United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
|_| 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: 0-11883
TELEBYTE, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 11-2510138
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
270 Pulaski Road, Greenlawn, New York, 11740
(Address of principal executive offices)
(631) 423-3232
(Issuer'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 |_|
As of August 14, 2003, there were outstanding 1,253,631 shares of Common Stock,
$.01 par value.
Transitional Small Business Disclosure Format (check one);
Yes |_| No |X|
TELEBYTE, INC. & SUBSIDIARY
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet
June 30, 2003 (Unaudited)
Consolidated Statements of Operations
Three and six months ended
June 30, 2003 and 2002 (Unaudited)
Consolidated Statement of Shareholders' Equity
Six months ended
June 30, 2003 (Unaudited)
Consolidated Statements of Cash Flows
Six months ended
June 30, 2003 and 2002 (Unaudited)
Notes to Condensed Consolidated Financial
Statements (Unaudited)
ITEM 2. Management's Discussion and Analysis or Plan of Operation
ITEM 3. Controls and Procedures
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
Part I Financial Information
Item 1. Financial Statements
TELEBYTE, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2003
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 77,950
Accounts receivable, net of allowance of $47,942 460,965
Inventories 1,675,239
Prepaid expenses 78,283
Refundable income taxes 169,942
Deferred income taxes 208,000
----------
TOTAL CURRENT ASSETS 2,670,379
PROPERTY AND EQUIPMENT, net 1,024,038
INTANGIBLE ASSETS, net 70,133
OTHER ASSETS 35,000
----------
$3,799,550
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 299,804
Accrued expenses 160,745
Borrowings under line of credit 304,623
Current maturities of long-term debt 111,689
Current maturities of capital lease obligations 7,206
----------
TOTAL CURRENT LIABILITIES 884,067
LONG-TERM BORROWINGS UNDER LINE OF CREDIT 361,954
LONG-TERM DEBT, less current maturities 480,294
DEFERRED SERVICE REVENUE 23,509
DEFERRED INCOME TAXES 76,000
SHAREHOLDERS' EQUITY
Common stock - $.01 par value; 9,000,000 shares authorized;
1,253,631 shares issued and outstanding 12,536
Capital in excess of par value 1,781,672
Retained earnings 179,518
----------
1,973,726
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,799,550
==========
The accompanying notes are an integral part of this financial statement.
3
TELEBYTE, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Six Months
ended June 30, ended June 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
NET SALES $ 1,050,643 $ 1,325,541 $ 2,027,208 $ 2,608,859
COST OF SALES 581,022 758,960 1,136,449 1,540,024
----------- ----------- ----------- -----------
GROSS PROFIT 469,621 566,581 890,759 1,068,835
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling, general and administrative 392,227 478,000 781,208 1,075,748
Research and development 152,463 176,445 442,491 366,573
----------- ----------- ----------- -----------
544,690 654,445 1,223,699 1,442,321
----------- ----------- ----------- -----------
Operating loss (75,069) (87,864) (332,940) (373,486)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Other income 12,217 8,772 125,402 8,772
Rental income 12,049 12,049 24,098 24,098
Interest income 84 201 215 429
Interest expense (19,288) (31,515) (39,545) (54,431)
----------- ----------- ----------- -----------
Loss before income taxes (70,007) (98,357) (222,770) (394,618)
Provision (benefit) for income taxes 802 (4,470) 3,802 (122,970)
----------- ----------- ----------- -----------
NET LOSS $ (70,809) $ (93,887) $ (226,572) $ (271,648)
=========== =========== =========== ===========
Loss per common share:
Basic $ (0.06) $ (0.07) $ (0.18) $ (0.22)
=========== =========== =========== ===========
Diluted $ (0.06) $ (0.07) $ (0.18) $ (0.22)
=========== =========== =========== ===========
Shares used in computing loss per common share:
Basic 1,253,631 1,253,631 1,253,631 1,253,631
=========== =========== =========== ===========
Diluted 1,253,631 1,253,631 1,253,631 1,253,631
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
TELEBYTE, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2003
(Unaudited)
Number of Capital in
shares Common excess of Retained
issued stock par value earnings Total
------ ----- --------- -------- -----
Balance at January 1, 2003 1,253,631 $ 12,536 $ 1,781,672 $ 406,090 $ 2,200,298
Net loss (226,572) (226,572)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 2003 1,253,631 $ 12,536 $ 1,781,672 $ 179,518 $ 1,973,726
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of this financial statement.
