U.S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________________ to ______________ Commission file number 0-9352 American Teletronics, Inc. - ------------------------------------------------------------------------------ (Exact name of small business issuer as specified in its charter) Colorado 76-1675704 - ------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.) 15400 Knoll Trail, Suite 205, Dallas, TX 75248 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (214) 661-2345 - ------------------------------------------------------------------------------- (Registrant's telephone number) - ------------------------------------- ---------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 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 ____ APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 52,639,056 PART I - FINANCIAL INFORMATION Item 1. Financial Information. AMERICAN TELETRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS September 30, December 31, 1996 1995 ----------- ----------- CURRENT ASSETS Cash .............................................................. $ 449,778 $ 230,591 Certificates of Deposit, pledged to secure notes payable .......... 350,000 350,000 Accounts Receivable, net of allowance for doubtful accounts of $62,422 and $67,985 in 1996 and 1995, respectively 532,496 302,591 Receivable Under Warehouse Agreements ............................. -- 82,296 Mortgage Loan Receivable .......................................... 79,141 87,941 Prepaid Expenses .................................................. 12,136 101,610 Workers' Compensation Insurance Deposit ........................... 943,490 813,840 Single Family Residential Real Estate ............................. 220,935 271,435 FmHA Loan Fees Receivable ......................................... -- 320,000 ----------- ----------- TOTAL CURRENT ASSETS ......................................... 2,587,976 2,560,304 ----------- ----------- OFFICE BUILDING, FURNITURE AND EQUIPMENT ................................. 986,963 880,071 Less Accumulated Depreciation ..................................... (299,215) (189,438) ----------- ----------- NET OFFICE BUILDING, FURNITURE AND EQUIPMENT ................. 687,748 690,633 ----------- ----------- OTHER ASSETS Mortgage Loan Participation ....................................... 128,028 268,077 Investment in Bank Stock .......................................... 91,500 91,500 Investment in Preferred Stock ..................................... 204,000 204,000 Land Held for Sale ................................................ 365,957 365,957 Goodwill, net of accumulated amortization of $1,011,379 and $969,836, respectively ..................... 512,020 553,563 Noncompete Agreements, net of accumulated amortization of $41,250 and $30,000, respectively ......................... 33,750 45,000 Deposits and Other Assets ......................................... 42,090 68,586 Related Party Receivables ......................................... 127,165 319,403 ----------- ----------- TOTAL OTHER ASSETS ........................................... 1,504,510 1,916,086 ----------- ----------- TOTAL ASSETS ................................................. $ 4,780,234 $ 5,167,023 =========== =========== (Continued) The accompanying notes are an integral part of these consolidated financial statements. F-1 AMERICAN TELETRONICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) September 30, December 31, 1996 1995 ----------- ----------- CURRENT LIABILITIES Notes Payable ............................................... $ 1,114,042 $ 802,426 Current Maturities of Long-Term Debt ........................ 290,825 294,744 Accounts Payable ............................................ 227,244 233,691 Accrued Liabilities ......................................... 1,891,607 629,387 Payables Under Warehouse Agreements ......................... 347,682 -- Deferred FmHA Loan Fees ..................................... -- 320,000 ----------- ----------- TOTAL CURRENT LIABILITIES .............................. 3,871,400 2,280,248 LONG-TERM DEBT, Excluding Current Maturities ....................... 972,842 1,248,380 ----------- ----------- TOTAL LIABILITIES ...................................... 4,844,242 3,528,628 ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIT) Common Stock, no par value; Authorized 100,000,000 shares; issued and outstanding 52,639,056 and 52,139,056 shares, respectively ................................... 3,815,975 3,715,975 Retained (Deficit) .......................................... (3,501,476) (1,987,389) ----------- ----------- 314,499 1,728,586 Less Treasury Shares at Cost ........................... (378,507) (90,191) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ................... (64,008) 1,638,395 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ... $ 4,780,234 $ 5,167,023 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-2 AMERICAN TELETRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Sept 30, Nine Months Ended Sept 30, ---------------------------- ---------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ------------ REVENUES Employee Leasing ............................. $ 11,015,513 $ 10,512,036 $ 31,066,538 $ 32,282,524 Mortgage Services Income ..................... 