10-Q 1 form10q2005-2.htm FORM 10-Q PERIOD ENDING JUNE 30, 2005 Form 10-Q Quarter Ended June 30, 2005

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 June 30, 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 August 15, 2005, there were 7,874,539 shares of the Registrant’s Common Stock, par value $.001, outstanding.


Exhibit index appears on page 13.




TABLE OF CONTENTS

      PAGE
PART I   FINANCIAL INFORMATION  
  ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at June 30, 2005
(Unaudited) and December 31, 2004
3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three months and Six months ended June 30, 2005 and 2004
4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six months ended June 30, 2005 and 2004
5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
11
ITEM 4. CONTROLS AND PROCEDURES 11
PART II   OTHER INFORMATION  
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 12
ITEM 6. EXHIBITS 12
SIGNATURE 13
EXHIBIT INDEX 14


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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TELTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands, except shares and per share amounts

ASSETS

  June 30,
December 31,
  2005
2004
  (Unaudited)  
  
Current assets:    
     Cash and cash equivalents $   2,348  $   1,580 
     Accounts receivable, net of allowance for
          doubtful accounts 6,653  5,499 
     Costs and estimated earnings in excess of billings
          on uncompleted contracts 276  342 
     Inventories, net 4,869  3,858 
     Other current assets 1,500  382 

          Total current assets 15,646  11,661 
 
Property and equipment, net 2,933  3,729 
Other assets 1,002  1,034 

          Total assets $ 19,581  $ 16,424 


LIABILITIES AND SHAREHOLDERS' DEFICIENCY

Current liabilities:
     Current portion of long-term debt and capital
          lease obligations $ 13,659  $   4,831 
     Accounts payable 6,210  5,883 
     Other current liabilities 5,024  3,869 

          Total current liabilities 24,893  14,583 

Long-term liabilities:
     Long-term debt and capital lease obligations,
          net of current portion 128  7,885 
Commitments and contingencies
Shareholders' deficiency:
     Capital stock
     Additional paid-in capital 24,302  24,301 
     Accumulated deficit and other comprehensive loss (29,750) (30,353)

          Total shareholders' deficiency (5,440) (6,044)

          Total liabilities and shareholders' deficiency $ 19,581  $ 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 June 30,

  Six Months
  Ended June 30,

  2005
2004
      2005
2004
Net sales        
     Product sales and installation $       9,671  $     9,627  $   16,285  $   18,421 
     Maintenance and service 3,336  2,517  6,515  5,030 

  13,007  12,144  22,800  23,451 
Cost of goods sold 7,451  7,635  13,034  13,873 

Gross profit 5,556  4,509  9,766  9,578 

Operating expenses:
     General and administrative 1,263  1,278  2,788  2,889 
     Sales and marketing 1,809  2,190  3,874  4,412 
     Research and development 945  830  1,959  1,694 

  4,017  4,298  8,621  8,995 

Income from operations 1,539  211  1,145  583 


Other income (expense):
     Interest (395) (515) (743) (949)
     Gain on sale of abandoned technology ---  ---  495  --- 
     Other 51  66  --- 

  (344) (512) (182) (949)

Income (loss) before income taxes 1,195  (301) 963  (366)
Income taxes

Net income (loss) 1,192  (302) 955  (369)
 
Dividends on Preferred Series B and C
     Convertible stock
163  158  322  311 

Net income (loss) available to common
     Shareholders
$       1,029  $      (460) $        633  $      (680)

Net income (loss) per share:
     Basic $         0.13  $    (0.06) $       0.08  $    (0.09)
     Diluted $         0.11  $    (0.06) $       0.08  $    (0.09)

Weighted average shares outstanding:
     Basic 7,874,539  7,838,686  7,870,826  7,817,178 
     Diluted 10,905,227  7,838,686  7,960,217  7,817,178 


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 CASH FLOWS

In thousands, except shares and per share amounts



  Six Months Ended June 30,
  2005
2004
 
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES $     (455)      $    469      
 
INVESTING ACTIVITIES - NET 297       (316)     
 
FINANCING ACTIVITIES:
     Net borrowings on line of credit 1,394       229      
     Other (437)      (141)     

Net cash flows provided by financing activities 957       88      
 
Effect of exchange rate changes on cash (31)      6      

 
Net increase in cash and cash equivalents for the period 768       247      

 
Cash and cash equivalents - Beginning of Period 1,580       146      
 
Cash and cash equivalents - End of Period $    2,348       $    393      







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 six month period ended June 30, 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
June 30,