5
TELEBYTE, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
ended June 30,
----------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(226,572) $(271,648)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for bad debts 2,942 6,000
Depreciation and amortization 90,985 82,343
Provision for inventory obsolescence 24,000 24,998
Loss from disposal of property and equipment -- 3,923
Decrease (increase) in operating assets:
Accounts receivable (11,612) (126,144)
Inventories (91,452) 38,271
Prepaid expenses, taxes and other 11,828 (81,243)
Increase (decrease) in operating liabilities:
Accounts payable (30,055) (5,365)
Accrued expenses and taxes (29,509) (24,529)
Deferred service revenue 1,759 12,548
--------- ---------
Net cash used in operating activities (257,686) (340,846)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (2,498) (8,843)
--------- ---------
Net cash used in investing activities (2,498) (8,843)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long term debt (50,929) (46,413)
Principal payments on capital lease obligations (5,893) (5,403)
Net borrowings under line of credit agreement 304,623 74,274
Net (payments) borrowings under long-term line of credit (32,156) 230,539
--------- ---------
Net cash provided by financing activities 215,645 252,997
--------- ---------
Net decrease in cash and cash equivalents (44,539) (96,692)
Cash and cash equivalents at beginning of period 122,489 245,057
--------- ---------
Cash and cash equivalents at end of period $ 77,950 $ 148,365
========= =========
The accompanying notes are an integral part of these financial statements.
6
TELEBYTE, INC. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of June 30, 2003, the consolidated statements
of operations, shareholders' equity and cash flows, for the three-months and
six-months in the periods ended June 30, 2003 and 2002, have been prepared by
us, without audit. In the opinion of management, all adjustments (which include
only normal recurring accrual adjustments) necessary to present, fairly, the
financial position, results of operations and cash flows have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. It is suggested
that these financial statements be read in conjunction with the financial
statements and notes thereto included in our Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2002, as amended. The results of operations
for the periods ended June 30, 2003 and 2002 are not necessarily indicative of
the operating results for the full year.
2. EARNINGS PER SHARE
Excluded from the calculation of diluted earnings per share are 606,250 options
to purchase the Company's common stock for the three and six months ended June
30, 2003 and 533,000 options, for the three and six months ended June 30, 2002,
as their inclusion would be anti-dilutive.
The Company applies APB Opinion No. 25 in accounting for its fixed price stock
options. Accordingly, no compensation cost for options has been recognized in
the financial statements. The chart below sets forth the Company's net loss and
net loss per share for three and six months ended June 30, 2003 and 2002, as
reported on a pro forma basis as if the compensation cost of stock options had
been determined consistent with SFAS 123.
7
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net Loss, as reported $ (70,809) $ (93,887) $ (226,572) $ (271,648)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (22,673) (1,451) (45,346) (1,451)
----------- ----------- ----------- -----------
Pro forma net loss $ (93,482) $ (95,338) $ (271,918) $ (273,099)
=========== =========== =========== ===========
Basic loss Per Share:
As Reported $ (0.06) $ (0.07) $ (0.18) $ (0.22)
Pro forma $ (0.07) $ (0.08) $ (0.22) $ (0.22)
Diluted loss Per Share:
As Reported $ (0.06) $ (0.07) $ (0.18) $ (0.22)
Pro forma $ (0.07) $ (0.08) $ (0.22) $ (0.22)
3. BUSINESS SEGMENTS
The Company has two reportable segments: Telebyte is a manufacturer of
technology products and Nextday.com distributes Telebyte's and other
manufacturers' products through e-commerce.
The Company's chief operating decision maker utilizes net sales and net earnings
(loss) information in assessing performance and making overall operating
decisions and resource allocations. The accounting policies of the operating
segments are the same as those described in the summary of significant
accounting policies as set forth in the December 31, 2002 Annual Report on Form
10-KSB, as amended. Information about the Company's segments for the three
months and six months ended June 30, 2003 and 2002 are as follows:
8
Three Months Six Months
Ended June 30, Ended June 30,
----------- ----------- ----------- -----------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales from external customers
Telebyte $ 1,038,096 $ 1,294,601 $ 2,006,770 $ 2,438,886
Nextday.com
12,547 30,940 20,438 169,973
----------- ----------- ----------- -----------
$ 1,050,643 $ 1,325,541 $ 2,027,208 $ 2,608,859
=========== =========== =========== ===========
Intersegment net sales
Telebyte $ (325) $ (9,428) $ (325) $ (8,207)
Nextday.com -- -- -- --
----------- ----------- ----------- -----------
$ (325) $ (9,428) $ (325) $ (8,207)
=========== =========== =========== ===========
Operating loss
Telebyte $ (70,709) $ (84,069) $ (324,695) $ (356,224)
Nextday.com
(4,360) (3,795) (8,245) (17,262)
----------- ----------- ----------- -----------
$ (75,069) $ (87,864) $ (332,940) $ (373,486)
=========== =========== =========== ===========
Loss before income taxes
Telebyte $ (65,669) $ (94,659) $ (214,571) $ (377,566)
Nextday.com
(4,338) (3,698) (8,199) (17,052)
----------- ----------- ----------- -----------
$ (70,007) $ (98,357) $ (222,770) $ (394,618)
=========== =========== =========== ===========
Identifiable assets
Telebyte $ 3,734,752 $ 4,781,777
Nextday.com 64,798 116,508
----------- -----------
$ 3,799,550 $ 4,898,285
=========== ===========
4. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46).