422,925 497,576 2,000,789 1,051,961 Mortgage Interest ............................ 52,382 43,754 159,574 83,219 FmHA Loan Fees ............................... -- -- 629,866 -- ------------ ------------ ------------ ------------ TOTAL REVENUES .......................... 11,490,820 11,053,366 33,856,767 33,417,704 ------------ ------------ ------------ ------------ COST OF REVENUES Leased Employee Cost ......................... 10,591,480 9,618,264 30,705,624 30,077,437 Commissions and Other Mortgage Services Costs 278,523 155,496 1,104,568 464,267 Mortgage Interest ............................ 34,484 26,434 162,999 42,740 ------------ ------------ ------------ ------------ TOTAL COST OF REVENUES .................. 10,904,487 9,800,194 31,973,191 30,584,444 ------------ ------------ ------------ ------------ GROSS PROFIT ............................ 586,333 1,253,172 1,883,576 2,833,260 ------------ ------------ ------------ ------------ SELLING EXPENSES .................................... 65,769 54,250 178,171 214,387 ------------ ------------ ------------ ------------ GENERAL AND ADMINISTRATIVE EXPENSES Salaries and Employee Benefits ............... 533,775 458,250 1,771,648 1,424,488 Occupancy Expense ............................ 125,802 104,502 388,768 291,194 Amortization ................................. 27,005 55,597 56,093 132,436 Other ........................................ 228,136 284,420 859,245 704,697 ------------ ------------ ------------ ------------ TOTAL GENERAL AND ADMINISTRATIVE EXPENSES 914,718 902,769 3,075,754 2,552,815 ------------ ------------ ------------ ------------ OTHER INCOME AND (EXPENSE) Interest Income .............................. 23,865 -- 63,162 15,143 Other Income (Expense) ....................... (457) (9,011) (671) 45,078 Interest Expense ............................. (68,412) (94,136) (258,831) (241,441) ------------ ------------ ------------ ------------ TOTAL OTHER INCOME AND (EXPENSE) ........ (45,004) (103,147) (196,340) (181,220) ------------ ------------ ------------ ------------ (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES .......................... (439,158) 193,006 (1,566,689) (115,162) INCOME TAX EXPENSE .................................. -- -- -- -- ------------ ------------ ------------ ------------ (LOSS) INCOME FROM CONTINUING OPERATIONS ............ ($ 439,158) $ 193,006 ($ 1,566,689) ($ 115,162) DISCONTINUED OPERATIONS Income on Disposal of Subsidiaries ........... -- -- 52,602 -- ------------ ------------ ------------ ------------ NET (LOSS) INCOME ................................... ($ 439,158) $ 193,006 ($ 1,514,087) ($ 115,162) ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING .......... 52,639,056 51,688,153 52,439,056 51,668,153 ============ ============ ============ ============ (LOSS) INCOME PER SHARE Continuing Operations ........................ ($ 0.01) $ 0.00 ($ 0.03) $ 0.00 Discontinued Operations ...................... -- -- -- -- ------------ ------------ ------------ ------------ ($ 0.01) $ 0.01 ($ 0.03) $ 0.00 ============ ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-3 AMERICAN TELETRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited) Retained COMMON STOCK Earnings Treasury ------------------------ Shares Amount (Deficit) Stock TOTAL ---------- ------------ ------------- ------------ -------------- BALANCE DECEMBER 31, 1994 .......... 51,668,153 $ 3,598,249 ($1,180,041) -- $ 2,418,208 Sale of Common Stock August, 1995 ........... 470,903 117,726 -- $ 117,726 Acquisition of Treasury Stock -- -- -- -90191 ($ 90,191) Net Loss 1995 ............... -- -- (807,348) ($ 807,348) ----------- ----------- ----------- ----------- ----------- BALANCE DECEMBER 31, 1995 .......... 52,139,056 $ 3,715,975 ($1,987,389) ($ 90,191) $ 1,638,395 Sale of Common Stock March, 1996 ............ 500,000 100,000 -- -- $ 100,000 Acquisition of Treasury Stock -- -- -- (288,316) (288,316) Net (Loss) 1996 ............. -- -- (1,514,087) -- ($1,514,087) ----------- ----------- ----------- ----------- ----------- BALANCE SEPT 30, 1996 .............. 52,639,056 $ 3,815,975 ($3,501,476) ($ 378,507) ($ 64,008) =========== =========== =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-4 AMERICAN TELETRONICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Three Months Ended Nine Months Ended Sept 30, Sept 30, -------------------------- ---------------------------- 1996 1995 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net (Loss) Income .................................................... ($ 439,158) $ 193,006 ($1,514,087) ($ 115,162) Adjust. to Reconcile Net (Loss)Income to Net Cash Used by Operation Income From Discontinued Operations ............................. -- -- (52,602) -- Depreciation .................................................... 