Six Months Ended
June 30,

  2005
2004
2005
2004
Net income (loss) $ 1,192  $(302) $ 955  $(369)
Foreign currency translation (6) (1) (30)

Total comprehensive income (loss) $ 1,186  $(303) $ 925  $(363)








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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
June 30,

Six Months Ended
June 30,

Net income per share     2005
    2004
    2005
    2004
Basic        
Net income (loss) $        1,192  $       (302) $         955  $       (369)
Preferred dividends (163) (158) (322) (311)




  1,029  (460) 633  (680)




Weighted average shares outstanding 7,874,539  7,838,686  7,870,826  7,817,178 
Net income (loss) per share $          0.13  $     (0.06) $        0.08  $     (0.09)




Diluted
Net income (loss) $        1,192  $       (302) $         955  $       (369)
Preferred dividends ---  (158) (322) (311)
Interest 32  ---  ---  --- 




  1,224  (460) 633  (680)




Weighted average shares outstanding 10,905,227  7,838,686  7,960,217  7,817,178 
Net income (loss) per share $          0.11  $     (0.06) $        0.08  $     (0.09)




For the three and six months ended June 30, 2005 and 2004, options to purchase 1,541,350 and 1,664,000 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 and six months ended June 30, 2005 and 2004, warrants to purchase 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:

  June 30, 2005
December 31, 2004
  (Unaudited)

Raw materials $   2,920     $   1,707    
Work-in-process 535     759    
Finished goods 1,414     1,392    


  $   4,869     $   3,858    




NOTE 5 – SUBSEQUENT EVENTS

On July 6, 2005 the Company entered into a new Revolving Credit, Term Loan and Security Agreement (“Agreement”) under which the Company obtained a $3,000 term loan (“Term Loan”) and was granted an $8,000 revolving credit facility (“Revolver”). Advances under the Revolver are based on a borrowing base formula that provides for, among other things, eligibility based on certain percentages of receivables and inventory. Advances under the Revolver bear interest at prime plus 2.5% while the Term Loan, which is payable in 36 monthly installments based on a six year amortization, bears interest at prime plus 3.5%. Substantially all of the Company’s assets are pledged to secure borrowings under the Agreement.


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Under the terms of the Agreement, the Company used approximately $8,100 under the facility to satisfy the Company’s debt under its previous line of credit facility and its Secured Promissory Note. The Company recognized a gain of $3,622 or $0.46 per basic share on the extinguishment of the Secured Promissory Note.

The Company also issued a warrant to purchase 236,236 Common shares in connection with the Agreement. The warrant is exercisable for a period of up to ten years at a price, which is subject to escalation under certain conditions, of $0.35 per share. The Company recorded a deferred charge of $57 in connection with issuing the warrant which will be amortized over the three year term of the Agreement.












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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 increased $863 or 7.1% for the three month period ended June 30, 2005 as compared to the same period in 2004. Net sales decreased $651 or 2.8% for the six month period ended June 30, 2005 as compared to the same period in 2004. The three month increase is primarily the result of a shift in customer demands from the first quarter to the second quarter. The decrease in sales for the six months ending June 30, 2005 is primarily attributable to the ongoing downturn in the Intelligent Systems Management market as customers switch from the Time Division Multiplexing technology to the Internet Protocol technology.

Gross profit margin for the three month period ended June 30, 2005 and 2004 was 42.7% and 37.1%, respectively. Gross profit margin for the six month period ended June 30, 2005 and 2004 was 42.8% and 40.8%, respectively. Gross profit margin percentage is driven by sales mix, manufacturing variances and project management.

Operating Expenses

Operating expenses were $4,017 and $4,298 for the three month period ended June 30, 2005 and 2004, respectively.

General and administrative expenses decreased $15 for the three month period ended June 30, 2005 as compared to the same period in 2004. The net decrease was primarily the result of a $45 decrease in depreciation expense, a $27 decrease in employee recruitment, and $62 decrease in auditing and legal fees, partially offset by an increase of $41 in the provision for doubtful accounts, an increase of $31 in rent, and an increase of $32 temporary help.

Sales and marketing expenses decreased $381 for the three month period ended June 30, 2005 as compared to the same period in 2004. The net decrease was primarily the result of a $87 decrease in depreciation expense, an $85 decrease in commissions, a $53 decrease in travel and entertainment, and a $140 decrease associated with a change in facilities in the NYC sales office.


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Research and development expenses increased $115 for the three month period ended June 30, 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.

Operating expenses were $8,621 and $8,995 for the six month period ended June 30, 2005 and 2004, respectively.

