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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)
For the transition period from _______________ to _______________
Commission File Number: 0-17893
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TELTRONICS, INC.
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(Name of small business issuer in its charter)
Delaware 59-2937938
- ----------------------------- ------------------------
(State or other jurisdiction (IRS Employer
of Incorporation or organization) Identification Number)
2150 Whitfield Industrial Way, Sarasota, Florida 34243
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (941) 753-5000
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common stock, $.001 par value
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(Title of Class)
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K, [ X ].
Issuer's revenues for its most recent fiscal year: $26,794,674
The aggregate market value (closing sale price) on the NASDAQ Stock Market
of the Registrant's Common Stock held by non-affiliates at February 26,
1999, was approximately $2,904,000. For purposes of computing such market
value, the Registrant has assumed that affiliates include only its
executive officers, directors and 5% stockholders. This determination of
affiliate status has been made solely for the purpose of this Report, and
the Registrant reserves the right to disclaim that any such individual is
an affiliate of the Registrant for any other purposes.
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate
market value of the common equity held by non-affiliates on the basis of
reasonable assumptions, if the assumptions are stated.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of February 26, 1999, 3,604,522 shares of the Registrant's common stock,
par value $.001, were issued and outstanding.
Exhibit index appears on pages 52-54.
TABLE OF CONTENTS
Page
PART I
Item 1 Business...................................................3
Item 2 Properties.................................................9
Item 3 Legal Proceedings.........................................10
Item 4 Submission of Matters to a Vote of Security Holders.......10
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters...............................11
Item 6 Selected Financial Data...................................12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation........................13
Item 7A Quantitative and Qualitative Disclosures About
Market Risk...............................................18
Item 8 Financial Statements......................................19
Item 9 Changes and Disagreements with Accountants in
Accounting and Financial Disclosure.......................44
PART III
Item 10 Directors and Executive Officers of the Registrant....... 45
Item 11 Executive Compensation....................................47
Item 12 Security Ownership of Certain Beneficial Owners
and Management............................................49
Item 13 Certain Relationships and Related Transactions............51
PART IV
Item 14 Exhibits, Financial Statements, Schedules and
Reports on Form 8-K.......................................52
2
PART I
ITEM 1. BUSINESS
GENERAL
Teltronics, Inc. ("Teltronics" or "Company"), a Delaware corporation,
designs, develops, manufactures and markets electronic hardware and
application software products, and engages in contract manufacturing for
the telecommunication industry. Through its majority owned subsidiary,
Interactive Solutions, Inc. ("ISI") it has also engaged in the design and
manufacturing of a small, Pentium (R) powered, multimedia computer for the
wearable computer industry.
In October 1995, the Company formed a subsidiary, AT Supply, Inc. ("AT
Supply"), to engage in sales and distribution of telecommunications
hardware, software and related products. The Company, through its wholly-
owned subsidiary TTG Acquisition Corp. owned a majority of the outstanding
Common Stock of AT Supply. On March 6, 1998, the Company sold the assets
and transferred the liabilities of AT Supply to a corporation owned by two
former executive officers of AT Supply.
On April 18, 1996, ISI acquired certain assets and technology from
Interactive Solutions, LLC, a Kentucky limited liability company
("Interactive") and its three members ("Members") pursuant to an Agreement
of Sale dated March 27, 1996 as amended by an Amendment to Agreement of
Sale dated April 18, 1996 ("Agreement"). Under the Agreement, ISI acquired
all of Interactive's and its Members' rights to and in certain technology
for a wearable, self-contained, voice activated, portable, Pentium (R)
processor driven, multimedia computer ("Technology") and other Purchased
Assets described in the Agreement. See BUSINESS - MOBILE, MULTIMEDIA
COMPUTER PRODUCTS.
On September 20, 1996, Teltronics/SRX, Inc. ("Teltronics/SRX"), a
wholly owned Delaware subsidiary of the Company acquired substantially all
of the assets of Shared Resource Exchange, Inc., a Delaware corporation
("Seller") located in Dallas, Texas, under an Agreement of Sale among
Seller, Teltronics/SRX and the Company dated September 19, 1996
("Agreement") approved by order of the United States Bankruptcy Court,
Eastern District of Texas, Sherman Division. In addition to the Company's
issuing 650,000 restricted shares of its Voting Common Stock for
substantially all of the Seller's assets, the Company issued 100,000
restricted shares of Voting Common Stock to discharge the indebtedness
Seller owed to certain lenders, and the Company and Teltronics/SRX assumed
certain obligations as described in the Agreement. Teltronics/SRX sells
PBX systems, switches and related PBX telecommunication and peripheral
devices. On December 22, 1998, the Company issued an additional 62,626
shares of restricted common stock to settle all claims with the Seller. In
addition, the Company released the restrictive legend on the 750,000 shares
of common stock issued in 1996 as part of the acquisition. See BUSINESS -
PBX/ACD PRODUCTS.
