<PAGE>
================================================================================
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-16580
TELENETICS CORPORATION
(Name of small business issuer in its charter)
CALIFORNIA 33-0061894
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25111 ARCTIC OCEAN
LAKE FOREST, CALIFORNIA 92630
(Address of principal executive offices)
Issuer's telephone number: (949) 455-4000
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's only class of
Common Stock, no par value per share, was 9,797,165 on August 20, 1999.
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
<TABLE>
TELENETICS CORPORATION
Condensed Balance Sheets
(Unaudited)
----------
June 30, 1999
<CAPTION>
ASSETS
------
June 30,
1999
-------------
<S> <C>
Current Assets:
Cash $ 447
Accounts receivable, net of allowance for
doubtful accounts of $17,280 1,894,614
Receivable from related parties 161,343
Inventories 1,386,060
Prepaid expenses and other current assets 121,184
-------------
Total current assets 3,563,648
Property, plant and equipment, net 122,984
Goodwill, net 428,586
Intangibles 266,012
Other assets 222,336
-------------
$ 4,603,566
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Bank overdraft $ 66,728
Revolving line of credit 29,228
Current portion of related party debt 25,762
Accounts payable 1,166,457
Accrued expenses 306,064
Advance payments from customers 98,695
Income taxes payable 172,837
-------------
Total current liabilities 1,865,771
Related party debt, less current portion 250,000
Subordinated unsecured promissory notes 720,621
-------------
Total liabilities 2,836,392
-------------
Shareholders' equity:
Preferred stock, no par value. Authorized 5,000,000 shares;
Series A 7.0% Convertible Redeemable Preferred Stock;
issued and outstanding 734,284 shares 801,038
Series B Convertible Preferred Stock; issued and
outstanding 128,571 shares 249,106
Series C 7.0% Convertible Preferred Stock; issued and outstanding
400,000 shares 550,000
Common stock, no par value. Authorized 25,000,000 shares;
issued and outstanding 9,737,165 shares 11,506,187
Accumulated deficit (11,339,157)
-------------
Total shareholders' equity 1,767,174
-------------
$ 4,603,566
=============
</TABLE>
See accompanying notes to condensed financial statements.
1
<PAGE>
<TABLE>
TELENETICS CORPORATION
Condensed Statements of Operations
(Unaudited)
----------
<CAPTION>
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 3,787,975 $ 375,944 $ 7,626,025 $ 1,333,034
Costs of sales 2,759,806 285,802 5,597,642 725,755
-------------- -------------- -------------- --------------
Gross profit 1,028,169 90,142 2,028,383 607,279
Selling, general and
administrative expenses 848,618 308,853 1,239,917 642,800
Engineering and
product development expenses 155,587 70,990 310,765 119,614
-------------- -------------- -------------- --------------
Income (loss) from operations 23,964 (289,701) 477,701 (155,135)
Interest expense (68,487) (33,419) (157,260) (150,283)
Debt termination costs (84,465) - (84,465) -
Other income 36 - 36,334 27,497
-------------- -------------- -------------- --------------
Income (loss) before income taxes (128,952) (323,120) 272,310 (277,921)
Income taxes - 800 829 800
-------------- -------------- -------------- --------------
Net income (loss) $ (128,952) $ (323,920) $ 271,481 $ (278,721)
============== ============== ============== ==============
Earnings (loss) per common share:
Basic $ (.015) $ (.039) $ .027 $ (.035)
============== ============== ============== ==============
Diluted $ (.015) $ (.039) $ .025 $ (.035)
============== ============== ============== ==============
Common shares used in
computing earnings (loss) per common share:
Basic 9,576,066 8,256,165 9,551,751 8,052,949
============== ============== ============== ==============
Diluted 9,576,066 8,256,165 11,044,096 8,052,949
============== ============== ============== ==============
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
<TABLE>
TELENETICS CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
----------
<CAPTION>
Six Months Six Months
Ended June 30, Ended June 30,
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 271,481 $ (278,721)
Adjustments to reconcile net income (loss) to net cash
used in operations:
Depreciation and amortization 80,787 4,597
Stock issued for services 25,000 6,350
Warrants issued in connection with
debt to equity conversion 17,797 --
Benefits from debt relief (36,160) --
Changes in operating assets and liabilities:
Accounts receivable 122,612 46,922
Inventories 1,903,028 (43,000)
Prepaid and other assets (266) (13)
Accounts payable (1,343,623) (154,905)
Accrued expenses 15,489 (25,460)
Advance payment from customers (1,309,279) 292,275
-------------- --------------
Net cash used in operating activities (253,134) (151,955)
-------------- --------------
Cash flows from investing activities:
Purchases of property, plant and equipment (22,426) (30,424)
Payments for business acquisitions (378,901) --
Other assets (121,430) --
Amounts collected from (advanced to) related parties (54,981) 9,219
-------------- --------------
Net cash used in investing activities (577,738) (21,205)
-------------- --------------
Cash flows from financing activities:
Bank overdraft 41,618 --
Proceeds from (repayment on) obligation under
factoring agreement (289,627) 337,864
Net proceeds from revolving line of credit 29,228 --
Repayments of long-term debt -- (39,776)
Repayments of related party debt (40,553) (25,000)
Proceeds from subscription receivable 224,959 --
