U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Quarterly Period Ended March 31, 2005 [ ] 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: 0-17893
TELTRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of Incorporation or organization)59-2937938
(IRS Employer Identification Number)2150 Whitfield Industrial Way, Sarasota, Florida 34243
(Address of principal executive offices including zip code)(941) 753-5000
Issuer's telephone number, including area code
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 is an accelerated filer (as defined in Exchange Act Rule 12-b-2 of the Exchange Act.) Yes [ ] No [ X ]
As of May 10, 2005, there were 7,874,539 shares of the Registrant’s Common Stock, par value $.001, outstanding.
Exhibit index appears on page 12.
TABLE OF CONTENTS
PAGE PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets at March 31, 2005
(Unaudited) and December 31, 20043 Condensed Consolidated Statements of Operations (Unaudited)
for the Three months ended March 31, 2005 and 20044 Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three months ended March 31, 2005 and 20045 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK9 ITEM 4. CONTROLS AND PROCEDURES 9 PART II OTHER INFORMATION ITEM 3. DEFAULTS UPON SENIOR SECURITIES 10 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10 SIGNATURE 11 EXHIBIT INDEX 12
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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTSTELTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except shares and per share amountsASSETS
March 31, December 31, 2005 2004 (Unaudited) Current assets: Cash and cash equivalents $ 880 $ 1,580 Accounts receivable, net of allowance for doubtful accounts 5,404 5,499 Costs and estimated earnings in excess of billings on uncompleted contracts 655 342 Inventories, net 4,585 3,858 Other current assets 1,033 382 Total current assets 12,557 11,661 Property and equipment, net 3,345 3,729 Other assets 978 1,034 Total assets $ 16,880 $ 16,424 LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current liabilities: Current portion of long-term debt and capital lease obligations $ 4,698 $ 4,831 Accounts payable 7,238 5,883 Other current liabilities 3,938 3,869 Total current liabilities 15,874 14,583 Long-term liabilities: Long-term debt and capital lease obligations, net of current portion 7,468 7,885 Commitments and contingencies Shareholders' deficiency: Capital stock 8 8 Additional paid-in capital 24,302 24,301 Accumulated deficit and other comprehensive loss (30,772) (30,353) Total shareholders' deficiency (6,462) (6,044) Total liabilities and shareholders' deficiency $ 16,880 $ 16,424
The accompanying notes are an integral part of these condensed consolidated financial statements.
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TELTRONICS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except shares and per share amounts
Three Months Ended March 31, 2005 2004 Net sales Product sales and installation $ 6,614 $ 8,794 Maintenance and service 3,179 2,513 9,793 11,307 Cost of goods sold 5,583 6,238 Gross profit 4,210 5,069 Operating expenses: General and administrative 1,525 1,611 Sales and marketing 2,065 2,222 Research and development 1,014 864 4,604 4,697 Income (loss) from operations (394) 372
Other income (expense):Interest (348) (434) Gain on sale of abandoned technology 495 --- Other 15 (3) 162 (437) Loss before income taxes (232) (65) Income taxes 5 2 Net loss (237) (67) Dividends on Preferred Series B and C Convertible stock 159 153 Net income (loss) available to common shareholders $ (396) $ (220) Net income (loss) per share: Basic and Diluted $ (0.05) $ (0.03) Weighted average shares outstanding: Basic and Diluted 7,869,617 7,795,670
The accompanying notes are an integral part of these condensed consolidated financial statements.
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TELTRONICS, INC. AND SUBSIDIARIESUN
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands, except shares and per share amounts
Three Months Ended March 31, 2005 2004 NET CASH FLOWS USED IN OPERATING ACTIVITIES $ (424) $ (127)
INVESTING ACTIVITIES - NET353 (45)
FINANCING ACTIVITIES:Net borrowings on line of credit (629) 1,244 Other 24 (35) Net cash flows provided by (used in) financing activities (605) 1,209 Effect of exchange rate changes on cash (24) 7 Net decrease in cash and cash equivalents for the period (700) (86) Cash and cash equivalents - Beginning of Period 1,580 146 Cash and cash equivalents - End of Period $ 880 $ 60
The accompanying notes are an integral part of these condensed consolidated financial statements.
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TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In thousands, except shares and per share amounts
(Unaudited)NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. 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 March 31, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.
NOTE 2 - COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) is as follows:
Three Months Ended March 31, 2005 2004 Net loss $ (237) $ (67) Foreign currency translation (24) 7 Total comprehensive income (loss) $ (261) $ (60) 6
NOTE 3 - NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:
Three Months Ended March 31, 2005 2004 Basic and diluted Net loss $ (237) $ (67) Preferred dividends (159) (153) $ (396) $ (220) Weighted average shares outstanding 7,869,617 7,795,670 Net loss per share $ (0.05) $ (0.03) For the three months ended March 31, 2005 and 2004, options to purchase 1,700,000 shares of common stock, respectively, were not included in the computation of diluted net loss per share because the effect would be anti-dilutive.
For the three months ended March 31, 2005 and 2004, warrants to 1,190,000 shares of common stock were not included in the computation of diluted net loss per share because the effect would be anti-dilutive.