FORWARD-LOOKING STATEMENTS
A number of statements contained in this Annual Report on Form 10-K
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 involve a number of risks and uncertainties,
including 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, the ability to comply with the rules
for inclusion in the Nasdaq Stock Market and other factors described in the
Company's filings with the Securities and Exchange Commission. The actual
results that the Company achieves may differ materially from any forward-
looking statements due to such risks and uncertainties.
3
TELTRONICS - SEGMENT
REMOTE MAINTENANCE PRODUCTS
Emphasis on service as a product (the maintenance and repair of
systems) caused a market for automated fault/alarms management systems to
emerge in the 1980's. The market is based on the need to monitor a
population of remotely located, computer based systems from a Technical
Assistance Center ("TAC"). This capability is extremely important in the
telecommunications industry as well as in other service environments. To
effectively address this market, service providers need state of the art
technology to manage and maintain their equipment, and to project a
proactive service image to their customers.
Management believes that it has established a strong competitive
position in the Remote Maintenance market through sales of the following
products: Site Event Buffer-II (R), SEB jr. (tm), and IRISnGEN (tm).
Site Event Buffer-II ("SEB-II (R)"). The SEB-II (R) monitoring system
monitors remotely located Network elements.
The SEB-II product may simultaneously monitor up to four Network
elements. In addition to fault/alarm reporting and security functionality
the SEB-II also has data storage and retrieval capabilities. Its multi-
port configuration allows the SEB-II to concurrently collect and store
various forms of data, such as Station Message Detail Records (SMDR),
Automatic Call Distribution (ACD) data, and Private Automated Branch
Exchange ("PABX") traffic information. By using IRIS and IRISnGEN (tm),
this data may be retrieved and processed into useful reports.
The SEB-II is a multi-application product whose architecture permits
its operational characteristics to be completely changed by remotely
downloading new software. Introduced in mid-1991, the SEB-II replaces the
original Site Event Buffer-I (SEB-I) with a product that offers increased
functionality, twice the data storage capacity, and support for additional
Network elements.
In late 1993, development efforts were initiated which provided for
scripts, written in a high-level language, that may be used to create a
dialogue between the SEB-II and the Network element. This dialogue allows
the SEB-II to clear fault conditions present in the Network element and to
perform more complex analysis of maintenance data. Included in these
development activities is the design of high speed internal modems required
for more demanding applications and for international markets. These
developments were completed in 1994.
SEB jr. (tm). The SEB jr. (tm) remote monitor was introduced to
penetrate a new segment of the market. SEB jr. (tm) is an affordable
remote monitor for smaller, less expensive Network elements, yet provides
virtually all of the features of the SEB-II. SEB jr. is positioned to
allow service providers to offer complete end-to-end monitoring of networks
consisting of a wide variety of elements. With the introduction of SEB
jr., Teltronics' Remote Maintenance product line now offers one-stop
capability of providing efficient, cost-effective monitoring to every link
in the chain of Network elements, regardless of size or cost.
INTELLI.M@N (tm) The INTELLI.M@N (tm) product, introduced in late
1997, moves the Remote Maintenance product line into exciting new areas.
The monitoring of local area network ("LANs"), wide area network ("WANs"),
equipment is critical to the operation of enterprise data networks. The
INTELLI.M@N (tm) product works in conjunction with the SEB and allows
Service Providers to leverage their investment a new way. This device lets
the SEB monitor data networks and report faults and other events through
the same infrastructure that is used to monitor PABXs, and voice mail
systems in traditional voice network applications. Since most service
customers have both voice and data systems, this offering provides a new
revenue opportunity for Service Providers. A single SEB can monitor a
PABX, a voice mail system, and through the INTELLI.M@N (tm) device many
network elements. The INTELLI.M@N (tm) is fully simple network management
protocol ("SNMP") compliant and can receive alarms from network elements
and actively query many parameters (MIB objects) in the multiple network
elements. In this role, the INTELLI.M@N product serves as an SNMP manager
responsible for a segment of the network and reports alarms out-of-
4
band to the Service Provider. It can also serve as an SNMP Mid-Level-
Manager reporting in-band to a Network Management System ("NMS") in the
enterprise.
When configured with the LATIN (Legacy Adapter To InterNet) software
option INTELLI.M@N (tm) serves as a universal SNMP proxy agent for
equipment that is not SNMP compliant. Customers may now monitor a wide
variety of legacy telecom and data network devices with their enterprise
SNMP based NMS. INTELLI.M@N (tm) hardware will interface to any equipment
that outputs fault and status information via an RS232C port. Received
events are sent to the NMS as SNMP traps and the INTELLI.M@N (tm) MIB may
be queried and examined by the NMS. The INTELLI.M@N (tm) product also has
a WEB Server which allows the MIB to be viewed with a simple WEB browser.
