8/1/02 - Telenetics Reports Second Quarter 2002 Results

LAKE FOREST, California – August 1, 2002 – Telenetics Corporation (OTC-BB: TLNT), a provider of wired and wireless data communications products for customers worldwide, today reported financial results for the three and six months ended June 30, 2002.

Comparison of Results for Quarters Ended June 30, 2002 and 2001

Net sales for the quarter ended June 30, 2002 were approximately $3.9 million, a decrease of 46% from the $7.2 million in net sales for the quarter ended June 30, 2001. Approximately $3.1 million of the $3.3 million decrease was due to the existence during the quarter ended June 30, 2001, but not during the quarter ended June 30, 2002, of $816,000 in sales from the Traffic Management Systems Division that the Company divested in August 2001 and $2.3 million in non-recurring pass-through sales to Motorola’s Multiservice Networks Division. If the Company’s net sales for the quarter ended June 30, 2001 were adjusted to exclude those $3.1 million in sales, then the Company’s net sales for the quarter ended June 30, 2002 would have represented only a $600,000, or 13%, decrease from the Company’s adjusted net sales for the quarter ended June 30, 2001. Earnings before interest, taxes, depreciation and amortization ("EBITDA") improved by $346,000 to a loss of ($184,000), or ($0.01) per share, for the quarter ended June 30, 2002, as compared to a loss of ($530,000), or ($0.03) per share, for the quarter ended June 30, 2001.

Gross profit for the quarter ended June 30, 2002 was approximately $1.2 million, a decrease of $456,000, or 28%, from the $1.6 million of gross profit for the quarter ended June 30, 2001. Gross margin for the quarter ended June 30, 2002 was 29.8% of net sales, an improvement of 7.3%, as compared to the gross margin of 22.5% of net sales for the quarter ended June 30, 2001.

Loss from operations for the quarter ended June 30, 2002 was ($468,000), an improvement of $428,000 as compared to the loss from operations of ($897,000) for the quarter ended June 30, 2001.

Net loss for the quarter ended June 30, 2002 improved by $456,000 to ($885,000), or ($0.03) per share, as compared to a net loss of ($1.3 million), or ($0.21) per share, for the quarter ended June 30, 2001. Net loss, loss from operations and EBITDA for the quarters ended June 30, 2002 and June 30, 2001 include gains of $41,000 and $58,000, respectively, relating to negotiated discounts on certain litigation obligations and accounts payable.

Comparison of Results for the Six Months Ended June 30, 2002 and 2001

Net sales for the six months ended June 30, 2002 were approximately $8.1 million, a decrease of 11% from the $9.1 million in net sales for the six months ended June 30, 2001. During the six months ended June 30, 2001, but not during the six months ended June 30, 2002, the Company recorded a combined aggregate of $3.4 million in net sales of its former Traffic Management Systems Division and of its non-recurring pass-through sales to Motorola’s Multiservice Networks Division. If the Company’s net sales for the six months ended June 30, 2001 were adjusted to exclude those $3.4 million in sales, then the Company’s net sales for the six months ended June 30, 2002 would have represented an increase of $2.4 million, or 42%, over the Company’s net sales for the six months ended June 30, 2001. EBITDA improved by $3.1 million to $651,000, or $0.02 per share, for the six months ended June 30, 2002, as compared to a negative EBITDA of ($2.4 million), or ($0.14) per share, for the six months ended June 30, 2001.

Gross profit for the six months ended June 30, 2002 was approximately $2.5 million, an increase of $516,000, or 26%, over the $2.0 million of gross profit for the six months ended June 30, 2001. Gross margin for the six months ended June 30, 2002 was 31.2% of net sales, an improvement of 9.0%, over the gross margin of 22.2% of net sales for the six months ended June 30, 2001.

Income from operations for the six months ended June 30, 2002 was $103,000, an improvement of $3.2 million as compared to the loss from operations of ($3.1 million) for the six months ended June 30, 2001.

Net loss for the six months ended June 30, 2002 improved by $3.0 million to ($912,000), or ($0.03) per share, as compared to a net loss of ($3.9 million), or ($0.37) per share, for the six months ended June 30, 2001. Net income, income from operations and EBITDA for the six months ended June 30, 2002 and June 30, 2001 include gains of $754,000 and $58,000, respectively, relating to negotiated discounts on certain litigation obligations and accounts payable.

