,000
---------- ----------
Cash and cash equivalents at the
end of period $ 4,494,000 $11,995,000
---------- ----------
---------- ----------
---------------------------------
Cash flow information:
Interest paid $ 31,000 $ 46,000
---------- ----------
---------- ----------
Income taxes paid (excluding
payment of long term tax liability) $ 43,000 $ 185,000
---------- ----------
---------- ----------
(1) Acquisitions:
Inventory $ -- $ (39,000)
Intangible assets (181,000) (249,000)
Other assets -- (3,000)
Accrued expenses -- 11,000
---------- ----------
$ (181,000) $ (280,000)
---------- ----------
---------- ----------
(2) Non-cash activity:
Reduction of intangible assets
to establish deferred tax asset $ -- $ 2,660,000
---------- ----------
---------- ----------
See accompanying Notes to Consolidated Financial Statements.
TIE/communications, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned domestic and foreign subsidiaries. All intercompany
accounts and transactions are eliminated. Certain amounts previously
reported have been reclassified to conform with revised classifications
adopted in the first quarter of 1994.
2. Inventories
March 31, December 31,
1994 1993
----------- -------------
Raw materials $ 1,284,000 $ 1,374,000
Work-in-process 1,839,000 1,538,000
Finished goods 12,542,000 11,311,000
----------- ------------
$15,665,000 $ 14,223,000
----------- ------------
----------- ------------
3. Property
The following is a schedule of property, plant and equipment:
March 31, December 31,
1994 1993
----------- -------------
Land $ 10,000 $ 10,000
Buildings 224,000 224,000
Equipment and tooling 15,760,000 15,591,000
Leasehold improvements 683,000 668,000
Furniture and fixtures 3,690,000 3,692,000
----------- ------------
20,367,000 20,185,000
Less accumulated depreciation
and amortization 18,446,000 18,311,000
----------- ------------
$ 1,921,000 $ 1,874,000
----------- ------------
----------- ------------
4. Income Taxes
Effective January 1, 1993, the Company prospectively adopted SFAS No. 109
which requires the recognition of deferred tax benefits to the extent it is
more likely than not that such benefits will be realized. In accordance
with this new statement, the Company recognized a net deferred tax asset of
approximately $2.7 million as of January 1, 1993, with a corresponding
reduction of intangible assets.
At December 31, 1993, the Company had a gross deferred tax asset of $37.1
million, primarily related to net operating loss carryforwards not
recognized on the tax return, and a valuation reserve of $35.1 million
against that asset. At March 31, 1994, the net deferred tax asset was
reduced from approximately $2.0 million at January 1, 1994 to $1.7 million
due to the recognition of the utilization of predecessor company net
operating losses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Quarter Ended March 31, 1994 versus March 31, 1993
For the quarter ended March 31, 1994, the Company generated net income of $295
thousand or $0.07 per share as compared to net income of approximately $239
thousand or $0.06 per share for the first quarter of 1993. The $56 thousand
increase in net income from 1993 is due to increased sales volume offset
unfavorably by a decline in gross margin percentage and a less favorable
exchange rate in the earnings of the Company's Canadian subsidiary.
Total net revenue for the first quarter of 1994 increased $6.5 million or 27.4%
as compared to the comparable 1993 period. The increase occurred primarily in
new equipment sales with a $5.2 million or 29.5% increase over the first quarter
1993. Net revenue from new equipment sales accounted for approximately 75.5%
and 74.3% of the total revenue for the first quarter of 1994 and 1993,
respectively. The service revenue increased $1.3 million or 21.3% over the 1993
first quarter with an increase of $1.4 million generated in U.S. operations.
The Company's Canadian subsidiary also experienced an increase in service
revenue, however, this was adversely affected by a less favorable exchange rate
between the Canadian and U.S. dollar resulting in a decrease of $0.1 million
from 1993. Net revenues from services provided accounted for approximately
24.5% of total revenue in the first quarter of 1994 as compared to 25.7% of
total revenue in the first quarter of 1993. Revenue from service transactions
is expected to continue to comprise a significant portion of the Company's
overall net revenue in future periods.
The gross margin percentage for the quarter ended March 31, 1994 was 48.7% as
compared to 51.1% for the same period of 1993. The decline in the gross margin
percentage is due to the change in sales mix with a higher proportion of revenue
being generated from new equipment sales and sales of proprietary products,
which carry a lower margin versus service transactions. Lower margins on new
equipment sales are acceptable as new equipment sales present future service
business. Additionally, the gross margin on service revenue has declined from
67.4% in the first quarter of 1993 to 55.7% in the first quarter of 1994
primarily due to increased competition in the industry. The Company expects
that these factors will continue to affect the gross margin percentages in the
future but not cause a significant deterioration.
Another factor that may affect the Company's gross margin percentage in the more
distant future relates to the Company's agreement with NTK America. Under that
agreement, the Company is provided with the most favorable purchase prices on
NTK America products for the duration of the agreement. Once the agreement
expires (July 1996) or the Company is no longer purchasing the related product
lines (whichever occurs earlier), it is anticipated that the cost to the Company
to purchase these products will increase thereby lowering the gross margin. The
Company cannot estimate the impact of the foregoing on future gross margin at
this time.