In a third configuration, the INTELLI.M@N (tm) combines the
capabilities of both remote maintenance SNMP manager and proxy agent. This
product is used when both proxy agent and out-of-band reporting is required
at a single site.
IRISnGEN (tm). The IRISnGEN (tm) system is a comprehensive software
package that is used by service providers in Technical Assistance Centers
to monitor alarms and to process data collected from the Network Elements.
SEB remote monitors associated with remote Network elements report
events to the IRISnGEN (tm) software. These events may represent alarm
conditions in the Network elements, or may simply be status information to
indicate that everything is working properly. Using IRISnGEN (tm)
software, the service provider often identifies and resolves problems
before the customer is aware of them. IRISnGEN software is also used to
collect data stored in SEBs and direct the data to the proper software
application for processing. The software also provides the tools required
to manage remotely located SEBs and to access Network elements for routine
maintenance.
A database of Network element alarms is maintained in IRISnGEN so that
the service provider may obtain reports on alarm status at any time.
Comprehensive reports that provide statistical analysis of received alarms
are also available. Service personnel use them to isolate faulty
components, identify trends, and track the historical performance of
Network Elements
Building on the success of the UNIX based IRIS product, the IRISnGEN
product brings the next generation of alarms management to the marketplace.
This new product incorporates all the features of the original IRIS product
while introducing major new capabilities.
This advanced alarms management system is a client/server application
and takes full advantage of the power and flexibility of Windows NT (R).
Any number of users with PCs running Windows (R) 95 or Window NT (R)
Workstation can access the system. The system has a relational database
designed to support the organization of a typical Service Provider
operating a Technical Assistance Center. It also supports the creation of
an unlimited number of relationships that logically group customer sites
and monitored systems. Geographical alarm display, alarm escalation, alarm
correlation, alarm forwarding, help desk, and World Wide Web access are
just a few of the new capabilities being introduced. Heavy emphasis is
placed on graphics and ad-hoc reporting capabilities. A comprehensive
Application Program Interface (API) has been introduced to assist customers
in integrating IRISnGEN with legacy management systems and databases.
IRISnGEN is designed for growth. Customers can purchase as much as, or
as little, as their business needs dictate by selecting capabilities that
are grouped into feature packages. The basic package is a full-featured,
highly capable alarms management system that will allow both large service
providers and self-maintained end users to enter into the alarms management
arena. Customers may add optional feature packages as the demands of their
business change.
IRIS (R) Traffic. This optional IRISnGEN software module is a traffic
analysis system that allows service providers to perform traffic studies on
NORTEL SL-1 and Meridian-1 PABX systems. The information created by this
application assists the service provider in "fine tuning" their customer's
PABX
5
to operate more efficiently. The IRISnGEN Traffic system has proven to be
a very effective revenue generator for service providers. The system
allows the service provider to identify PABX enhancements that can be sold
to the end-user to improve PABX performance.
PBX/ACD PRODUCTS
VisionLS (tm)/VisionMS (tm). The Vision (R) Systems are multi-function
Key/PBX/CENTREX/Hybrid telecommunications systems. They are used to
process calls by: general business and professional organizations, health
care, financial, government, technology, transportation, and education,
call centers, service centers, and other organizations that need flexible,
value added telecommunications capabilities. These systems are also used
to pass data to and receive commands from computers via a Computer
Telephone Interface ("CTI"). Inherent in the software of these
telecommunications platforms are automatic call distribution (ACD),
automated attendant (AIR), intelligent call handling and dynamic call
routing based on ANI, DNIS, and Caller ID. Some features, such as
automatic telephone relocation, copy, and replace are unmatched in the
telecommunications industry.
QueVision (tm). QueVision (tm) is a call center management product,
using CTI techniques, that accepts call events from Vision (R) systems and
uses that data to deliver real-time information enabling supervisors to
effectively manage either formal or informal call center activity. The
system provides on-demand and scheduled reports and supports the use of a
wall mounted display sign to let all agents see the performance of the call
center.
CENTRALINK911. This Vision switching platform provides both the
telecommunications link and automatic location identification to over
seven-hundred Public Safety Answering Points (911 emergency call centers).
The system is comprised of two parts: The ANI Controller, which is a Vision
telecommunications platform with specialized features and the ALI
controller, a computer running Teltronics' software that allows it to
retrieve and display information about the location of a 911 caller based
on the caller's telephone number.
VisionWorks (tm). VisionWorks (tm) is a Windows (tm) based voice mail
system providing a full- featured voice mail plus unified messaging.
Through integration with MAPI compliant applications, every email, every
voice mail, every fax can be handled on the client desktop. Options
include local area paging, fax on demand, AMIS standard networking, and on
screen call control. Using VisionPath (tm) CTI to connect to any Vision
system, users can view the name and number of incoming callers, record
calls as messages, and divert calls to other extensions or mailboxes.
Outgoing calls can be launched from the desktop using the VisionWorks, or
other contact manager.
