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, 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
- - ------------- -------------------- ------------------
June 30, 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 - June 30, 1994 and
December 31, 1993 3 - 4
Consolidated Statements of Operations -
Six Months Ended June 30, 1994 and 1993 5
Consolidated Statements of Operations -
Three Months Ended June 30, 1994 and 1993 6
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1994 and 1993 7 - 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10 - 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 13
-1-
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 balance sheet is
derived from the audited financial statements presented in the Registrant's
Annual Report on Form 10-K.
-2-
Item 1. Financial Statements
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1994 1993
----------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,489,000 $ 8,133,000
Notes and accounts receivable, net
of allowance for doubtful accounts:
June 30, 1994 - $1,692,000
December 31, 1993 - $1,528,000 13,713,000 12,941,000
Inventories 15,880,000 14,223,000
Restricted cash equivalents 290,000 290,000
Current portion of long-term notes receivable 261,000 276,000
Current deferred tax assets, net 232,000 232,000
Prepaid expenses 918,000 1,053,000
Miscellaneous 2,341,000 2,154,000
----------- -----------
Total current assets 35,124,000 39,302,000
Property, net 2,000,000 1,874,000
Intangible assets, net 20,116,000 19,655,000
Long-term deferred tax assets, net 1,000,000 1,805,000
Long-term notes receivable 354,000 473,000
Other assets 157,000 157,000
----------- -----------
Total assets $58,751,000 $63,266,000
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
-3-
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1994 1993
----------- ------------
(Unaudited)
Current liabilities:
Notes payable and current
maturities of long-term debt $ 1,000,000 $ 1,424,000
Accounts payable 4,331,000 7,796,000
Accrued expenses 12,525,000 10,626,000
Restructuring reserves 221,000 777,000
Deferred service revenue 9,617,000 10,207,000
Income taxes payable 2,109,000 2,353,000
----------- -----------
Total current liabilities 29,803,000 33,183,000
Other non-current liabilities 434,000 739,000
Long-term tax liability 4,338,000 4,370,000
Minority interest 157,000 1,735,000
----------- -----------
Total liabilities 34,732,000 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 3,487,000 2,725,000
Common stock in treasury, at cost (60,000) (60,000)
----------- -----------
23,043,000 22,281,000
Cumulative currency translation
adjustment 976,000 958,000
----------- -----------
Total stockholders' equity 24,019,000 23,239,000
----------- -----------
Total liabilities and
stockholders' equity $58,751,000 $63,266,000
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
-4-
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30,
-------------------------
1994 1993
----------- -----------
Net revenue:
Equipment sales $47,238,000 $35,304,000
Services provided 14,653,000 12,456,000
----------- -----------
61,891,000 47,760,000
----------- -----------
Cost of sales:
Equipment sales 25,724,000 18,771,000
Services provided 6,232,000 4,661,000
----------- -----------
31,956,000 23,432,000
----------- -----------
Gross margin:
Equipment sales 21,514,000 16,533,000
Services provided 8,421,000 7,795,000
----------- -----------
29,935,000 24,328,000
----------- -----------
48.4% 50.9%
Operating expenses 29,006,000 24,274,000
----------- -----------
Operating income from
consolidated operations 929,000 54,000
Interest income 152,000 444,000
Interest expense (112,000) (344,000)
Other income, net 715,000 740,000
----------- -----------
Pretax income 1,684,000 894,000
Provision for income taxes 854,000 372,000
----------- -----------
Income before minority interest 830,000 522,000
Minority interest 68,000 24,000
----------- -----------
Net income $ 762,000 $ 498,000
=========== ===========
Primary and fully diluted income
per share $ 0.19 $ 0.13
=========== ===========
Average shares outstanding 3,981,338 3,981,338
See accompanying Notes to Consolidated Financial Statements.