Operating expenses increased $2.3 million (19.4%) in the first quarter of 1994
versus 1993, however, declined approximately 4% as a percent of sales from the
comparable period of 1993. The increase in operating expenses consists of
additional expenses resulting from customer base acquisitions occurring in the
latter part of 1993, as discussed below, and an increase in selling expenses
consistent with the 27.4% increase in net revenue. Operating expenses for the
first quarter of 1994 also include increased expenses incurred to support the
new products and services being offered by the Company, predominantly in the new
strategic business units of network services, videoconferencing products and
services, as well as a new direct equipment sales program. The Company is
continuing to monitor operating expenses and will seek to continue to control
costs in future periods. It is not expected that operating expenses will
increase significantly in the future without a corresponding significant
increase in revenue.
Other income, net of $364 thousand for the first quarter of 1994 increased $63
thousand as compared to the same period of 1993. Other income, net is
substantially comprised of royalty income of $413 thousand and $297 thousand for
the three months ended March 31, 1994 and 1993, respectively, primarily from NTK
America for its sale of equipment designed by the Company. The NTK royalty
agreement is in effect through July, 1996. All other items included in Other
income, net decreased $53 thousand in the aggregate in the first quarter of 1994
compared to 1993.
In 1993, and continuing into the first quarter of 1994, TIE focused its efforts
on maintaining its existing customer base and implementation of training and
marketing programs related to its new strategic businesses. The purchase of
certain assets of PacTel Meridian Systems (PTMS) was consummated during the
month of September 1993. Initially the California region results were below
expectations due to the logistics and non-recurring expenses related to the
transition of that base into the domestic direct sales and service business.
However, currently the acquisition is expected to have a positive impact on the
Company's 1994 results.
Inflation
Inflation has had a relatively minor impact on the Company as the rate of
inflation has declined in recent reporting periods. If operating expenses
increase, then the Company, to the extent permitted by competition, may attempt
to recover these increased costs by increasing sales prices to customers.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 1994 totalled $4.5 million, a decrease of
$3.6 million from December 31, 1993. For the first quarter of 1994, the Company
used approximately $2.4 million of cash for operating activities, including
inventory purchases, reduction of accounts payable and a $0.4 million legal
settlement. Additionally, the Company used approximately $0.3 million for net
capital expenditures, $0.2 million to expand its service network and $0.4
million for debt repayments.
Upon confirmation of the Company's Plan of Reorganization, HCR Partners made
available to the Company a $10.0 million revolving line of credit through
December 31, 1993. The Company agreed that in connection with the liquidation
of HCR Partners, the revolving line of credit agreement could be assigned to and
assumed by Marmon Holdings, Inc. No funds were borrowed under this line of
credit. Substantially all of the Company's assets are secured under this
agreement and the indebtedness under this line of credit has been guaranteed by
certain of the Company's subsidiaries. Effective December 31, 1993, the term of
the Credit Agreement was extended for an additional three year period ending
December 31, 1996 upon substantially the same terms and conditions, except that
the maximum credit available was reduced to $7,000,000.
The Company believes sufficient cash resources exist to support its short-term
needs through currently available cash, cash expected to be generated from
future operations, or from the line of credit previously mentioned. The Company
can borrow against this line of credit if needed, assuming no breach of any of
the covenants (which include restrictions on asset purchases and require
specified levels of working capital and net worth to be maintained) and that the
aggregate principal amount outstanding at any time under the credit agreement
does not exceed the "Borrowing Base" (which is based on inventory and
receivables) set forth in the credit agreement. The Company was in compliance
with or had received a waiver of the covenants as of March 31, 1994 and
therefore was qualified to borrow the entire $7,000,000 available under the
line. The Company anticipates the need to draw down this line on a short-term
basis during the second quarter.
Although the Company's operating results have improved significantly since the
reorganization, the industry in which the Company is engaged is characterized by
intense competition and this factor, coupled with the effect of an uncertain
economic recovery, makes the future results of the Company extremely difficult
to predict.
The Company does not anticipate a need for long-term financing at this time. If
the need for long-term financing should arise, management believes it could be
available if the Company continues a trend of profitability. The Company is not
certain of the cost, terms and conditions upon which such financing might be
available.
At March 31, 1994 the Company did not have any material commitments for capital
expenditures.
Recent Accounting Pronouncements
The Company does not provide post-retirement or post-employment benefits and,
therefore, there is no impact on the Company under SFAS 106, "Employers
Accounting for Post-Retirement Benefits Other Than Pensions" and SFAS 112
"Employers Accounting for Post-Employment Benefits".
Part II. OTHER INFORMATION
Not Applicable.
SIGNATURES
Pursuant to the requirement 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.
TIE/communications, Inc.
Dated: May 13, 1994 By: /s/ George N. Benjamin, III
George N. Benjamin, III
President and Chief Executive Officer
Dated: May 13, 1994 By: /s/ Jane E. Closterman
Jane E. Closterman
Corporate Controller