VisionVM (tm). A mature voice mail system that provides up to eight
ports of voice mail for small to mid-sized organizations. VisionVM takes
advantage of the advanced voice mail integration capabilities inherent in
every Vision system to deliver customized features. VisionVM installs
quickly and can be customized by users. VisionVM provides up to 6,000
mailboxes, fax detection, and networks to any AMIS compliant voice mail
system.
ELECTRONIC MANUFACTURING PRODUCTS
Teltronics provides contract electronic manufacturing services for
companies in the telecommunications, industrial control, and other
computer-related industries. Services include product design, turnkey
material procurement and management, automated through-hole or surface
mount circuit board assembly, in-circuit and functional test, and final
mechanical integration. Teltronics' manufacturing operations are certified
by BABT 340 and UL. In addition, during the fourth quarter of 1998, the
Company received ISO 9002 certification. Through this important quality
certification, Teltronics has established and demonstrated effective
procedures and processes that ensure that all products are manufactured,
installed and serviced under a quality system, which carries an
internationally recognized and certified level of excellence.
6
Teltronics' current manufacturing capacity should allow for increased
growth of the Company's existing product lines and accommodate an increase
in electronic manufacturing services business. Teltronics' electronic
manufacturing services business enables the Company to profit from
increased parts and components purchasing discounts, and utilization of
excess plant capacity. This reduces direct materials and overhead costs
associated with manufacturing the Company's products. These cost savings
should help make Teltronics' products more profitable and competitive in
their respective markets.
ISI - SEGMENT
MOBILE, MULTIMEDIA COMPUTER PRODUCTS
MENTIS (R). The MENTIS (R) computer is a mobile, Pentium (R)
processor powered, multimedia computer that could set the standard for
multimedia computer based instruction. MENTIS (R) hardware and MentiSoft
(tm) software provide full multimedia capability and a human to human
interface. The first product of its kind, MENTIS (R) computer's approach
to training is called Real Time Mentoring (tm) or RTM (tm). Using full
motion video and responding to voice activated commands, MENTIS (R)
computer systems have the potential to minimize or eliminate classroom
training in the workplace.
PATENTS, COPYRIGHTS AND TRADEMARKS
Teltronics has no patents or copyright registrations. The Company has
registered the following trademarks: Ideas That Communicate (R), Site Event
Buffer (R), SuperVizor (R), CallQuest (R), IRIS, Dispatcher (R),
Net-Path(R) and SEB InterAct (R), and has applied for registration of the
following trademarks: IRISnGEN (tm) and INTELLI@MAN (tm).
Teltronics/SRX has the following patents, copyrights and trademarks:
(i) Trademarks: Shared Resource Exchange (R), SRX (R), SRX and design (R),
Vision and design (R), OmniWorks and design (R), SRX OmniWorks and design
(R), VisionPath (R), VisionMS (R), VisionLS (R), VisionPhone (R),
VisionXPhone (R), VisionPhonePC (tm), VisionACD (R), VisionVM (R),
VisionTAS (tm), VisionOS (tm), VisionView (tm), VisionWorks (tm) and
QueVision (tm); (ii) Copyrights: SRX Call processing, CENTRALINK release
1.0 software, SRX E911 software, CENTRALINK ALI release 1.2 software (co-
owned with Pro-Tel, Inc.), SRX Call Processing, VisionMS (System Two)
release 2.2 software, and SRX call processing, System One release 4.6
software; (iii) US Patents: Station Controller for Enhanced Multi-Line
Pick-Up in a Centrex Exchange Telephone System and Station Controller for
Multi-Line Pick-Up and Automatic Monitoring of Telephone Station Moves;
and (iv) Canadian Patents: Station Controller for Enhanced Multi-Line Pick-
Up in a Centrex Exchange Telephone System.
ISI markets products under the trademarks Interactive Solutions (tm),
MENTIS (R), VoiceZoom (tm), VoiceProbe (tm), rtmEditor (tm), rtmNavigator
(tm), MentiSoft (tm), RTM (tm), Real Time Mentoring (tm), Just In Time
Learning (tm) and ISI and design (tm). ISI is the owner of a copyright for
its MentiSoft (tm) software for its MENTIS (R) multimedia computer.
The Company also seeks to protect its confidential and proprietary
information through the enforcement of confidentiality and non-compete
agreements presently executed by key employees.
WARRANTY AND SERVICE
The Company provides a limited warranty on most of its products, for a
period of 3 to 18 months (depending on the product), under which the
Company agrees to repair or replace, in the Company's sole discretion,
units defective in material or workmanship, provided the equipment has not
been subjected to alteration or abuse. The Company's technical service and
engineering staff provide support services over the telephone to customers
with installation or operational questions. Warranty and other repair
services are provided by the Company at its facility in Sarasota, Florida.
To date, warranty expenses have been insignificant in relation to the
Company's gross sales.