-5-
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30,
---------------------------
1994 1993
----------- -----------
Net revenue:
Equipment sales $24,395,000 $17,663,000
Services provided 7,241,000 6,348,000
----------- -----------
31,636,000 24,011,000
----------- -----------
Cost of sales:
Equipment sales 13,490,000 9,156,000
Services provided 2,950,000 2,671,000
----------- -----------
16,440,000 11,827,000
----------- -----------
Gross margin:
Equipment sales 10,905,000 8,507,000
Services provided 4,291,000 3,677,000
----------- -----------
15,196,000 12,184,000
----------- -----------
48.0% 50.7%
Operating expenses 14,588,000 12,201,000
----------- -----------
Operating income (loss) from
consolidated operations 608,000 (17,000)
Interest income 85,000 205,000
Interest expense (51,000) (152,000)
Other income, net 351,000 439,000
----------- -----------
Pretax income 993,000 475,000
Provision for income taxes 493,000 218,000
----------- -----------
Income before minority interest 500,000 257,000
Minority interest 33,000 (2,000)
----------- -----------
Net income $ 467,000 $ 259,000
=========== ===========
Primary and fully diluted income
per share $ 0.12 $ 0.07
=========== ===========
Average shares outstanding 3,981,338 3,981,338
See accompanying Notes to Consolidated Financial Statements.
-6-
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
1994 1993
----------- -----------
Cash flows from operating activities:
Net income $ 762,000 $ 498,000
Adjustments to reconcile net income
to cash flows from operating activities:
Depreciation and amortization 1,356,000 1,031,000
Deferred income (33,000) (28,000)
Minority interest 68,000 24,000
Deferred income taxes 805,000 420,000
Changes in working capital, net of
acquisitions and divestitures:
Accounts receivable (901,000) 495,000
Inventories (1,825,000) (535,000)
Restricted cash equivalents -- 1,382,000
Other receivables 152,000 191,000
Prepaid expenses and miscellaneous
current assets (237,000) (305,000)
Accounts payable (3,412,000) (1,441,000)
Accrued expenses 1,766,000 (378,000)
Restructuring reserves (554,000) (630,000)
Deferred service revenue (509,000) (498,000)
Taxes payable (237,000) 44,000
----------- -----------
Cash flows (used for) provided by
operating activities (2,799,000) 270,000
Cash flows from investment activities:
Capital expenditures, net of disposals (534,000) (194,000)
Assets of businesses acquired (1) (299,000) (399,000)
Purchase of minority interest in
consolidated subsidiary (2,551,000) (796,000)
Other -- (62,000)
----------- -----------
Cash flows used for investment
activities (3,384,000) (1,451,000)
(Continued)
See accompanying Notes to Consolidated Financial Statements.
-7-
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Six Months Ended June 30,
-------------------------
1994 1993
----------- -----------
Cash flows from financing activities:
Long-term and short-term debt repayments $ (424,000) $ (430,000)
Payment of long-term tax liability (32,000) (308,000)
Other 122,000 213,000
----------- -----------
Cash flows used for financing activities (334,000) (525,000)
Impact of changes in foreign currency
translation (127,000) (36,000)
----------- -----------
Decrease in cash and cash equivalents (6,644,000) (1,742,000)
Cash and cash equivalents at the
beginning of period 8,133,000 14,052,000
----------- -----------
Cash and cash equivalents at the
end of period $ 1,489,000 $12,310,000
=========== ===========
- - ---------------------------------
Cash flow information:
Interest paid $ 62,000 $ 343,000
=========== ===========
Income taxes paid (excluding
payment of long term tax liability) $ 65,000 $ 108,000
=========== ===========
(1) Acquisitions:
Inventory $ -- $ (39,000)
Intangible assets (299,000) (368,000)
Other assets -- (3,000)
Accrued expenses -- 11,000
----------- -----------
$ (299,000) $ (399,000)
=========== ===========
(2) Non-cash activity:
Reduction of intangible assets
to establish deferred tax asset $ -- $ 2,660,000
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
-8-
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 six
months of 1994.
