this is an interesting stock with an OS of 1.6 million and float of 614,000 in the telecom business
Form 10QSB for CORTELCO SYSTEMS PUERTO RICO INC
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17-Mar-2006
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
This report contains unaudited forward-looking statements within the meaning of the federal securities laws. Unaudited forward-looking statements are those that express management's views of future events, developments, and trends. In some cases, these statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of such terms and other comparable expressions. Unaudited forward-looking statements include statements regarding the Company's anticipated or projected operating performance, financial results, liquidity and capital resources. These statements are based on management's beliefs, assumptions, and expectations, which in turn are based on the information currently available to management. Information contained in these unaudited forward-looking statements is inherently uncertain,
and the Company's actual operating performance, financial results, liquidity, and capital resources may differ materially due to a number of factors, most of which are beyond Managements ability to predict or control. The Company also directs your attention to the risk factors affecting its business that are discussed in our 10-KSB filed for the period ended July 31, 2005. CSPR disclaims any obligation to update any of the unaudited forward-looking statements contained in this report to reflect any future events or developments. The following discussions should be read in conjunction with the Company's unaudited financial statements and the notes included thereto.
Plan of Operation
During the month of January, the Company began a new line of business, the resale of Puerto Rico Telephone Company ("PRTC" - the local main telephone company) services offered to the local users of intra-island calls, ISDN, T1, and other services excluding the long distance outside Puerto Rico to customers that are willing to change the billing company. CSPR expects to increase this line of business in the near future offering the services mainly to the Company's customer base which may require the hiring of two or three additional employees.
Another new line of business that the Company has the commitment to develop is the sale of CellStik, a new product in the market. CellStik is a small hand-held device that allows simple and easy back up, edit and transfer between handsets of cellular telephones contacts. It also allows users to enter and edit cell phonebook contacts from the comfort of their full-sized PC keyboard. The CellStik is manufactured by Spark Technologies, a California company that is wholly owned by Mr. David S. Lee, the majority shareholder of CSPR. The Company has hired one salesperson to introduce and develop the product in Puerto Rico's market. This product could represent a potential for grow in the future to CSPR if it is well accepted in the market.
To achieve the increased opportunities, CSPR will continue to seek a credit line from a Puerto Rican financial institution to provide cash flow financing. The Company believes that, if its financial condition continues to improve, it will continue to obtain more beneficial credit terms from its primary suppliers.
CSPR plans to continue to closely monitor company operating costs and expenses, which stabilized in 2005. The Company will continually look for ways to increase its installed base of customers via improved equipment sales and customer service performance, along with increased maintenance service sales efforts. To improve service performance, the Company will continue its training program to develop more highly qualified technicians and salespersons. CSPR has achieved Platinum level with Avaya, the highest qualification that Avaya gives to its Business Partner. Among other things, being a Platinum Business Partner entitles the Company to additional discounts and special technical trainings. Also, CSPR's technical staff includes an Avaya Certified Expert (ACE). This is not only the highest level given to a technical person but also is the first ACE awarded to an Avaya Business Partner in the Caribbean. CSPR is also seeking the highest certifications in Mitel and Nortel, which are the other key product lines, which the Company believes will improve its competitive position with customers and suppliers. To improve new installation and maintenance sales results, the Company has three salespersons dedicated to support and increase its customer base. The Company is pursuing productivity with continuing improvements in customer service and support through Web ticketing and Project Management programs.
While the Company believes that here are a number of positive trends in its business, no assurance can be given that CSPR will be successful in achieving its near term goals.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company's cash position has improved from prior years. The Company will continue with the policy of accelerated payment terms to improve cash flows and continue to maintain accounts receivable and inventories at controlled levels during the current fiscal year. CSPR's slight shortfall to budgeted sales in the first quarter ended October 31, 2005 was due to a postponement of the installation of a major system. Historically, the second quarter of each fiscal year is a low point for sales revenue, but CSPR achieved the current budget for this quarter ended January 31, 2006. For the third quarter, the Company has been receiving customer commitments for new systems installations that should allow CSPR to achieve the current budget.
Results of Operations and Cash Flow for the Three Months Ended January 31, 2006 and 2005
The following discussion provides information about the Company's operations, for the three months ended January 31, 2006 and for the three months ended January 31, 2005.
Net Revenues
Net revenues consist of sales of new system installations and additions ("Products") and services related to revenues from maintenance contract, warranties and other billable services ("Services"). Net revenues increased 1.73% in the three months ended January 31, 2006 compared to the three months ended January 31, 2005. The results primarily reflect increased revenue of approximately $38,000 in Products, due to an installation of major equipment during the current quarter, and a decrease of approximately $10,000 in Services due to normal fluctuations in the maintenance business. The three months ended January 31, 2005 included approximately $200,000 in export sales that the current quarter does not reflect.
Cost of Revenues and Gross Profit
Cost of revenues consists primarily of purchases from equipment manufacturers and other suppliers and costs incurred for final assembly, quality assurance, system installation and maintenance labor cost. The gross margin for the three months ended January 31, 2006 and 2005 was 35.74% and 31.91%, respectively. The gross margin improvement results basically from better markups in the price of products, maximizing productivity, decrease in some subcontracting services by doing them with internal resources, and more competitive selling and operational strategies.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of salaries and benefit costs, advertising, and facilities and other overhead expenses incurred to support our business. Selling, general and administrative expenses increased less than one percent to approximately $539,000 in the three months ended January 31, 2006 from approximately $537,000 in the three months ended January 31, 2005. This is the result of Management's ongoing plan of monitoring this expense.