7
COMPONENT PROCUREMENT
The Company assembles all of its products at its facility in Sarasota,
Florida. All components used in the assembly of the Company's products are
purchased from distributors and manufacturers.
Purchase orders for components are placed from one month to six months
in advance, depending on the supply sensitivity of a particular component.
Most components are available from several sources, based upon current
price quotations. If these suppliers should stop carrying or manufacturing
components for the Company, the Company's operations could be adversely
affected until alternative sources are located and increased operating
costs could result from product re-engineering required to use such
substitute components. Certain electronic components used in the Company's
products are purchased through American distributors from sources outside
of the United States. The costs of such components increase as the value
of the United States dollar decreases in relation to foreign currencies.
In addition, the availability of such components may be affected by factors
external to the United States, including war, civil strife, embargo and
export or import restrictions. Although there can be no assurance for the
future, the Company has not experienced and does not anticipate
experiencing any significant difficulty in purchasing components.
BACKLOG
The Company's backlog at December 31, 1998, 1997 and 1996 was
$3,489,000, $2,617,000 and $9,943,000 respectively. At February 26, 1999,
March 18, 1998, and February 29, 1997 the Company's backlog was $4,860,000,
$3,926,000 and $11,319,000 respectively. The Company's business has
changed and only Electronic manufacturing operates on a sales order backlog
basis. All backlog will be shipped in 1999.
CUSTOMERS
Sales to major customers were as follows:
Years Ended December 31,
------------------------
1998 1997 1996
------------------------
Customer A 13% --- ---
Customer B 12% 13% ---
Customer C 11% --- ---
Customer D 10% --- ---
No other customers exceeded 10% of total sales in any year.
COMPETITION
The Company has two significant competitors in the Remote Maintenance
marketplace, Microframe, Inc. and TSB International. The PBX market has
many competitors with the dominant players being Lucent and NORTEL. The
Vision PBX is active in the ACD and small PBX market. The Mobile,
Multimedia Computer market is new and evolving and has a small number of
competitors. Management of the Company believes the Company's products are
competitive in price, product performance, warranty, technology and
service. The Company continues to spend significant funds to enhance
already technologically complex equipment and develop or acquire new
products.
8
RESEARCH AND PRODUCT DEVELOPMENT
The Company maintains continuing research and development efforts
directed toward enhancement of its existing product lines and development
of new products. The Company's research and development expenditures
during the fiscal years ended December 31, 1998, 1997 and 1996 were
$3,057,000, $2,428,000 and $1,391,000, respectively.
REGULATION
Part 68 of the Federal Communications Commission ("FCC") Rules ("Part
68") contains the majority of the technical requirements with which
telephone systems must comply to qualify for FCC registration for
interconnection to the public telephone network. Part 68 registration
represents a determination by the FCC that telecommunication equipment
interfacing with the public telephone network complies with certain
interference parameters and other technical specifications. FCC
registration for the Company's products has been granted and the Company
intends to apply for FCC registration for all of its new products.
Certain of the Company's products are also subject to and comply with
regulation under Part 15 of the FCC Rules ("Part 15") which requires
equipment classified as containing a Class A computing device to meet
certain radio and television signal interference requirements.
Notwithstanding this minimum compliance, however, Part 15 provides that
operators of equipment containing Class A computing devices may be required
to take whatever steps are necessary to correct radio and television
interference caused by operation of such equipment in a residential area.
EMPLOYEES
As of December 31, 1998, the Company employed 214 personnel.
ITEM 2. PROPERTIES
TELTRONICS - HEADQUARTERS AND PLANT
The Company's headquarters and principal facility consists of
approximately 72,000 square feet, located in a two story concrete and steel
building leased from ARE Sarasota Limited Partnership, a limited
partnership ("ARE Lease"). Approximately 36,000 square feet are used for
laboratories and offices. The plant is located at 2150 Whitfield
Industrial Way, Sarasota, Florida.
The monthly ARE Lease payment is $50,198. The ARE Lease expires in
August, 2005, and may be extended by the Company for two five year periods.
Included in the ARE Lease is a single story building located at 2240
Whitfield Industrial Way. This building consists of approximately 7,500
square feet.
The Company leases approximately 10,000 square feet of warehouse space
at 2245 Whitfield Industrial Way in Sarasota, Florida. The monthly lease
payments are $2,450 through April 30, 1999 and $2,489 through April 30,
2000. The lease expires on April 30, 2000.
The Company leases approximately 10,655 square feet of office space
for the Teltronics/SRX research and development facility in Dallas, Texas.
The monthly lease payment is $7,325 during 1996-1999 and $7,636 per month
during 2000-2001. The lease expires in December, 2001.
9
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to litigation which arises
in the normal course of business. There is no litigation pending, or to
the Company's knowledge, threatened which, if determined adversely, would
have a material adverse effect upon the business or financial condition of
the Company.