Exercise of warrants 45,000 --
Proceeds of Series A 7.0% Convertible Redeemable
Preferred Stock offering 881,843 --
Debt issuance costs (61,149) --
-------------- --------------
Net cash provided by financing activities 831,319 273,088
-------------- --------------
Net increase in cash 447 99,928
Cash, beginning of period -- 13,205
-------------- --------------
Cash, end of period $ 447 $ 113,133
============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
<TABLE>
TELENETICS CORPORATION
Condensed Statements of Cash Flows (Continued)
(Unaudited)
----------
<CAPTION>
Six Months Six Months
Ended June 30, Ended June 30,
1999 1998
-------------- --------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 129,283 $ 137,550
Income taxes -- --
Supplemental disclosures of non-cash investing
and financing activities:
Issuance of Common Stock upon conversion of debt 68,000 167,525
Issuance of Series A 7.0% Convertible Redeemable
Preferred Stock upon conversion of debt 185,000 --
Issuance of preferred stock upon business acquisitions:
Series B Convertible Preferred Stock (Greenland) 249,106 --
Series C 7.0% Convertible Preferred Stock
(Sunnyvale General Devices and Instruments) 550,000 --
Issuance of note payable to related party in exchange
for decrease in accounts payable -- 257,035
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
TELENETICS CORPORATION
Notes to Condensed Financial Statements
1. Basis of Presentation
---------------------
The condensed financial statements included herein have been prepared by
Telenetics Corporation (the "Company"), 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. The Company believes that the
disclosures are adequate to make the information presented not misleading when
read in conjunction with the Company's financial statements for the nine month
transition period ended December 31, 1998. The financial information presented
reflects all adjustments, consisting only of normal recurring adjustments, which
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods presented. The results of operations for the six months
ended June 30, 1999 are not necessarily indicative of the results to be expected
for the full year ended December 31, 1999 or any other period.
2. Earnings Per Common Share
-------------------------
Basic earnings per share are computed by dividing earnings available to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflect per share amounts that
would have resulted from the dilutive potential effect of common stock
instruments. The net income (loss) for the three months and six months ended
June 30, 1999 has been adjusted by $18,013 for dividends during such periods on
the Company's preferred stock to arrive at the basic earnings (loss) per share
of Common Stock.
3. Revolving Line of Credit
------------------------
On April 2, 1999, the Company entered into a revolving line of credit
agreement for borrowings of up to $3,000,000, which is collateralized by
substantially all assets of the Company. Borrowings under this revolving line of
credit are based on 80% of eligible accounts receivable. Interest is payable
monthly at the greater of the bank's prime rate plus 3% or 10.75%, with
principal and accrued interest due October 2, 2000.
4. Asset Purchase Agreements
-------------------------
On April 5, 1999, the Company entered into an agreement with Greenland
Corporation to purchase its AirLink(TM) wireless technology and related
intellectual property rights, as well as assume certain contracts in exchange
for 128,571 shares of the Company's Series B Convertible Preferred Stock. The
Series B Convertible Preferred Stock has a liquidation preference of $7.00 per
share, aggregating $900,000, which is subordinated to the liquidation preference
of the Company's Series A 7.0% Convertible Redeemable Preferred Stock. In
addition, each share of the Series B Convertible Preferred Stock is initially
convertible into one share of Common Stock, subject to certain adjustments. As
of June 30, 1999, the acquired technology had yet to be employed by the Company.
Beginning in the quarter ending September 30, 1999, the value of this intangible
asset will be amortized on a straight-line basis over a five-year period.
5
<PAGE>
Effective June 1, 1999, the Company acquired all of the assets of Sunnyvale
General Devices and Instruments, Inc. ("GDI") used in GDI's business of
manufacturing communications equipment for the traffic control and
transportation industries and assumed certain liabilities of GDI in exchange for
$350,000 in cash and 400,000 shares of the Company's Series C 7.0% Convertible
Preferred Stock. The Series C 7.0% Convertible Preferred Stock has a liquidation
preference of $1.50 per share, aggregating $600,000, which is subordinate to the
liquidation preference of the Company's Series A 7.0% Convertible Redeemable
Preferred Stock and on a parity with the liquidation preference of the Company's
Series B Convertible Preferred Stock. Each share of Series C 7.0% Convertible
Preferred Stock is initially convertible into one share of Common Stock, subject
to certain adjustments, voluntarily beginning on June 1, 2002 or automatically
upon the occurrence of certain events. The holders of Series C 7.0% Convertible
Preferred Stock are entitled to receive cumulative dividends at the rate of
$0.105 per share per year, payable quarterly. The cost in excess of the net
assets acquired was $435,850, which is being amortized on a straight-line basis
over its estimated useful life of five years.