2. Inventories
June 30, December 31,
1994 1993
----------- ------------
Raw materials $ 1,247,000 $ 1,374,000
Work-in-process 2,213,000 1,538,000
Finished goods 12,420,000 11,311,000
----------- -----------
$15,880,000 $14,223,000
=========== ===========
3. Property
The following is a schedule of property, plant and equipment:
June 30, December 31,
1994 1993
----------- ------------
Land $ 10,000 $ 10,000
Buildings 224,000 224,000
Equipment and tooling 15,014,000 15,591,000
Leasehold improvements 754,000 668,000
Furniture and fixtures 3,694,000 3,692,000
----------- -----------
19,696,000 20,185,000
Less accumulated depreciation
and amortization 17,696,000 18,311,000
----------- -----------
$ 2,000,000 $ 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
June 30, 1994, the net deferred tax asset was reduced from approximately $2.0
million at January 1, 1994 to $1.2 million due to the recognition of the
utilization of predecessor company net operating losses.
5. Investments
On June 15, 1994, the Company's Canadian subsidiary, TIE Telecommunications
Canada, Ltd., through a tender offer, redeemed all of the outstanding 2.251
million minority-owned shares for approximately $2.4 million U.S. dollars and
$0.1 million of related expenses. For accounting purposes the redemption will
be treated as a purchase. Goodwill of $1.2 million will be amortized over 20
years. The redemption was effected from internally available funds and no
borrowing was initiated.
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Six Months and Three Months Ended June 30, 1994 versus June 30, 1993
For the quarter ended June 30, 1994, the Company generated net income of $467
thousand or $0.12 per share as compared to net income of approximately $259
thousand or $0.07 per share for the second quarter of 1993. For the six months
ended June 30, 1994, the Company generated net income of $762 thousand or $0.19
per share as compared to net income of $498 thousand or $0.13 per share for the
comparable 1993 period. The improvement in net income from 1993 is due
primarily to the net effect of increased sales volume which was offset by a
decline in gross margin percentage and a less favorable exchange rate affecting
the earnings of the Company's Canadian subsidiary.
Total net revenue for the second quarter of 1994 and the first six months of
1994 increased $7.6 million or 31.8% and $14.1 million or 29.6%, respectively,
from the comparable 1993 periods. The increases occurred primarily in new
equipment sales with a $6.7 million or 38.1% increase over the second quarter
1993 and $11.9 million or 33.8% increase over the first six months of 1993 as a
result of revenues generated by the Company's direct sales and service units
from acquisitions occurring in the latter part of 1993. Net revenue from new
equipment sales accounted for approximately 77.1% and 73.6% of the total revenue
for the second quarter of 1994 and 1993, respectively, and 76.3% and 73.9% of
the total revenue for the first six months of 1994 and 1993, respectively. The
service revenue increased $2.2 million or 17.6% in the first six months of 1994
over the comparable 1993 period with an increase of $2.4 million generated in
U.S. operations. The Company's Canadian subsidiary experienced a slight
decrease in service revenue of $14 thousand in Canadian dollars in the 1994 six
month period, however, this was adversely affected by a less favorable exchange
rate between the Canadian and U.S. dollar resulting in a larger decrease of $0.2
million from the comparable period in 1993. Net revenues from services provided
accounted for approximately 22.9% of total revenue in the second quarter of 1994
as compared to 26.4% of total revenue in the second quarter of 1993 and 23.7% of
total revenue in the first six months of 1994 as compared to 26.1% in the
comparable 1993 period. Revenue from service transactions is expected to
continue to comprise a significant portion of the Company's overall net revenue
in future periods, however, there are no assurances that the foregoing will
occur.
