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Thursday, January 04, 2007

Teltronics (TELT)

TELT (sec)
I looked at it here and here and here.

When I looked at the 2004 10-K, TELT was in fairly bad shape, defaulting on a note payable to Tri-Link Technologies. They had dealt with a mezzanine financier who dumped 12,625 shares of preferred and had the unconditional right to elect a director at any time. TELT tried unsuccessfully to keep the director off the board.

TELT is a telecom equipment maker involved in voice-over-IP.
Revenue (page 12):
2001: $64 million
2002: $54 million
2003: $47 million
2004: $46 million (helped by $2 million in new revenue from UK acquisition)
2005: $46 million

The unchanged 2005 revenue was due to a $200K increase in the UK subsidiary and a $400K increase in the US part of the company, offset by a $420K decrease in the Mexico subsidiary. The increases were in the 20/20 voice-over-IP market offset by an "ongoing" downturn in the IMS network management area (customers switching from the older TDM technology to IP).

If you look at the table I linked to above, you'll see that operating income has been steadily improving over the years, except that 2005 was down somewhat from 2004. Net earnings are not a good gauge of the business due to steadily increasing non-operating gains and other income. This may have set unrealistic expectations in the market.

If we jump ahead to Q3 2006, revenues for 9 months were fairly flat, while revenues for 3 months are up 13% (product sales and installation was up 18%). Operating income is much improved over 2005. Q3 net earnings were $332K. On Nov 1, 2006, they had 8.6 million shares. Based on the 2006 10-K, they have 10.5 million diluted shares plus another 1.3 million anti-dilutive options and warrants (which I include because I only plan to buy stock that will go up substantially, making them dilutive). So I'm figuring 11.8 fully diluted shares. This results in 2.8 cents per fully diluted share for Q3 2006. However, Q3 is typically a strong quarter for them. Looking back at Q1 and Q2, I'd say that a reasonable estimate of earnings for the year would be around 4 or 5 cents.

The stock is selling for 43 cents on the ask, making this an interesting company to look at.

2005 10-K:
Period ending Dec 31, 2005
8.6 million shares on March 23, 2006

New $3 million term loan, $8 million revolver. The financial switch caused a $3.9 million gain in the income statement, so watch out for it.

TELT settled a legal dispute with Tri-Link Technologies: TELT paid $1 million, 750K shares, and a $750K note payable. This caused a gain of $211K in the income statement.

They've been surviving in the telecom hell by focusing on "quality" voice and data products. They have their own manufacturing (which is odd nowadays).

I covered some of what the company does here. Note that I spent many years in the datacom industry and, to me, it's not the least bit glamorous. It's extremely competitive, generally a terrible place to invest, and unexpected market changes can happen without much warning. The fact that they have homologation (i.e. meet specific certifications in specific countries) in more than 60 countries means that they have at least somewhat of a niche to cling to.

Backlog on Dec 31, 2005 was $14.6 million.

Primary customers:
NYC Dept of Education:
2003: 17%
2004: 14%
2005: 19%

2003: 14%
2004: 12%
2005: 7%

Nielson Media Research:
2003: 13%
2004: 10%
2005: 7%

As I mentioned before, Ion Networks (IONN, sec) is the other signficant competitor to TELT in the ISM market (network management). IONN is facing declining revenues and going underwater. The digital switching systems part of TELT's business has a lot of competitors like Lucent and Nortel.

256 employees

Over the years, revenue fell until stabilizing in 2004. TELT was able to improve gross margins over the years and gross profits remained fairly steady.

Gross margins:
2003: 39.0%
2004: 39.7%
2005: 41.1%

Operating expenses:
2003: 42.4%
2004: 37.6% (RIF, lower doubtful acct provision, lower public company costs, cost cutting, increases due to UK acquisition)
2005: 36.8% (more R&D headcount, lower deprec, lower legal fees, lower doubtful acct provision, lower support costs, lower rent and phone expenses)

Being inside "tech" companies during hard times on multiple occasions, it's a good sign when management increases R&D expenses. It means they see reachable opportunities.