5. Lease
-----
On April 12, 1999, the Company entered into an agreement with an unrelated
party to lease a new corporate and manufacturing facility. The lease has an
initial term of five years and one five-year option to extend. The initial
monthly base rent is $23,871 and the lease includes an annual 3% rent escalation
provision. The lease also provides for certain options for the Company to
purchase the building.
6. Private Equity Offering
-----------------------
On April 9 and 15, 1999, the Company sold an aggregate of 628,571 shares of
Series A 7.0% Convertible Redeemable Preferred Stock at $1.75 per share and five
year warrants to purchase up to 628,571 shares of Common Stock at an exercise
price of $1.875 per share, subject to certain adjustments, in a private equity
offering. In connection with the offering, the Company also issued five-year
warrants to purchase up to 62,857 shares of Common Stock at an exercise price of
$2.10 per share to its placement agent. The cash proceeds of the offering, net
of commissions and offering costs, were $881,843.
The Series A 7.0% Convertible Redeemable Preferred Stock has a liquidation
preference of $1.75 per share, aggregating $1,100,000. In addition, each share
of the Series A 7.0% Convertible Redeemable Preferred Stock is initially
convertible into one share of Common Stock, subject to certain adjustments. The
holders of Series A 7.0% Convertible Redeemable Preferred Stock are entitled to
receive cumulative dividends at the rate of $0.1225 per share per year, payable
quarterly, which dividends are subject to certain increases.
7. Exchange Offer
--------------
Between May 25 and June 15, 1999, the Company conducted an exchange
offering ("Exchange Offering") involving holders of the Company's 10%
Subordinated Unsecured Promissory Notes due 2000 ("Notes") and related warrants
("Note Warrants"). The Exchange Offering gave each holder who was an accredited
investor the opportunity to (i) exercise such holder's Note Warrant in full by
applying a portion of the principal amount of the Note toward ("Exercise
Adjustment") and/or paying in cash the exercise price and (ii) exchange the
holder's Note for shares of the Company's Series A 7.0% Convertible Redeemable
Preferred Stock at an exchange rate of one share of Series A 7.0% Convertible
Redeemable Preferred Stock for each $1.75 principal amount of a Note following
any Exercise Adjustment. In addition, each participating holder was issued one
common stock purchase warrant ("Exchange Warrant") to purchase 7,500 shares of
the Company's Common Stock at $1.875 per share, subject to adjustment, for each
$25,000 in principal amount of a holder's Note prior to any Exercise Adjustment.
The Exchange Warrants will expire on April 15, 2002. As a result of the Exchange
Offering, holders of an aggregate of $275,000 of Notes, 110,000 Note Warrants
and $20,000 in cash were exchanged for 105,713 shares of Series A 7.0%
Convertible Redeemable Preferred Stock, 110,000 shares of Common Stock and
82,500 Exchange Warrants.
8. Subsequent Events
-----------------
In July 1999, the Company paid dividends aggregating $18,013 due on shares
of Series A 7.0% Convertible Redeemable Preferred Stock for the quarter ended
June 30, 1999.
6
<PAGE>
Effective July 26, 1999, the Company entered into an agreement with Sierra
Digital Communications, Inc. ("SDC") and certain shareholders of SDC to purchase
SDC's millimeter wave radio technology as well as certain other assets in
exchange for $110,000 in cash and an aggregate of 110,594 shares of Common Stock
that are subject to certain registration rights. In connection therewith, the
Company acquired substantially all of the claims of unsecured creditors against
SDC at substantial discounts.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the Company's Condensed Financial Statements and Notes thereto included
elsewhere in this Quarterly Report on Form 10-QSB. Except for the historical
information contained herein, the following discussion contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Quarterly Report on Form 10-QSB should be
read as being applicable to all related forward-looking statements wherever they
appear herein. See "Forward-Looking Statements; Cautionary Statement." The
Company's actual results may differ materially from the results discussed in the
forward-looking statements.