On January 28, 1998, an action was commenced against the Company by
Kelley Drye & Warren, LLP seeking approximately $172,000 for legal fees
incurred by Shared Resource Exchange, Inc. ("SRX") in connection with the
sale of substantially all of its assets to the Company in September, 1996.
The Plaintiff claims that the Company agreed to pay all of its fees under
the Agreement of Sale entered into between SRX and the Company on September
20, 1996. On December 28, 1998, the Court approved a stipulation among the
parties dismissing the action with prejudice. This action was settled as
part of the issuance of 62,626 shares of restricted common stock which
settled all claims between SRX and the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended December 31, 1998, no matters were submitted
to a vote of the stockholders of the Company.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of August 1, 1989, the Company listed its Common Stock for trading
on The National Association of Securities Dealers, Inc. Automated Quotation
System ("Nasdaq"). The Company's Common Stock trades on The Nasdaq
SmallCap Market tier of The Nasdaq Stock Market (R) under the symbol:
TELT. The following table sets forth for the fiscal periods indicated the
high and low trade prices in the over-the-counter market for the Company's
Common Stock as reported on Nasdaq.
COMMON STOCK
-------------------------
1998 1997
Trade Trade
-------------------------
High Low High Low
---- --- ---- ---
PERIOD
1st Quarter 3.00 1.78 4.75 3.25
2nd Quarter 9.00 2.00 4.13 2.19
3rd Quarter 4.06 1.63 5.50 1.69
4th Quarter 3.88 1.50 4.88 2.50
On February 26, 1999, the closing bid quotation for the Company's
Common Stock as reported on Nasdaq was $1.94. As of February 26, 1999,
there were approximately 1,415 shareholders of the Company's Common Stock.
The Company has not paid cash dividends to holders of its common stock and
does not plan to pay such dividends in the foreseeable future.
11
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data should
be read in conjunction with the consolidated financial statements and the
related notes thereto in Item 8 and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7.
1998 1997 1996
-------------------------------------
Statement of Operations Data:
Net sales $26,794,674 $34,673,407 $28,878,016
Gross profit 11,448,963 11,025,664 9,359,476
Total operating expenses 11,156,756 12,110,926 11,401,763
----------- ----------- -----------
Income (loss) from operations 292,207 (1,085,262) (2,042,287)
Other income (expense):
Interest (904,682) (1,110,530) (547,743)
Financing (443,778) (135,793) (42,250)
Litigation costs (58,346) (189,645) (323,094)
Settlement of consulting
agreement 0 0 0
Gain on dispositions 1,248,250 0 0
Loss from Com-Central
transaction 0 0 0
Gain on sale of software rights 0 0 0
Cost of conversion right 0 0 0
Other 247,205 33,850 9,703
----------- ----------- -----------
Total other income (expense) 88,649 (1,402,118) (903,384)
----------- ----------- -----------
Net income (loss) 380,856 (2,487,380) (2,945,671)
=========== =========== ===========
Net income (loss) attributable to
common shareholders 130,856 (2,487,380) (2,945,671)
=========== =========== ===========
Net income (loss)per share:
Basic .04 (0.74) (1.05)
Diluted .04 (0.74) (1.05)
=========== =========== ===========
Shares used to compute amount:
Basic 3,417,744 3,382,223 2,817,586
Diluted 3,522,354 3,382,223 2,817,586
Balance Sheet Data:
Working capital 668,480 (50,409) (481,574)
Total assets 14,430,769 16,052,764 17,013,085
Current portion of long term
debt and capital lease
obligations 4,500,244 4,923,050 4,354,981
Long term debt, less
current portion 3,417,288 4,690,231 921,740
Total shareholders
equity (deficiency) 2,618,747 (711,846) 1,717,034
1995 1994
------------------------
Statement of Operations Data:
Net sales $21,603,491 $14,762,344
Gross profit 8,378,507 6,098,820
Total operating expenses 7,611,517 8,946,595
----------- -----------
Income (loss) from operations 766,990 (2,847,775)
Other income (expense):
Interest (381,645) (264,615)
Financing (287,275) (413,841)
Litigation costs 0 0
Settlement of consulting
agreement 0 (803,894)
Gain on dispositions 0 0
Loss from Com-Central
transaction 0 (897,781)
Gain on sale of software rights 165,000 0
Cost of conversion right 0 (2,058,000)
Other (2,466) (14,077)
----------- -----------
Total other income (expense) (506,386) (4,452,208)
----------- -----------
Net income (loss) 222,879 (6,783,433)
=========== ===========
Net income (loss) attributable to
common shareholders 222,879 (6,783,433)
=========== ===========
Net income (loss) per share:
Basic 0.09 (11.08)
Diluted 0.08 (11.08)
=========== ===========
Shares used to compute amount:
Basic 2,528,018 612,177
Diluted 2,631,659 612,177
Balance Sheet Data:
Working capital 887,433 472,193
Total assets 8,913,951 7,698,361
Current portion of long term
debt and capital lease
obligations 2,717,716 2,677,159
Long term debt, less
current portion 583,673 1,539,352
Total shareholders
equity (deficiency) 2,338,170 1,545,293
(1) Reflects the startup of AT Supply, Inc. in October, 1995.