"Consolidation of Variable Interest Entities." FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is required to be applied to preexisting
entities of the Company as of the beginning of the first quarter after June 15,
2003. FIN 46 is required to be applied to all new entities with which the
Company becomes involved beginning February 1, 2003.
9
ITEM 2. Management's Discussion and Analysis or Plan of Operation.
When used herein, the words "believe," "anticipate," "think," "intend," "will
be," "expect" and similar expressions identify forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are not guarantees of future performance and involve certain risks
and uncertainties discussed herein and under the caption "Risk Factors" in our
Annual Report on Form 10-KSB for the year ended December 31, 2002, as amended,
which could cause actual results to differ materially from those in the
forward-looking statements. Readers are cautioned not to place undue reliance on
the forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law. Readers are also urged carefully
to review and consider the various disclosures made by us which attempt to
advise interested parties of the factors which affect our business, including,
without limitation, the disclosures made under the caption "Management's
Discussion and Analysis or Plan of Operation." All references to a fiscal year
are to our fiscal year, which ends December 31.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial conditions and results of
operations are based on our Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, bad debts, inventories, asset impairments,
income taxes, contingencies, and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values for assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
For additional information regarding our critical accounting policies and
estimates, see the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form
10-KSB for the year ended December 31, 2002, as amended.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2003 and 2002
Net sales during the second quarter ended June 30, 2003 decreased 20.7% to
$1,050,643 compared to net sales of $1,325,541 for the same period in 2002. Net
sales for the six months ended June 30, 2003 decreased 22.3% to $2,027,208
compared to net sales of $2,608,859 for the same period in 2002. This decrease
in sales is primarily due to the general downturn in the economy.
With respect to the sales in each of the Company's product lines results are as
follows. For the Data Communications products; the sale of interface converters
represented 38% of Telebyte's net sales in the second quarter of 2003 as
compared to 40% for the same period in 2002, the sale of short haul modems
represented 17% of Telebyte's net sales in the second quarter of 2003 as
compared to 10% for the same period in 2002. For the Broadband Test Equipment
product line, Broadband test equipment represented 30% of Telebyte's net sales
in the second quarter of 2003 as compared with 38% for the same period in 2002.
10
Cost of sales for the second quarter ended June 30, 2003 of $581,022 decreased
23.4% compared with cost of sales of $758,960 during the second quarter of 2002.
Cost of sales for the six months ended June 30, 2003 of $1,136,449 also
decreased 26.2% compared with cost of sales of $1,540,024 during the same period
in 2002. The decreases in cost of sales are attributed to the decreases in net
sales as discussed above. Cost of sales as a percentage of net sales was 55.3%
for the second quarter ended June 30, 2003 as compared with 57.3% of net sales
during the same period in 2002. Cost of sales as a percentage of net sales was
56.1% for the six months ended June 30, 2003 as compared with 59.0% of net sales
for the same period in 2002. The increase in our gross profit margin percentage
was primarily due to improved efficiencies in manufacturing.
Selling, general and administrative expenses for the second quarter ended June
30, 2003 of $392,227 decreased by $85,773 from $478,000 during the same period
in of 2002. Selling, general and administrative expenses for the six months
ended June 30, 2003 of $781,208 decreased by $294,540 from $1,075,748 during the
same period in of 2002. The decrease was the result of aggressive cost reduction
measures taken by management. These measures included reduction of salary and
benefits of selected Company personnel and reduction of outside contractor
services.
The Company began a program of translating its website www.telebytedatacom.com
into foreign languages so as to broaden its presence in the international
marketplace and provide stronger support for its international distributors.