General and administrative expenses decreased $101 for the six month period ended June 30, 2005 as compared to the same period in 2004. The net decrease was primarily the result of a $85 decrease in depreciation expense, and a $165 decrease in the provision for doubtful accounts resulting from the collection of outstanding specific accounts. These are partially offset by an increase of $60 in auditing and legal fees, and an increase of $82 in compensation and employee fringe expenses.

Sales and marketing expenses decreased $538 for the six month period ended June 30, 2005 as compared to the same period in 2004. The net decrease was primarily a result of the decrease in severance costs of $114 related to the reduction in force in the NYC sales office, a decrease of $80 in commission expense, a $144 reduction in depreciation expense, and a $196 decrease in rent expense associated with the change in facility in NYC.

Research and development expenses increased $265 for the six month period ended June 30, 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, offset by a $38 reduction in depreciation expense.

Other Income (Expense)

Other expense was $344 and $512 for the three month period ended June 30, 2005 and 2004, respectively. For the three month period ended June 30, 2005 interest expense decreased $33, financing costs decreased $84 and other expenses decreased $48. The decrease in interest expense was a result of the decrease in the interest rate on the note payable to Harris Corporation.

Other expense was $182 and $949 for the six month period ended June 30, 2005 and 2004, respectively. For the six month period ended June 30, 2005 interest expense decreased $104, financing costs decreased $99 and other expenses decreased $66. The decrease in interest expense was a result of the decrease in the interest rate on the note payable to Harris Corporation.

The six month period ended June 30, 2005 also included a gain of $495 on the sale of abandoned technology.

LIQUIDITY AND CAPITAL RESOURCES

In April 2005 we amended our former credit facility to extend the maturity of the facility until March 31, 2006. The Company’s interest rate under the facility was 9.0% at June 30, 2005 and 8.25% at December 31, 2004.

In July 2005, the Company entered into a new Revolving Credit, Term Loan and Security Agreement (“New Agreement”) under which the Company obtained a $3,000 term loan (“Term Loan”) and was granted an $8,000 revolving credit facility (“Revolver”). Advances under the Revolver are based on a borrowing base formula that provides for, among other things, eligibility based on certain percentages of receivables and inventory. Advances under the Revolver bear interest at prime plus 2.5% while the Term Loan, which is payable in 36 monthly installments based on a six year amortization, bears interest at prime plus 3.5%. Substantially all of the Company’s assets are pledged to secure borrowings under the New Agreement.

Under the terms of the New Agreement, the Company used approximately $8,100 under the facility to satisfy the Company’s debt under its previous line of credit facility and its Secured Promissory Note. The Company recognized a gain of $3,622 or $0.46 per basic share on the extinguishment of the Secured Promissory Note.


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The Company also issued a warrant to purchase 236,236 Common shares in connection with the New Agreement. The warrant is exercisable for a period of up to ten years at a price, which is subject to escalation under certain conditions, of $0.35 per share. The Company recorded a deferred charge of $57 in connection with issuing the warrant which will be amortized over the three year term of the New Agreement.

In February 2005, an entity controlled by a Director of the Company provided a $750 loan to the Company. In March 2005, the Company paid $530 to the entity and in June 2005 the remainder of the loan was repaid.

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 June 30, 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 June 30, 2005, we were in arrears on dividend payments on our Series B and Series C Preferred Stock in the amounts of $173 and $1,000, respectively, which amounts include interest thereon.

We were also in arrears on the Note Payable to Tri-Link Technologies Inc. ("Tri-Link") in the amount of $1,260. Teltronics has contested the claims of Tri-Link in an arbitration scheduled for hearing in September, 2005 under the auspices of the International Centre for Dispute Resolution of the American Arbitration Association, in which Teltronics has contended that all or some of the claims by Tri-Link are without merit. As well, Teltronics has asserted counterclaims in this arbitration and commenced an action in the Untied State District Court (M.D. FL) against Hargan-Global Ventures, Inc., a shareholder of Tri-Link, for damages related to the Tri-Link matter.

ITEM 6.   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






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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:  August 15, 2005
TELTRONICS, INC.


By: /s/ EWEN R. CAMERON
——————————————
Ewen R. Cameron
President & Chief Executive Officer



Dated:  August 15, 2005



By: /s/ RUSSELL R. LEE III
——————————————
Russell R. Lee III
Vice President & Chief Financial Officer







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EXHIBIT INDEX



Exhibit
Number
Description
   
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.

 
(*) Filed as an Exhibit to this Report on Form 10-Q for the period ended June 30, 2005.








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