Interest, Other Income and Expense and Other Comprehensive Loss
The Company had no significant other income and interest expense in the three months ended January 31, 2006.
For the quarter ended January 31, 2006, the resulting income tax was offset by the available carryforward losses, through a change in valuation allowance. There was no taxable income during the quarter ended January 31, 2005.
Other comprehensive loss consists of unrealized potential loss, if sold, of securities owned by the Company.
Cash Flow
Cash flow used in operating activities was approximately ($561,000) in the three months ended January 31, 2006 and cash flow provided by operating activities was approximately $326,000 in the three months ended January 31, 2005. Cash used in operating activities in the three months of this fiscal year resulted primarily from an increase in trade accounts receivable, and a decrease in accounts payable. Cash flows used in investing activities for the three months ended January 31, 2006 and 2005 was approximately ($1,000) and ($11,000), respectively. The change in cash for investing activities in both periods reported is related to the acquisition of new hardware and software to improve employee performance.
Results of Operations and Cash Flow for the Six Months Ended January 31, 2006 and 2005
The following discussion provides information about the Company's operations, for the six months ended January 31, 2006 and for the six months ended January 31, 2005.
Net Revenues
Net revenues decreased 3.29% in the six months ended January 31, 2006 compared to the six months ended January 31, 2005. The decrease was primarily due to revenues of approximately $200,000 in export sales achieved in the quarter ended January 31, 2005 that the current period does not reflect.
Cost of Revenues and Gross profit
The gross margin for the six months ended January 31, 2006 was 32.48% and 29.58% for the six months ended January 31, 2005. The gross margin improvement results basically from better markups in the price of products, maximizing
productivity, decrease in some subcontracting services by doing them with internal resources, and more competitive selling and operational strategies.
Selling, General and Administrative
Selling, general and administrative expenses decreased approximately $32,000 in the six months ended January 31, 2006 from approximately $1,095,000 in the six months ended January 31, 2005 to approximately $1,063,000 in this quarter. This is the result of Management's ongoing plan of monitoring this expense.
Interest, Other Income and Expense and Other Comprehensive Loss
The Company had no significant other income and interest expense in the six months ended January 31, 2006.
For the six-months period ended January 31, 2006, the resulting income tax was offset by the available carryforward losses, through a change in valuation allowance. There was no taxable income during the six-month period ended January 31, 2005.
Other comprehensive loss consists of unrealized potential loss, if sold, of securities owned by the Company.
Cash Flow
Cash flow used in operating activities was approximately ($62,000) in the six months ended January 31, 2006 and cash flow provided by operating activities was approximately $249,000 in the six months ended January 31, 2005. Cash used in operating activities in the six months of fiscal year 2006 resulted primarily from increases in accounts receivable and inventories partially offset by increases in customer deposits. Cash flows used in investing activities for the six months ended January 31, 2006 and 2005 was approximately ($12,000) and ($23,000), respectively. The change in cash for investing activities in both period reported is related to the acquisition of new hardware and software to improve employee performance.
Liquidity and Capital Resources
The Company has principally relied on cash provided from operations as our primary sources of capital. CSPR does not anticipate the need to raise additional capital to meet its operational, and capital expenditure requirements in the foreseeable future. The Company's funding status is dependent on a number of factors including those related to profit margins, inventories, and the control of selling, general and administrative expenses. CSPR expects the cash generated from operations will be sufficient to meet the cash requirements for the business, including capital expenditures and working capital needs for the near future. Should actual results differ significantly from current assumptions, the Company's liquidity position could be adversely affected and could be in a position that would require to raise additional capital, which may not be available to CSPR or may not be available on acceptable terms.
Other Relevant Financial Information
The Company's Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of any preferred stock that may be issued in the future may harm the rights of the holders of common stock. Certain provisions of our certificate of incorporation and bylaws may make it more difficult for a third party to acquire control of CSPR without the consent of our Board of Directors, even if such changes were favored by a majority of the stockholders. These include provisions that provide for a staggered board of directors, prohibit stockholders from taking action by written consent and restrict the ability of stockholders to call special meetings.
CSPR's officers, directors and five percent or greater stockholders beneficially own or control, directly or indirectly, approximately 979,850 shares, which in the aggregate represent approximately 61% voting interest in the outstanding shares of our common stock. These stockholders have the ability to control all matters submitted to our stockholders for approval, including the election and removal of directors and the approval of any business combinations.
The Company believes its stock fits the definition of a penny stock. The Securities Exchange Act of 1934 defines a penny stock as any equity security that is not traded on a national securities exchange or authorized for quotation on The Nasdaq Stock Market and that has a market price of less than $5.00 per share, with certain exceptions. Penny stocks are subject to
Rule 15g under the Securities Exchange Act of 1934, which imposes additional sales practice requirements on broker-dealers who sell such securities. In general, a broker-dealer, prior to a transaction in a penny stock, must deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer must provide the customer with current bid and offer quotations for the penny stock, information about the commission payable to the broker-dealer and its salesperson in the transaction and monthly statements that disclose recent price information for each penny stock in the customer's account. Finally, prior to any transaction in a penny stock, the broker-dealer must make a special written suitability determination for the purchaser and receive the purchaser's written consent to the transaction prior to sale. All of these requirements may restrict your ability to sell CSPR stock and could limit the trading volume and adversely affect the price investors are willing to pay for CSPR stock.
Off-Balance Sheet Arrangements
CSPR was not involved in any significant off-balance sheet arrangements during the three months ended January 31, 2006 and for the three months ended January 31, 2005.
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