(2) Reflects the acquisition of Interactive Solutions, Inc. on
April 18, 1996.
(3) Reflects the acquisition of Teltronics/SRX, Inc. on
September 20, 1996.
(4) Reflects the disposition of AT Supply, Inc. on March 6, 1998.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL OVERVIEW
The Company has established itself in its traditional markets. It
developed its position in those markets principally through organic growth
and continues to grow these markets. However, the Company believes that
future growth requires development or acquisition of new products and new
markets. To that end, the Company acquired the technology of ISI in April,
1996 and the technology of SRX in September, 1996. These acquisitions have
enabled the Company to enter other markets. In acquiring new technologies,
the Company has been able to reduce its dependence on mature and less
profitable markets. The Company has, therefore, been able to either close
down or sell products and/or companies. The Company is now firmly focused
in Telecommunications through its Vision switching platform, Remote
Maintenance, and Electronic Manufacturing products. ISI is focused in the
mobile, multimedia computer market.
ACQUISITIONS
On February 19, 1999, the Company acquired certain assets and the
technology of Cascade Technology Corporation ("Cascade"). The Company
acquired all of Cascade's rights to and in certain technology for a
DiscoverMATE (tm) panel link display, open sales orders and other purchased
assets described in the Agreement. The display is sold to Ford Visteon,
Chrysler, General Motors and Kelsey Hayes and other companies.
The Company delivered an aggregate of 126,383 restricted shares
(including 52,117 shares in escrow for potential claims by the Company) of
its voting common stock for selected assets of Cascade. The holders of
these restricted shares have been granted certain registration rights under
a Registration Rights Agreement which allows them to elect to have their
shares registered if the Company proposes to register any of its securities
under the Securities Act of 1933, as amended, in an offering for cash. In
addition, the Company paid $57,000 at closing and issued a non-interest
bearing note for $47,913 that is due no later than May 19, 1999.
DISPOSITIONS
On March 6, 1998, the Company sold the assets and liabilities of AT
Supply, a majority owned subsidiary. The subsidiary was sold to the
minority owners of the subsidiary for $424,836 in cash and a note
receivable for $200,000. Interest on the note receivable is payable at 12%
and principal and interest are due monthly over three years starting April
1, 1998. The note receivable is secured by a second lien on assets and is
personally guaranteed by the principals of the buyer. The buyer paid
$972,450 at closing to terminate all liens and security interests with the
Company's principal lender. The buyer assumed responsibility for payment
of all liabilities. The Company recognized a gain on the disposition of AT
Supply of $1,148,250 during the year ended December 31, 1998. Revenues and
net income for AT Supply were $1,278,000 and $6,000 respectively for the
year ended December 31, 1998. Revenues and net loss were $9,293,000 and
$608,000, respectively for the year ended December 31, 1997.
On April 23, 1998, the Company sold the customer list and maintenance
and support agreements for the ORBi-TEL for Windows and non-Unix call
accounting product lines to MDR Telemanagement Limited. These product
lines were sold for $100,000 in cash, a contingent consideration payable in
one year of $112,000 and a 30% commission based on sales, payable monthly
for one year. The gain on the sale is $100,000 and the contingent gain of
$112,000 and 30% commission will be recorded when realized. Revenues for
these product lines were $82,000 for the year ending December 31, 1998 and
$299,000 for the year ended December 31, 1997.
13
RESULTS OF OPERATIONS
The following tables set forth certain data, expressed as a percentage
of revenue, from consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.
1998 1997 1996
------------------------------
Net sales 100.0% 100.0% 100.0%
Gross profit 42.7 31.8 32.4
Total operating expenses 41.6 35.0 39.5
------ ------ ------
Income (loss) from operations 1.1 -3.2 -7.1
------ ------ ------
Other income (expense):
Interest -3.4 -3.2 -1.9
Financing -1.7 -0.4 -0.1
Litigation costs -.2 -0.5 -1.1
Gain on dispositions 4.7 0.0 0.0
Other .9 0.1 0.0
------ ------ ------
Total other income (expense) .3 -4.0 -3.1
------ ------ ------
Income (loss) before income taxes 1.4 -7.2 -10.2
Income tax expense 0.0 0.0 0.0
------ ------ ------
Net income (loss) 1.4% -7.2% -10.2%
====== ====== ======
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
Sales were $26,795,000 for 1998 as compared to $34,673,000 for 1997.
This decrease was due to a reduction in AT Supply sales of $8,015,000,
offset by an ISI sales increase of $530,000.