OVERVIEW
Telenetics Corporation designs and manufactures high quality, industrial
grade modems, fiber optic drivers and radio modems within the industrial
automation industry. The Company is also active in the design and manufacture of
customized modem products for manufacturers of utility meters, remote terminal
units, electric relays, flow measurement devices, traffic controllers and for
companies within the oil and gas industry. In addition to the Company's primary
focus on the industrial automation market, the Company plans to expand into
several other markets that have similar requirements for the type of specialized
modems the Company designs, such as transportation, lottery and gaming, vending
machine automation, security, point of sales and automated teller machines,
telemedicine and military applications.
The Company's results of operations have been and may continue to be
subject to significant fluctuations. The results for a particular period may
vary due to a number of factors, many of which are beyond the Company's control,
including the timing and nature of revenues from product sales that are
recognized during any particular quarter, the impact of price competition upon
the Company's average selling prices, the availability and pricing of components
for the Company's products, market acceptance of new product introductions by
the Company and its competitors, the timing of expenditures in anticipation of
future sales, product returns, the financial health of the Company's customers,
the overall state of the modem and data communications industry and economic
conditions generally. In addition, the volume and timing of orders received
during a quarter are difficult to forecast. The Company expects that its
quarterly operating results will continue to fluctuate in the future as a result
of these and other factors.
The Company continually seeks to improve its product designs and
manufacturing and assembly approach in order to reduce its costs. The Company
pursues a strategy of outsourcing rather than internally developing its modem
chipsets, which are application-specific integrated circuits that form the
technology base for its modems. By outsourcing the chipset technology, the
Company is able to concentrate its research and development capabilities on
modem system design, leverage the extensive research and development
capabilities of its chipset suppliers, and reduce its development time and
associated costs and risks. This approach enables the Company to quickly develop
new and innovative products while maintaining a relatively low level of research
and development efforts and expenses. The Company also outsources aspects of its
manufacturing to contract assemblers as a means of reducing its fixed labor
+*costs and capital expenditures and providing the Company with greater
flexibility in its capacity planning.
7
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months ended June 30,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales......................................................... 100.0% 100.0%
Cost of sales..................................................... 72.9 76.0
---------- ----------
Gross profit...................................................... 27.1 24.0
Selling, general and administrative............................... 22.4 82.2
Engineering and product development............................... 4.1 18.9
---------- ----------
Operating income (loss)........................................... 0.6 (77.1)
Interest expense.................................................. (1.8) (8.9)
Debt termination costs............................................ (2.2) -
---------- ----------
Net loss.......................................................... (3.4)% (86.2)%
========== ===========
</TABLE>
NET SALES. Net sales for the three months ended June 30, 1999 were $3.8
million as compared to $0.4 million for the three months ended June 30, 1998, an
increase of $3.4 million or approximately 908%. This increase in revenues was a
result of the Company's increased volumes of sales, primarily due to increased
purchases of the Company's products by Duquesne and by G. E. Harris Energy
Systems.
GROSS PROFIT. Gross profit increased as a percentage of net sales to 27.1%
for the three months ended June 30, 1999 as compared to 24.0% for the same
period in 1998. This increase was primarily attributable to higher increased
absorption of manufacturing overhead due to the increased sales volume. Cost of
sales increased by $2.5 million, or approximately 866% to $2.8 million during
the three months ended June 30, 1999 from $0.3 million during the three months
ended June 30, 1998. The increase in cost of sales resulted primarily from a
significant increase in the volume of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $540,000 or approximately 175%, to $849,000
during the three months ended June 30, 1999 from $309,000 during the three
months ended June 30, 1998 but decreased as a percentage of net sales from 82.2%
during the three months ended June 30, 1998 to 22.4% during the three months
ended June 30, 1999. The increase in expenses resulted primarily from a
significant increase in professional service expenses associated with the
Company's switch to a national auditing firm, its efforts to bring its filings
required under the Securities Exchange Act of 1934 and its accounting procedures
up to date, and its efforts to re-establish communication with the financial
community. The increase was also due to the inclusion of one month of expenses
associated with the acquisition of the assets of GDI effective as of June 1,
1999. The decrease in selling, general and administrative expenses as a
percentage of net sales was due primarily to higher sales volume.
8
<PAGE>
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses increased by $85,000 or approximately 119% to $156,000
during the three months ended June 30, 1999 from $71,000 during the three months
ended June 30, 1998 but decreased as a percentage of net sales from 18.9% during
the three months ended June 30, 1998 to 4.1% during the three months ended June
30, 1999. This increase in engineering and product development expenses was
primarily attributable to increased engineering salaries associated with the
Company's efforts to bring all aspects of product design, other than modem
chipsets, in-house. The decrease in spending as a percentage of net sales was
due to certain expenses growing less rapidly than revenue.