The gross margin percentage for the quarter and six months ended June 30, 1994
was 48.0% and 48.4%, respectively, as compared to 50.7% and 50.9% for the same
periods 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. Although new equipment sales carry lower margins,
these sales present future service business to the Company. Additionally, the
gross margin on service revenue has declined from 62.6% in the first six months
of 1993 to 57.5% in the first six months of 1994 primarily due to increased
competition in the industry, however, has increased from 57.9% in the 1993
second quarter to 59.3% in the same period of 1994. The Company expects that
this factor will continue to affect the gross margin percentages in the future
but not cause a significant deterioration, although there are no assurances that
this will occur.
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. However, negotiations have commenced with NTK America to renew the
agreement for a ten year term and other parties have expressed interest in
assuming a technology license for manufacturing of products to the Company.
-10-
Operating expenses in the second quarter and the first six months of 1994
increased $2.4 million (19.6%) and $4.7 million (19.5%), respectively, over the
comparable 1993 periods. Operating expenses as a percent of sales, however,
decreased to 46.1% and 46.9%, respectively, in the second quarter of 1994 and
the first six months of 1994 as compared to 50.8% in both comparable periods 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
increases in net revenue of 31.8% and 29.6% in the quarter and year-to-date
periods, respectively, over the same periods of 1993. Operating expenses for
the second quarter and first six months 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 $715 thousand for the first six months of 1994 decreased
$25 thousand as compared to the same period of 1993. Other income, net is
substantially comprised of royalty income of $802 thousand and $641 thousand for
the six months ended June 30, 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 $186 thousand in the aggregate in the first six months of
1994 compared to 1993.
In 1993, and continuing into the first half 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 June 30, 1994 totalled $1.5 million, a decrease of
$6.6 million from December 31, 1993. During the first six months of 1994, the
Company used approximately $2.8 million of cash for operating activities,
including inventory purchases, reduction of accounts payable and $0.6 million
in legal settlements. In June 1994, approximately $2.5 million was used to
purchase all of the outstanding 2.251 million minority shares of the Company's
Canadian subsidiary resulting in a 100% ownership interest by the Company.
Additionally, the Company used approximately $0.5 million for net capital
expenditures, $0.3 million to expand its service network and $0.4 million for
debt repayments.
-11-
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 the covenants as of June 30, 1994 and therefore was qualified to borrow the
entire $7,000,000 available under the line. The Company borrowed under this
line of credit during the second quarter but no borrowings were outstanding as
of June 30, 1994.
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 June 30, 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".
-12-
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) - (c) The 1994 Annual Meeting of Stockholders of the Company was held on
June 22, 1994. At the meeting, the election of eight directors to serve for a
one year term and the ratification of the selection of KPMG Peat Marwick as the
Company's independent auditors for 1994 were approved. A total of 3,981,338
votes were eligible to be cast for each matter.
The result of the voting on the election of directors, as determined by the
independent inspectors of election, is as follows:
For Withheld
--------- --------
George N. Benjamin, III 3,742,679 22,004
Eric V. Carter 3,742,701 21,982
Lewis Collens 3,742,715 21,968
Robert Gluth 3,742,672 22,011
Thomas L. Kelly, Jr. 3,742,003 22,680
Robert E. LaBlanc 3,742,729 21,954
Robert A. Pritzker 3,742,663 22,020
Robert W. Webb 3,742,701 21,982
A total of 3,764,683 votes were submitted with respect to the ratification of
the selection of KPMG Peat Marwick as the Company's independent auditors for
1994. The result of the voting on such matter, as determined by the independent
inspectors of election, is as follows:
3,757,390 shares voted in favor of the motion, 2,398 shares voted against the
motion, and 4,895 shares abstained.
-13-
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: August 12, 1994 By: /s/ George N. Benjamin, III
George N. Benjamin, III
President and Chief Executive Officer
Dated: August 12, 1994 By: /s/ Jane E. Closterman
Jane E. Closterman
Corporate Controller
-14-