NOTE 4 - INVENTORIES
The major classes of inventories are as follows:
March 31,
2005
(Unaudited)December 31,
2004Raw materials $ 2,088 $ 1,707 Work-in-process 965 759 Finished goods 1,532 1,392 $ 4,585 $ 3,858 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (In thousands, except shares and per share amounts)FORWARD-LOOKING STATEMENTS
References in this report to the “Company,” “Teltronics,” “we.” or “us” mean Teltronics, Inc. together with its subsidiaries, except where the context otherwise requires. A number of statements contained in this Quarterly Report on Form 10-Q are forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” or words of similar import. Similarly, statements that describe our future plans, objectives, strategies or goals are also forward-looking statements. These forward-looking statements involve a number of risks and uncertainties that may materially adversely affect the anticipated results. Such risks and uncertainties include, but are not limited to, the timely development and market acceptance of products and technologies, competitive market conditions, successful integration of acquisitions, the ability to secure additional sources of financing, the ability to reduce operating expenses, and other factors described in the Company’s filings with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this Form 10-Q and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
RESULTS OF OPERATIONS
Net Sales and Gross Profit Margin
Net sales decreased $1,500 or 13.4% for the three month period ended March 31, 2005 as compared to the same period in 2004. The decrease resulted primarily from a sales lag on a product enhancement introduced in late 2004 and a shift of $500 from the first quarter to the second quarter of 2005 as the result of a particular government contract put on hold. This order was reinstated in May 2005.
Gross profit margin for the three month periods ended March 31, 2005 and 2004 was 43.0% and 44.8%, respectively. The decrease in gross profit percentage was primarily driven by sales mix.
Operating Expenses
Operating expenses were $4,604 and $4,697 for the three month period ended March 31, 2005 and 2004, respectively.
General and administrative expenses decreased $86 for the three month period ended March 31, 2005 as compared to the same period in 2004. The net decrease was primarily a result of a $205 decrease in the provision for doubtful accounts resulting from the collection of outstanding specific accounts, partially offset by an increase of $95 in compensation and benefits, and an increase of $34 in expenses related to employee recruitment.
Sales and marketing expenses decreased $158 for the three month period ended March 31, 2005 as compared to the same period in 2004. The net decrease was primarily a result of the decrease in severance costs related to the reduction in force in the NYC sales office.
Research and development expenses increased $150 for the three month period ended March 31, 2005 as compared to the same period in 2004. The net increase was primarily a result of the addition of new staff at the Atlanta facility.
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Other Income (Expense)
Other income (expense) were $162 and $437 for the three month period ended March 31, 2005 and 2004, respectively. For the three month period ended March 31, 2005 interest expense decreased $69, financing costs decreased $17 and other expenses decreased $16. The decrease in interest expense was a result of the decrease in the interest rate on the note payable to Harris.
The first quarter of 2005 also included a gain of $495 on the sale of abandoned technology.
LIQUIDITY AND CAPITAL RESOURCES
In April 2005 we amended our credit facility which has a maximum credit limit of $5,500. The new facility matures March 31, 2006. The facility bears interest at prime plus 2.0% to 3.0% depending on the Company’s financial results. At March 31, 2005 and December 31, 2004, the Company’s interest rate was 8.75% and 8.25%, respectively. The amount available under this credit facility is subject to restriction based on availability formulas. The availability formulas relate primarily to the eligibility of accounts receivable as part of the Company’s borrowing base. As a result of the foregoing availability restrictions, the amount available under this credit facility as of March 31, 2005 was $95. The credit facility is secured by a lien on substantially all our assets and a pledge of substantially all the capital stock of our subsidiaries.
In March 2005, the Company paid $530 to a related party reducing the outstanding loan balance to $248.
Seasonality
The Company has experienced seasonality due in part to purchasing tendencies of our customers during the fourth and first quarters of each calendar year. Consequently, net sales for the fourth and first quarters of each calendar year are typically not as strong as results during the other quarters. The net sales of the Company continued to be impacted by the general slowdown of telecommunications expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material changes to the disclosure under the caption “Quantitative and Qualitative Disclosures About Market Risks” in our Annual Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act. There has been no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of March 31, 2005, we were in arrears on dividend payments on our Series B and Series C Preferred Stock in the amounts of $173 and $881, respectively, which amounts include interest thereon. We were also in arrears on debt payment and the Note Payable to Tri-Link in the amount of $1,080.
ITEM 6(a). EXHIBITS 31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 10.1 Extension and Amendment of Lease between ARE Sarasota Limited Partnership and Teltronics, Inc. dated March 31, 2005 10.2 New York State Department of Education/DIIT Minibid #2189 Awarded January 31, 2005 to Teltronics, Inc 10.3 Amended Loan and Security Agreement between Teltronics, Inc. and The CIT Group/Business Credit, Inc. dated April 25, 2005
ITEM 6(b). REPORTS ON FORM 8-K
The Company filed two reports on Form 8-K during the quarter ended March 31, 2005. Information regarding the item reported on is as follows:Date Filed Item Reported On February 3, 2005 1.01 Entry Into a Material Definitive Agreement. The Company issued a Press Release announcing it had been awarded a Maintenance Contract with the New York City Board of Education . March 4, 2005 1.02 Termination of a Material Definitive Agreement. The Company issued a Press Release announcing International Media Network AG was unable to fulfill its obligation to Teltronics.
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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.
Dated: May 10, 2005TELTRONICS, INC.
BY: /S/ EWEN R. CAMERON
——————————————
Ewen R. Cameron
President & Chief Executive Officer
Dated: May 10, 2005
BY: /S/ RUSSELL R. LEE III
——————————————
Russell R. Lee III
Vice President & Chief Financial Officer
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EXHIBIT INDEX
Exhibit
NumberDescription 31.1* Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32* Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 10.1* Extension and Amendment of Lease between ARE Sarasota Limited Partnership and Teltronics, Inc. dated March 31, 2005 10.2* New York State Department of Education/DIIT Minibid #2189 Awarded January 31, 2005 to Teltronics, Inc 10.3* Amended Loan and Security Agreement between Teltronics, Inc. and The CIT Group/Business Credit, Inc. dated April 25, 2005 (*) Filed as an Exhibit to this Report on Form 10-Q for the period ended March 31, 2005. 12