DEBT TERMINATION COSTS. During the three months ended June 30, 1999 the
Company incurred $67,000 in costs related to the termination of its factoring
arrangement and the settlement of a related debt issuance obligation. In
addition, the Company issued warrants with an estimated value of $18,000 in
connection with the exchange of certain of its subordinated unsecured promissory
notes payable for shares of the Company's Series A 7.0% Convertible Redeemable
Preferred Stock.
INTEREST EXPENSE. Interest expense during the three months ended June 30,
1999 increased by $35,000 or approximately 105% to $68,000 or 1.8% of net sales,
from $33,000 or 8.9% of net sales in the three months ended June 30, 1998. This
increase in interest expense was due to increased borrowings necessitated by
increased working capital requirements to support the Company's rapid growth in
revenue.
NET LOSS. Net loss for the three months ended June 30, 1999 was $129,000 or
approximately 3.4% of net sales as compared to a net loss of $324,000 or 86.2%
of net sales in the three months ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Six Months ended June 30,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales............................................................ 100.0% 100.0%
Cost of sales........................................................ 73.4 54.4
---------- ----------
Gross profit......................................................... 26.6 45.6
Selling, general and administrative expenses......................... 16.3 48.2
Engineering and product development expenses......................... 4.1 9.0
---------- ----------
Operating income (loss).............................................. 6.3 (11.6)
Interest expense..................................................... (2.1) (11.3)
Debt termination costs............................................... (1.1) -
Other income......................................................... 0.5 2.1
---------- ----------
Net income (loss).................................................... 3.6% (20.9)%
========== ==========
</TABLE>
NET SALES. Net sales for the six months ended June 30, 1999 were $7.6
million as compared to $1.3 million for the six months ended June 30, 1998, an
increase of $6.3 million or approximately 472%. This increase in revenues was a
result of the Company's increased volumes of sales, primarily due to increased
purchases of the Company's products by Duquesne Light Company ("Duquesne"),
through its subcontractor Sargent Electric Corp., and by G. E. Harris Energy
Systems and ITRON.
9
<PAGE>
GROSS PROFIT. Gross profit decreased as a percentage of net sales to 26.6%
for the six months ended June 30, 1999 as compared to 45.6% for the same period
in 1998. This decrease was primarily attributable to higher material costs as a
percentage of sales in the Company's new products and unusually large discounts
given to two major customers to secure large contracts. Cost of sales increased
by $4.9 million, or approximately 671% to $5.6 million during the six months
ended June 30, 1999 from $0.7 million during the six months ended June 30, 1998.
The increase in cost of sales resulted from a significant increase in the volume
of sales as well as the higher material costs and large discounts described
above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $597,000 or approximately 93%, to $1.2
million during the six months ended June 30, 1999 from $643,000 during the six
months ended June 30, 1998, but decreased as a percentage of net sales from
48.2% during the six months ended June 30, 1998 to 16.3% during the six months
ended June 30, 1999. The increase in expenses resulted primarily from a
significant increase in professional service expenses associated with the
Company's switch to a national auditing firm, its efforts to bring its filings
required under the Securities Exchange Act of 1934 and its accounting procedures
up to date, and its efforts to re-establish communication with the financial
community. The increase was also due to the inclusion of one month of expenses
associated with the acquisition of the assets of GDI effective as of June 1,
1999. The decrease in selling, general and administrative expenses as a
percentage of net sales was due primarily to higher sales volume and the fact
that certain expenses required to establish the infrastructure necessary to
support higher revenues had been incurred in prior periods.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses increased by $191,000 or approximately 160% to $311,000
during the six months ended June 30, 1999 from $120,000 during the six months
ended June 30, 1998, but decreased as a percentage of net sales from 9.0% during
the six months ended June 30, 1998 to 4.1% during the six months ended June 30,
1999. This increase in engineering and product development expenses was
primarily attributable to increased engineering salaries associated with the
Company's efforts to bring all aspects of product design, other than modem
chipsets, in-house. The decrease in spending as a percentage of net sales was
due to certain expenses growing less rapidly than revenue.
DEBT TERMINATION COSTS. During the six months ended June 30, 1999, the
Company incurred $67,000 in costs related to the termination of its factoring
arrangement and the settlement of a related debt issuance obligation. In
addition, the Company issued warrants with an estimated value of $18,000 in
connection with the exchange of certain of its subordinated unsecured promissory
notes payable for shares of the Company's Series A 7.0% Convertible Redeemable
Preferred Stock.
OTHER INCOME. Other income increased by $9,000 to $36,000 during the six
months ended June 30, 1999 from $27,000 during the six months ended June 30,
1998. Other income in both periods was primarily attributable to the resolution
of certain liabilities for amounts less than the carrying value of those
obligations.