36,398 32,266 106,477 71,105 Amortization .................................................... 27,005 55,597 56,093 132,436 Changes in Current Assets and Liabilities (Increase) Decrease in Accounts Receivable ...................... 261,634 49,090 (229,905) 87,674 Collection of Insurance Receivable .............................. -- 420,000 -- 420,000 (Increase) Decrease in Receivable Under Warehouse Agreements .... 261,738 (21,389) 429,978 1,080 Decrease in Prepaid Expenses .................................... 28,851 -- 89,474 15,393 (Increase) in Workers' Compensation Ins. Deposit ................ (294,020) (200,788) (129,650) (601,925) Change in Single Family Residential Real Estate ................. 33,566 -- 59,300 -- Change in Cash Overdraft ........................................ -- -- -- (53,517) Increase (Decrease) in Accounts Payable ......................... 4,556 (19,557) (6,447) 32,838 Increase (Decrease) in Accrued Liabilities ...................... 333,801 (142,572) 1,262,220 263,924 ----------- ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 254,371 365,653 70,851 253,846 ----------- ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Office Furniture and Equipment ........................... (9,162) (34,529) (106,892) (86,121) Mortgage Loan Participation Collections .............................. -- (85,206) 140,049 (89,478) Deposits and Other ................................................... 25,524 41,782 26,496 30,996 ----------- ------------ ------------ ------------ NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES ........... 16,362 (77,953) 59,653 (144,603) ----------- ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Decrease in Related Party Receivable/Payable ......................... (64,274) (379,119) (43,476) (232,890) Note Borrowings ...................................................... -- 429,300 762,837 503,300 Note Payments ........................................................ (246,056) (93,791) (730,678) (125,284) Sale of Common Stock ................................................. -- 117,726 100,000 117,726 ----------- ------------ ------------ ------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ........... (310,330) 74,116 88,683 262,852 ----------- ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CERTIFICATES OF DEPOSIT ...................................................... (39,597) 361,816 219,187 372,095 CASH AND CERTIFICATES OF DEPOSITS AT THE BEGINNING OF THE PERIOD ................................................... 839,375 221,016 580,591 210,737 ----------- ------------ ------------ ------------ CASH AND CERTIFICATES OF DEPOSITS AT THE END OF THE PERIOD ................................................... $ 799,778 $ 582,832 $ 799,778 $ 582,832 =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Paid During the Year as: Interest Expense ........................................... $ 102,896 $ 49,147 $ 421,830 $ 124,678 =========== =========== =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Change in Related Party Receivable/Payable ...................... 235,714 -- -- ($ 103,000) Treasury Shares ................................................. (235,714) -- -- Assumption of Long-Term Debt .................................... -- -- -- 103,000 Receivable from Insurance Company ............................... -- -- -- 420,000 Aquisition of Assets ............................................ -- (156,250) -- (156,250) Common Stock .................................................... -- 156,250 -- 156,250 Increase in Workers' Comp Claim Liability ....................... -- -- -- -- Decrease in Workers' Comp Insurance Deposit ..................... -- -- -- (420,000) ----------- ------------ ------------ ----------- TOTAL ........................................................... $ -- $ -- $ -- $ -- =========== =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. F-5 AMERICAN TELETRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (UNAUDITED) NOTE 1: BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulations S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed, there has been no material change in the information disclosed in the notes to consolidated financial statements included in the Annual Report on Form 10-K of American Teletronics, Inc. and Subsidiaries for the year ended December 31, 1995. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended September 30, 1996, are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operation Financial Comparisons: First Nine Months of 1996: For the nine months ending September 30, 1996, ATI had consolidated revenues of $33,856,767. This compares to $33,417,704 for a like period in 1995 for a net increase of $439,063. Revenues from employee leasing decreased from $32,282,524 in 1995 to $31,066,538 for 1996 or $1,215,986 for the first nine months of 1996, a decrease of 3.8%. This reduction is a result of management's decision to eliminate unprofitable and/or high risk business during the third and fourth quarters of 1995 and by requiring that all new business meet heightened standards for credit, safety and profitability. Mortgage fee revenues increased from $1,051,961 during the first nine months of 1995 to $2,630,655, an increase of $1,578,694 or 150.1% for the comparable period. This increase is a result of revenues of $904,443 from the Timonium, Maryland branch which was not in existence in 1995, $629,866 from the FmHA government guaranteed loan program and increased revenues from the Dallas, Texas branch from mortgage products, which have been in development and are now starting to be implemented. For the nine months ending September 30, 1996, ATI had a consolidated loss from all operations of $1,514,087 compared to a comparable loss of $115,162 for the nine months ending September 30, 1995. This increase in loss of $1,398,925 is primarily a result of the following: (1) a determination on the part of management to recognize the total amount of the future costs with the employee leasing operation of workers compensation claims as estimated by its insurance carrier in the period of occurrence rather than as the claims are paid. The net effect of this change from previous recognition is an adjustment in workers compensation expense of approximately $800,000. Two large claims, which occurred in the first six months of 1996 and may amount to approximately $480,000 and could be paid over the next four years was a principal reason to cause management to focus on the change in the expense treatment. Management believes this recognition treatment is more conservative than the previous method and as such eliminates the potential requirement to adjust previous insurance policy years. In the event that the claims incurred do not mature into requirements for paid claims in the amount recognized then a recovery will be recognized as reduced expenses in subsequent periods. Since it is anticipated that Crest Outsourcing, Inc. ("Crest"), ATI's professional employer organization ("PEO"), will be involved in a "Spin Out" in the near future, this more conservative recognition of expenses will assist in the disclosure of the risk associated with the PEO Industry. This risk can be eliminated by Crest obtaining a fully insured workers compensation program. (2) A change by the Veteran's Administration in the amount of points charged on each mortgage loan and the elimination of variable rates from the current VA program has severally reduced the Timonium, Maryland revenues and caused that branch to incur losses of $359,494 for the nine month period and (3) the decision by management to defer recognition of income on FmHA loans until the cash is received rather than when the loan closes. This decision is to recognize the difficulty in estimating the timing of when cash will be received from these loans after they have closed and the guarantee is issued. At the start of the third quarter the Timonium branch adopted a wider menu of services which are consistent with the Dallas branch and which are not as interest rate sensitive and accordingly anticipated that revenues would increase by the end of the year. However, the anticipated increases in revenue did not occur and the mortgage operation is in the process of selling the Timonium operation to the employees in Maryland. In the event the sale is consummated, the operation will continue on a "Net Branch" basis with no future liabilities being assumed by the Company. The Dallas branch experienced mortgage operation revenues of $1,618,940 for the first nine months of 1996 as compared to $1,135,180 for the same period in 1995, an increase of 42.6%. The revenue increase of $482,760 is attributed to increased revenues of $629,866 from the government guaranteed loan program and a decrease in revenues of $147,106 due to a reduction of mortgage revenue for the previous comparable nine month period. The combined mortgage division sustained a combined profit of $170,431 before corporate overhead allocation and income tax provision. This compares to a loss of $475,385 for the nine month period ending September 30, 1995. This is an improvement of $645,816 of which the government guaranteed loan program represents $629,866 of the increase. Third Quarter of 1996: For the third quarter ending September 30, 1996, ATI had consolidated revenues of $11,490,820. This compares to $11,053,366 for a like period in 1995 for a net increase of $437,454. Revenues from employee leasing increased from $10,512,036 in the third quarter of 1995 to $11,015,513 for the same period in 1996 or $503,477, an increase of 4.8%. This increase reflects the first quarter that Crest, ATI's employee leasing subsidiary, has produced comparative numbers since Crest management began eliminating unprofitable and high risk clients. Crest's management decision