Operating income:
2001: ($4.48 million)
2002: ($3.02 million)
2003: ($1.60 million)
2004: $952K
2005: $2.02 million (not counting a $1.6 million impairment of capitalized software)

Diluted share count each year:
2001: 4.9 million shares
2002: 5.5 million shares
2003: 7.3 million shares
2004: 7.8 million shares
2005: 10.5 million shares

In 2004, they sold patents back to Harris Corporation that they had purchased from Harris earlier. This was in exchange for past due principle and interest on debt owed to Harris.

In 2005, both inventory and AR increased. Inventory increased due to forecasted demand increases, but capacity constraints occured in Q4 (I'm somewhat skeptical). AR increased due to increased sales.

Lots of interesting financing.
Current obligations:
$5.1 million revolver debt ($1 million remaining, 9.7% prime+2.5)
$2.8 million senior term loan (10.7%, prime+3.5 plus obligations, regular principal payments)
$708K note payable to Tri-Link (8%, matures Oct 2008, regular principal payments)
$258K related party payable (15% unsecured, matures Nov 2008, convertible)
$253K preferred stock dividends

2006: $2.9 million
2007: $3.0 million
2008: $9.6 million
2009: $2.1 million
2010: $1.9 million
trails off from there

Revenues per quarter (millions):
Q1 04: $11.3
Q2 04: $12.1
Q3 04: $11.6
Q4 04: $11.0
Q1 05: $9.8
Q2 05: $13.0
Q3 05: $10.8
Q4 05: $12.6
Q1 06: $10.3
Q2 06: $11.5
Q3 06: $12.2

Revenue gains are a real struggle.

Auditors are Kirkland, Russ, Murphy & Tapp of Clearwater, FL. Unqualified opinion.
Prior auditors were E&Y. Going concern qualifier pointing out losses, capital deficiency, and broken covenants in the past.

Visual display of financial statements:
Balance Sheet:
Current Assets:            ==========================================
Cash ***
Accounts Receivable ********************. (small allowance)
Costs etc in excess of billing *

PP&E net ***............etc........... . . . etc.
(nearly all depreciated)
Goodwill *
Other intangibles *
Other assets *
Total assets ================================================


Current Liabilities: =============================================
Line of Credit ***************
Curr Portion of LT Debt ***
Accounts Payable *****************
Accrued Payroll ****
Other Current Liabilities ***
Deferred Revenue ****

Deferred Dividends ***
Long Term Debt *********

Shareholder Deficit ========
Total =================================================

Income Statement:
Product Sales             ++++++++++++++++++++++++++++++++++
Maint and Service Revenue +++++++++++++

Cost of Goods Sold ---------------------------

G&A -----
Sales and Marketing -------
R&D ----
Deprec & Amort -
Impaired capital software --

Operating Income +

Interest Expense -
Gain on Sale of Assets +
Gain on Exting of Debt ++++

Tax .

Net Income ++++

Cash Flow Statement:
Operating Cash Flow:
Net Income ++++++++++++++++++++++++++++++++++++++
Other Non-operating Gains ----------------------------------------------
Impairment of Capitalized SW ++++++++++++++++
Provision for Doubtful Accts .
Provision for Slow Moving Inventories ++
Depreciation & Amortization ++++++++++++++
Forfeited Deferred Compensation -
Accounts Receivable ----------
Costs & Est Earnings in Excess of Billings -
Inventories -----------------------
Prepaid Etc. ------
Accounts Payable +++++++
Unearned Billings --
Operating Cash Burned ----------

Investing Cash Flow:
Acquisition of Prop & Equip ---
Proceeds from Sale of Prop & Eqip +++++
Cash from Investing ++

Financing Cash Flow:
Net Borrowings ++++++++++++++++++++++++++
Net Repayments --------------------
Borrowed from Related Party ++++++++++
Repayment to Related Party --------
Pfd Stock Dividends --
Cash from Financing ++++++

STOPPING at the Notes section.


Right now, it's not clear enough what the future will be for TELT. Revenues might remain stagnant or they might start climbing up. I don't see this being an investment for me, although other people might find it useful. I've found another investment [update: it's CFRI] that I'll be posting on Friday after hours.

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