Net loss, income (loss) from operations and EBITDA for the three and six months ended June 30, 2002 have been negatively impacted by a non-recurring charge of $139,000 to provide an allowance for uncollectability for the remaining unreserved balance of the related party receivable from Michael Armani, a former CEO, former President and former director of Telenetics. Mr. Armani’s actions, including the lack of any meaningful payments against the loan balance for almost two years and his refusal to provide the stock collateral required under a Stock Pledge Agreement he executed on March 21, 2002, has cast substantial doubt regarding his intention and ability to pay. The Company intends to pursue all remedies available to it under the law to recover the full amount of $223,000 due and owing from Mr. Armani.

Commenting on the recent changes and the Company’s outlook, David Stone, President and Chief Financial Officer of Telenetics stated, "The second quarter was extremely eventful for Telenetics. The quarter included a management change on May 15, 2002 and a subsequent restructuring of management, a change in selling strategy aimed at leveraging our international distributor and reseller network, and a significant effort to extend the maturity dates on term debt in order to reduce our liquidity risk.

"I am pleased to report that we have made significant progress in a number of these areas. The key elements of the management restructuring were the elimination of three executive management positions and a flattening of the organizational structure to improve interdepartmental communication and cooperation. The effective reduction in salaries coupled with other targeted expense reductions is expected to result in approximately $500,000 per year in savings, primarily in the area of selling, general and administrative expenses. The impact of these expense reductions will start to be seen in the current quarter.

"With regard to operations, after experiencing an extremely weak start to the second quarter, both in new orders and revenues, the second half of the quarter showed marked increases in customer inquiries, quote activity and new order bookings. I strongly believe this occurred as a result of the new management team’s increased focus on supporting our worldwide distribution network and our willingness to be both responsive and flexible with regard to project pricing. Working closely with our distributors on large projects has allowed us to win some business we previously would have lost, and in the process gain back the confidence of many distributors. Our orders during the second quarter included several from distributors that had never before ordered from us. I believe our emphasis on leveraging our distribution network will result in a significant increase in revenue opportunities, and I believe we are positioned well to benefit from increased orders. We have also begun an active program to convince our distributors and resellers to carry and market a broader array of Telenetics’ products. In the past, our international distributors have only marketed our Sunrise Series™ product line. We are now working with them to market our other products as well. Although revenues did not meet our expectations during the second quarter, we are very encouraged by the improvements during the latter half of the quarter, and we enter the third quarter much more optimistic about our chances of growing revenue.

"We have successfully renegotiated substantially all of our term debt. A note payable to Dolphin Offshore Partners, L.P. for $2.115 million, carrying an interest rate of 10% per annum and originally due January 2, 2003, has been replaced by a 6% note due April 1, 2005. Other notes payable that totaled $725,000 and were due in full between June 30, 2002 and July 2, 2002 have been converted into amortized notes with monthly interest and principal payments and a final due date of January 15, 2004. Additionally, other key suppliers and trade payable creditors representing in aggregate over $500,000 have agreed to extended payment terms for overdue balances. Primarily as a result of these debt restructuring activities, our net working capital increased during the second quarter by approximately $2.1 million, from a working capital deficit of ($538,000) at March 31, 2002 to a positive $1.5 million at June 30, 2002. Although improved inventory management will be required to fully realize the potential benefit, we believe that the changes that were implemented during the second quarter have now positioned Telenetics, for the first time in over two years, to support its activities from a combination of internal cash flow and working capital financing."

Selection and Use of EBITDA as Measure of Financial Performance

The Company’s management has selected and standardized its selection of EBITDA as a measure of Company financial performance for several reasons. The Company believes that a discussion of EBITDA is relevant because it can provide the reader and Company management with a more accurate and understandable picture of period-to-period changes in the Company’s operating performance by eliminating the effects of the Company's unusually heavy amortization and non-cash expense burdens, some of which are described below. The Company’s management believes these burdens generally have little contemporaneous relevance to financial reporting periods. The Company’s management also selected EBITDA as a measure of Company financial performance because EBITDA is a common and widely recognized measure used by financial institutions to evaluate a company's financial performance under various circumstances. Each of the elements the Company used in determining EBITDA have been taken from financial statement information prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The tables below outline these elements.

ABOUT TELENETICS

Based in Lake Forest, California, Telenetics designs, manufactures and distributes wired and wireless data communications products for customers worldwide. Telenetics offers a wide range of industrial grade modems and wireless products, systems and services for connecting its customers to end-point devices such as meters, remote terminal units, traffic and industrial controllers and remote sensors. Telenetics also provides high-speed communications products for complex data networks used by financial institutions, air traffic control systems and public and private wireless network operators. Additional information is available at www.telenetics.com.

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