to eliminate unprofitable and/or high risk business during the last two quarters of 1995 and by requiring that all new business meet heightened standards for credit, safety and profitability decreased revenues for the four consecutive quarters ending June 30, 1996. Mortgage fee revenues decreased from $497,576 during the third quarter of 1995 to $422,925 for the third quarter of 1996, a decrease of $74,651. This decrease is all related to decreased revenues from the Dallas operation. No revenue was recognized from government guaranteed loans and the Timonium, Maryland branch contributed revenues of $64,820. For the third quarter ending September 30, 1996, ATI had a consolidated loss from all operations of $439,158 compared to a consolidated profit of $193,006 for the third quarter ending September 30, 1995. This increase in loss of $632,164 is primarily a result of a determination on the part of management to recognize the total amount of the future costs of workers compensation claims as estimated by its insurance carrier in the period of occurrence rather than as the claims are paid. The net effect of this change from previous recognition is an adjustment in workers compensation expense of approximately $800,000 in the second quarter of 1996. Two claims, mentioned above, which occurred in the first six months of 1996 and which may amount to approximately $480,000 and which could be paid over the next four years was a principal reason to cause management to focus on the expense treatment. Management believes this recognition treatment is more conservative than the previous method and as such eliminates the requirement to adjust previous insurance policy years. Losses of $200,257 were incurred in the Timonium branch in the third quarter as a result of the continuing decreased revenues associated with discontinued or curtailed refinance programs by the Veterans Administration. Revenues declined from $213,695 in the second quarter of 1996 to $64,820 in the third quarter of 1996. At the beginning of the third quarter, 1996, Timonium adopted the wider menu of services which were developed in the Dallas branch and which are not as interest rate sensitive and accordingly anticipates that revenues will increase by the end of the year. This strategy was unsuccessful, and the Timonium Branch is being sold to the employees effective October 1, 1996. The Dallas branch experienced mortgage operation revenue of $303,031 for the third quarter of 1996 as compared to $310,570 for the same period in 1995. Cash and Temporary Cash Investments increased during the third quarter by $361,095. This change is attributed to $365,653 from operations and $74,116 from financing activities less $77,953 from investing in activities. Marketing ATI continues to develop new marketing programs for both the PEO operation and the mortgage division. Marketing in the PEO operation is being developed through increased Agent/Broker activities and is directed towards geographic expansion and specific niche markets as opposed to the prior broad approach to all markets. The Agent/Broker network that is being developed is continuing to develop brokers in other geographics areas. This merger was reported earlier and is scheduled to close before the end of August, 1996. Marketing developments in the mortgage division continue in the Home-A-Loan, Alternative Finance and Manufactured Housing areas. Management anticipates that increases in revenues and margins from all areas will continue as more relationships and markets develop. Joint Ventures, Mergers and Acquisitions, and Financing The execution of an agreement with Holigan Family Investments, Inc., Three Putt, Ltd. and Argo Realty, Inc., the wholly owned subsidiary of the mortgage operation, to create a Limited Liability Company to be known as Heart of Texas Trails, LLC is the first manufactured home land development for the Company. The development is approximately eighty acres and is scheduled for 288 lots. The mortgage division will provide the mortgage expertise, Holigan Family Investments, Inc. will provide the sales effort and the manager on site will be Three Putt, Ltd. Thedevelopment is located in Bellmeade adjacent to Waco, Texas. The first sales are scheduled for the spring of 1997. rest Outsourcing, Inc. has entered into a letter agreement with Southcoast Capital Corporation wherein Southcoast will act as Crest's exclusive financial adviser and agent to assist Crest with a best efforts private placement offering of approximately $5,000,000. The use of proceeds include funds for mergers and acquisitions, the development of additional marketing programs and the creation of a captive insurance company. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Exhibit 27 Financial Data Schedule Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. American Teletronics, Inc. December 13, 1996 /s/ Harry K. Myers, Jr. _________________________ By: Harry K. Myers, Jr., Chairman and Principal Financial Officer