INTEREST EXPENSE. Interest expense during the six months ended June 30,
1999 increased by $7,000 to $157,000 or 2.1% of net sales, from $150,000 or
11.3% of net sales in the six months ended June 30, 1998. This increase in
interest expense is attributable to the Company's increased borrowings
necessitated by increased working capital requirements to support the Company's
rapid growth in revenue which is partially offset by a significantly reduced
interest rate in connection with the Company's new revolving line of credit.
NET INCOME (LOSS). Net income for the six months ended June 30, 1999 was
$271,000 or approximately 3.6% of net sales as compared to a net loss of
$279,000 or 20.9% of net sales in the six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1999, the Company financed its
operations and capital expenditures primarily through working capital and
proceeds from the offering of its Series A 7.0% Convertible Redeemable Preferred
Stock. As of June 30, 1999, the Company had approximately $3,200,000 in backlog
orders for its products.
10
<PAGE>
As of June 30, 1999, the Company had working capital of $1,698,000 and an
accumulated deficit of $11,339,000. As of that date, the Company had a net bank
overdraft of $67,000 and $1,895,000 in accounts receivable. The Company also had
promissory notes outstanding in the aggregate amount of $996,383 (net of $63,429
of unamortized discount) as of June 30, 1999, of which $325,000 is due to a
related party. While the Company intends to repay some or all of the amounts of
such indebtedness out of future cash flow from operations, management's internal
cash projections estimate that such borrowings may remain outstanding until
their maturity.
On April 2, 1999, the Company secured a revolving line of credit with
Celtic Capital Corporation, a division of Foothill Capital Corporation. The line
of credit bears interest, at the greater of prime rate plus 3% or 10.75% per
annum, is collateralized by substantially all of the assets of the Company and
expires on October 2, 2000. The borrowing base under the line of credit is 80%
of eligible accounts receivable up to a maximum borrowing of $3,000,000. As of
June 30, 1999, the Company had borrowings of $29,000 under the line of credit.
In April 1999, the Company sold an aggregate of 628,571 shares of its
Series A 7.0% Convertible Redeemable Preferred Stock at $1.75 per share and
five-year warrants to purchase an aggregate of 628,571 shares of the Company's
Common Stock with an exercise price of $1.875 per share in a private equity
offering to six accredited investors. The cash proceeds of the offering, net of
commissions and estimated offering costs, were approximately $882,000. In
connection with this offering, the Company also issued five-year warrants to
purchase up to 62,857 shares of common stock at an exercise price of $2.10 per
share to its placement agent.
The cash proceeds from the private equity offering of Series A 7.0%
Convertible Redeemable Preferred Stock, together with current and anticipated
borrowings under the Company's line of credit with Celtic Capital Corporation,
have been, and will continue to be, used as working capital to fund research and
development costs associated with the Company's products, costs associated with
manufacturing and marketing the Company's products and costs associated with the
continued growth and expansion of the Company.
Between May 25 and June 15, 1999, an aggregate of $275,000 of Notes,
110,000 Note Warrants and $20,000 in cash were exchanged for 105,713 shares of
Series A 7.0% Convertible Redeemable Preferred Stock, 110,000 shares of Common
Stock and 82,500 Exchange Warrants in the Exchange Offering.
Effective July 26, 1999, the Company entered into an agreement with SDC and
certain shareholders of SDC to purchase SDC's millimeter waive radio technology
as well as certain other assets in exchange for $110,000 in cash and an
aggregate of 110,594 shares of Common Stock that are subject to certain
registration rights. In connection therewith, the Company acquired substantially
all of the claims of unsecured creditors against SDC at substantial discounts.
The Company believes that current and future available capital resources,
cash flow from operations, and other existing sources of liquidity, including
the Company's revolving line of credit with Celtic Capital Corporation, will be
adequate to fund its operations for the remainder of the current fiscal year.
However, there can be no assurance that sufficient funds will be available or
that future events will not cause the Company to seek additional capital sooner,
including, but not limited to, the failure by the Company to timely collect
outstanding accounts receivable. To the extent the Company is in need of any
additional financing, there can be no assurance that any additional financing
will be available to the Company on acceptable terms, or at all. The inability
to obtain such financing could have a material adverse effect on the Company's
business, financial condition and results of operations. If additional funds are
raised by issuing equity or convertible debt securities, options or warrants,
further dilution to the existing shareholders of the Company may result.
If adequate funds are not available, the Company may also be required to
delay, scale back or eliminate its product development efforts or to obtain
funds through arrangements with strategic partners or others that may require
the Company to relinquish rights to certain of its technologies or potential
products or other assets. Accordingly, the inability to obtain such financing
could result in a significant loss of ownership and/or control of its
proprietary technology and other important Company assets and could also
adversely affect the Company's ability to continue its product development
efforts, which the Company believes contributes significantly to its competitive
advantage. If any of such circumstances were to arise, the Company's business,
financial condition and results of operations could be materially and adversely
affected.