During this quarter the Company completed the translation of this website into
Korean and Chinese. Other translation projects are either underway or planned
for the future.
Research and development expenses, for the second quarter of 2003, of $152,463
decreased by $23,982, compared with $176,445 during the second quarter of 2002.
Research and development expenses for the six months ended June 30, 2003 of
$442,491 increased by $75,918, compared with $366,573 during the same period in
2002. During this quarter the Company's research and development efforts
continued to focus principally on the Model 4101-J. The Model 4101-J will be
used during the design and development of modems and signaling devices used for
the new ADSL+ broadband access strategy in Japan. Prototypes of the 4101-J were
delivered to customers in Japan and the Company expects to introduce the product
to the marketplace during the third quarter of 2003.
Interest expense decreased to $19,288 during the second quarter of 2003 from
$31,515 for the same period in 2002. Interest expense decreased to $39,545
during the six months ended June 30, 2003 from $54,431 for the same period in
2002. The decrease in interest expenses is primarily due to lower borrowings on
the Company's credit facilities during 2003 compared to 2002.
The effective tax rate in second quarter of 2003 was 1.1%, compared with 4.5% in
the same quarter of 2002. The effective tax rate for the six months ended June
30, 2003 was 1.7%, compared with (31.2)% in the same period in 2002. The
reduction in the effective tax rate is due to a valuation allowance applied to
the tax benefits from the Company's net operating losses for the three and six
months ended June 30, 2003.
The Company had a net loss of $(70,809), or $(0.06) diluted per share, for the
second quarter of 2003 as compared with a net loss of $(93,887), or $(0.07)
diluted per share, in the same quarter of 2002. The Company had a net loss of
$(226,572), or $(0.18) diluted per share, for the six months ended
11
June 30, 2003 as compared with a net loss of $(271,648), or $(0.22) diluted per
share, in the same six month period of 2002. The net loss during 2003 is due
primarily to the decrease in net sales as described above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities for the six months ended June 30, 2003 was
$257,686 compared with net cash used of $340,846 in the same period of 2002.
This change is due primarily to the lower level of Accounts Receivable during
second quarter of 2003 compared to the same period in 2002.
Working capital of $1,786,312 at June 30, 2003 decreased compared with
$2,019,502 at December 31, 2002. The current ratio as of June 30, 2003 increased
slightly to 3:1 compared to 4.2:1 as of December 31, 2002.
The Company has an agreement with a financial institution (the "Agreement"),
expiring August 31, 2003, which provides us with a line of credit of up to
$500,000 based on our eligible accounts receivable, purchased components and
materials and finished goods inventories, as defined in the Agreement. Further,
the Agreement contains certain financial covenants, which require us to maintain
a minimum level of tangible net worth and places limitations on the ratio of our
total debt to our tangible net worth, as defined in the Agreement. Borrowings
under the line of credit bear interest at the bank's specified prime rate plus
1%. Net borrowings under this line of credit totaled $304,623 at June 30, 2003.
While the Company believes that the Agreement will be renewed upon its
expiration on August 31, 2003, the Company has no guarantee of a renewal and,
accordingly, there is a risk that the corresponding line of credit could be
eliminated as a resource on August 31, 2003. If the line of credit is not
renewed, the Company believes it can obtain alternative financing; however,
there can be no assurances that alternative financing will be available.
In January 1999, we secured an additional reducing revolving line of credit from
the same institution that provides for initial borrowings up to a maximum of
$1,000,000. Availability under the reducing revolving line of credit decreases
by approximately $11,900 per month and the line expires January 2006.
Availability under this line at June 30, 2003 was approximately $368,000.
Borrowings under this loan agreement bear interest at the 30-Day Commercial
Paper Rate plus 2.90%. Net borrowings under this line of credit totaled $361,954
at June 30, 2003.
We believe that cash generated by our future operations, current cash and cash
equivalents, and the existing lines of credit should supply the cash resources
to meet our cash needs for at least the next 12 months. However, this
expectation is not at all guaranteed and it may be that these cash resources
fall short of the Company's cash needs over the next 12 months.
12
ITEM 3. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures as of the end of the period
covered by this quarterly report, and based on their evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
nor were any significant deficiencies or material weaknesses found in the
Company's internal controls.
13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(i) Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the CEO and the CFO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
14
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TELEBYTE, INC.
By: \s\
-------------------------------------
Kenneth S. Schneider
Chairman of the Board
(Principal Executive Officer)
By: \s\
------------------------------------
Michael Breneisen, President
(Principal Financial and Accounting Officer)
Date: August 14, 2003
15