11
<PAGE>
YEAR 2000 COMPLIANCE
The Company has identified substantially all of its major hardware and
software platforms in use and is continually modifying and upgrading its
software and information technology ("IT") and non-IT systems. The Company has
modified its current financial software to be Year 2000 ("Y2K") compliant. The
Company does not believe that, with upgrades of existing software and/or
conversion to new software, the Y2K issue will pose significant operational
problems for its internal computer systems. The Company expects all systems to
be Y2K compliant by September 30, 1999 through the use of internal and external
resources. The Company has incurred insignificant costs to date associated with
Y2K compliance and the Company presently believes estimated future costs will
not be material. However, the systems of other companies on which the Company
may rely also may not be timely converted, and failure to convert by another
company could have an adverse effect on the Company's systems. The Company
presently believes the Y2K problem will not pose significant operational
problems and is not anticipated to have a material effect on its financial
position or results of operations in any given year. However, actual results
could differ materially from the Company's expectations due to unanticipated
technology difficulties or project delays by the Company or its suppliers. If
the Company and third parties upon which it relies are unable to address the
issue in a timely manner, it could result in a material financial risk to the
Company. In order to assure that this does not occur, the Company has developed
a contingency plan and plans to devote all resources required to attempt to
resolve any significant Y2K issues in a timely manner.
LOOKING AHEAD
The Company believes that during 1999 a significant portion of revenues
will be realized from certain opportunities that were uncovered and developed
during the six-month period ended June 30, 1999. Some of these opportunities are
as follows:
o TRANSPORTATION INDUSTRY. The Company anticipates that its significant
activities within the transportation industry and close work with
several departments of transportation such as CALTRANS, Los Angeles
Department of Transportation, Wyoming Department of Transportation,
Pennsylvania Department of Transportation and several other departments
of transportation that are currently customers of the Company, will
result in a significant increase in the Company's business during 1999.
o GROWTH THROUGH ACQUISITIONS. To expand its markets, the Company's
business strategy includes growth through acquisitions. During the six
months ended June 30, 1999, the Company acquired certain assets of
Greenland Corporation and all of the assets of GDI.
o WIRELESS SOLUTIONS. The Company believes that a significant portion of
its future revenues will be generated through sales of its wireless
products, the cellular-based Omega AMR(TM) System and the
TrafficWatch(TM) and patent pending AirWave(TM) module. The recent
acquisition of millimeter wave radio technology from SDC is also
expected to contribute to this trend.
o DISTRIBUTION. The Company believes that its on-going aggressive plan in
identifying and hiring distributors, value added resellers and system
integrators will result in additional revenues in this sector in 1999
and beyond.
o INTERNATIONAL BUSINESS. The Company anticipates a significant increase
in international business. Current opportunities in China, Mexico,
India, Spain and several other countries that the Company has been
involved with may result in approximately $1 million of additional
revenues during the next 18 months.
12
<PAGE>
FORWARD-LOOKING STATEMENTS; CAUTIONARY STATEMENT
Certain of the statements contained in this report, including those under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and especially those contained under "Liquidity and Capital
Resources" and "Looking Ahead," are "forward-looking statements" that involve
risks and uncertainties. The actual future results of the Company could differ
materially from those statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this Quarterly
Report on Form 10-QSB and risks associated with managing the Company's growth.
While the Company believes that these statements are accurate, the Company's
business is dependent upon general economic conditions and various conditions
specific to the modem and data communications industry, and future trends and
results cannot be predicted with certainty. In particular:
o Given the significant backlog of orders at June 30, 1999, there can be
no assurance that there will be no delays in procuring, manufacturing,
testing and shipping such a large volume of products.
o Although the Company's business strategy includes growth through
acquisitions, identifying and pursuing acquisition opportunities and
integrating acquired products and businesses requires a significant
amount of management time and skill. There can be no assurance that
the Company will be able to continue to identify suitable acquisition
candidates, consummate additional acquisitions on acceptable terms or
successfully integrate any acquired business into the Company's
operations. There also can be no assurance that any future acquisition
will not have an adverse effect upon the Company's operating results,
particularly in the fiscal quarters immediately following consummation
of the acquisition while the acquired business is being integrated
into the Company's operations.
o In the past, the Company has experienced problems associated with
under-capitalization, including the inability to ship products in a
timely manner, which in some cases caused customers to cancel a portion
or all of their orders. Although the Company believes that current and
future available capital resources, cash flow from operations and other
existing sources of liquidity will be adequate to fund its operations
for the remainder of the current fiscal year, there can be no assurance
that sufficient funds will be available or that the Company will not in
the future experience problems associated with under-capitalization.
o The Company has experienced significant growth during the last 18
months. As a result of this rapid growth, the Company has had to raise
equity capital to fund its liquidity needs. The timing of which has, on
occasions, resulted in the Company being required to purchase product
components at less than optimal price points. As a result, the
Company's gross margins on many of its product lines may fluctuate on a
quarterly basis.
o The Company has limited experience in marketing and selling its
products in international markets. International customs, standards,
approvals and political and economical uncertainties may adversely
affect the Company's ability to ship its products internationally in a
timely and profitable manner.
o The trading price of the Company's Common Stock, like other technology
stocks, is subject to significant volatility due to factors impacting
the overall market which are unrelated to the Company's performance.
The historical results of operations and financial position of the
Company are not necessarily indicative of future financial performance.
If revenues or earnings fail to meet securities analysts' expectations,
there could be an immediate and significant adverse impact on the
trading price of the Company's Common Stock.
The Company has not experienced a material adverse impact of such risks and
uncertainties and does not anticipate such an impact. However, no assurance can
be given that such risks and uncertainties will not affect the Company's future
results of operations or its financial position.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In April 1999, the Company issued (i) 628,571 shares of its Series A
7.0% Convertible Redeemable Preferred Stock and (ii) five-year warrants to
purchase up to 628,571 shares of Common Stock at an exercise price of $1.875 per
share for cash consideration, net of commissions and estimated offering costs,
of $882,000. The Company also issued five-year warrants to purchase up to 62,857
shares of Common Stock at an exercise price of $2.10 per share to the Company's
placement agent in connection with the above-described issuance of preferred
stock.
In April 1999, the Company issued 128,571 shares of its Series B
Convertible Preferred Stock in connection with the acquisition of certain assets
of Greenland Corporation.
In June 1999, the Company issued 400,000 shares of its Series C 7.0%
Convertible Preferred Stock in connection with the acquisition of the assets of
GDI.
Between May 25 and June 15, 1999, an aggregate of $275,000 of Notes,
110,000 Note Warrants and $20,000 in cash were exchanged for 105,713 shares of
Series A 7.0% Convertible Redeemable Preferred Stock, 110,000 shares of Common
Stock and 82,500 Exchange Warrants in the Exchange Offering.
The issuances of the Company's securities in the above-referenced
transactions were effected in reliance upon the exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), as transactions not involving a public offering. Exemption from the
registration provisions of the Securities Act is claimed on the basis that such
transactions did not involve any public offering and the purchasers were
sophisticated with access to the kind of information registration would provide.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of Shareholders of the Company was held on
June 4, 1999.
(b) Omitted pursuant to Instruction 3 to Item 4 of Form 10-QSB.
(c)(i) PROPOSAL ONE: Election of five directors by the holders of
issued and outstanding shares of Common Stock.
For Abstain Against
--- ------- -------
Michael A. Armani 6,948,988 0 2,817
Shala Shashani 6,948,988 0 2,817
George Levy, M.D. 6,948,988 0 2,817
Edmund P. Finamore 6,948,988 0 2,817
Thomas Povinelli 6,948,988 0 2,817
(c)(ii) PROPOSAL TWO: Ratification of the approval of the Company's
1998 Stock Option Plan:
For: 6,470,050
Against: 78,938
Abstain: 2,817
14
<PAGE>
(c)(iii) PROPOSAL THREE: Ratification of the appointment of BDO
Seidman, LLP as the Company's independent certified public
accountants for the fiscal year beginning January 1, 1999:
For: 6,547,488
Against: 1,500
Abstain: 2,817
(d) Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TELENETICS CORPORATION
Dated: August 20, 1999 By: /S/ DAVID L. STONE
--------------------------------
David L. Stone
Chief Financial Officer
(principal financial and
accounting officer)
16
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 447
<SECURITIES> 0
<RECEIVABLES> 1,911,894
<ALLOWANCES> 17,280
<INVENTORY> 1,386,060
<CURRENT-ASSETS> 3,563,648
<PP&E> 337,870
<DEPRECIATION> 214,886
<TOTAL-ASSETS> 4,603,566
<CURRENT-LIABILITIES> 1,865,771
<BONDS> 0
0
1,600,144
<COMMON> 11,506,187
<OTHER-SE> (11,339,157)
<TOTAL-LIABILITY-AND-EQUITY> 4,603,566
<SALES> 7,626,025
<TOTAL-REVENUES> 7,626,025
<CGS> 5,597,642
<TOTAL-COSTS> 5,597,642
<OTHER-EXPENSES> 1,598,813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 157,260
<INCOME-PRETAX> 272,310
<INCOME-TAX> 829
<INCOME-CONTINUING> 271,481
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 271,481
<EPS-BASIC> .027
<EPS-DILUTED> .025
</TABLE>