Gross profit was $11,449,000 or 42.7% for 1998 as compared to
$11,026,000 or 31.8% for 1997. The increase was due to a change in product
mix, with increased Remote Maintenance and ISI sales, and the sale of AT
Supply.
General and administrative expenses were $3,398,000 for 1998 as
compared to $4,873,000 for 1997. The decrease was due to expense
reductions and the sale of AT Supply.
Sales and marketing expenses were $4,702,000 for 1998 as compared to
$4,810,000 in 1997.
Research and development expenses were $3,057,000 for 1998 as compared
to $2,428,000 for 1997. The increase was due to continued funding for ISI
and Teltronics Remote Maintenance and PBX/ACD products.
Income from operations was $292,000 for 1998 as compared to a loss
from operations of $1,085,000 for 1997. This increase relates to improved
margins, reduced expenses and the sale of AT Supply.
Other income was $89,000 for 1998 as compared to an expense of
$1,402,000 for 1997. Interest and financing was $1,348,000 for 1998 as
compared to $1,246,000 for 1997. AT Supply was sold for a gain of
$1,148,000 during the first quarter of 1998. The customer list and
maintenance and support agreements for the OBRi-TEL for Windows contract
maintenance business were sold to MDR Telemanagement Limited in April, 1998
for a gain of $100,000.
Income tax expense was offset by a corresponding reduction in the
deferred tax asset valuation allowance.
The net income was $381,000 for 1998 as compared to a net loss of
$2,487,000 for 1997.
14
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Sales were $34,673,000 for 1997 as compared to $28,878,000 for 1996.
This increase was due to increased sales by AT Supply and PBX/ACD products
and initial sales by ISI.
Gross profit was $11,026,000 or 31.8% for 1997 as compared to
$9,359,000 or 32.4% for 1996. The percentage reduction was due to product
mix, with increased low margin sales for AT Supply.
General and administrative expenses were $4,873,000 for 1997 as
compared to $5,138,000 for 1996. The decrease was due to personnel
reductions.
Sales and marketing expenses were $4,810,000 for 1997 as compared to
$4,872,000 for 1996.
Research and development expenses were $2,428,000 for 1997 and as
compared to $1,391,000 for 1996. The increase was due to continued funding
in ISI and Teltronics' PBX/ACD products.
The loss from operations was $1,085,000 for 1997 as compared to a loss
from operations of $2,042,000 in 1996. The 1997 loss resulted from the
Company's continued funding of ISI of $1,175,000 and an operating loss of
$156,000 at AT Supply.
Other expense was $1,402,000 for 1998 as compared to $903,000 for
1996. Interest and finance costs were $1,246,000 for 1997 as compared to
$590,000 for 1996. This increase resulted from the issuance of the 11%
Debentures in February, 1997.
The net loss was $2,487,000 for 1997 as compared to $2,946,000 for
1996. The loss resulted from the Company's net loss of $2,064,000 in ISI
and a net loss of $608,000 in AT Supply.
LIQUIDITY AND CAPITAL RESOURCES
Cash requirements were met with borrowings from The CIT Group/Credit
Finance ("CIT"), Debentures and Senior Secured Loans discussed below and
the disposition of AT Supply. On July 23, 1997, the Company's principal
lender, CIT entered into a Ninth Amendment to the Company's Line of Credit
Facility and Term Loan. The Amendment reduced the interest rate from 2.5%
to 2.0% above prime rate, increased maximum availability from $4,950,000 to
$7,000,000, increased the prepayment penalty for any payment prior to
October 28, 1998 from 1% to 1.5%, extended the Initial Term to October 28,
2000, and added ISI as a co-borrower on the Line of Credit Facility and
Term Loan. On December 22, 1998, the Ninth Amendment was changed reducing
the maximum availability to $5,500,000 due to the sale of AT Supply.
The Company's working capital ratio was 1.08:1 at December 31, 1998 as
compared to 1.0:1 at December 31, 1997. Net working capital was $668,000
at December 31, 1998 as compared to a deficiency of $(50,000) at December
31, 1997. Included in current liabilities was $3,998,000 and $4,463,000 of
borrowings under the Company's line of credit at December 31, 1998 and
1997, respectively.
Net cash decreased by $299,000 for the year ended December 31, 1998 as
compared to a net cash increase of $436,000 for the year ended December 31,
1997. Net cash flows used in operating activities were $94,000 for the
year ended December 31, 1998 as compared to $2,422,000 for the year ended
December 31, 1997.
Accounts receivable increased by $1,138,000 for the year ended
December 31, 1998 as compared to a decrease of $284,000 for the year ended
December 31, 1997. This increase was due to strong fourth quarter, 1998
sales. Inventories increased by $148,000 for the year ended December 31,
1998 as compared to a decrease of $965,000 for the year ended December 31,
1997. This increase is due to purchases for first quarter, 1999
production. Accounts payable increased by $398,000 for the year ended
December 31, 1998 as compared to a decrease of $2,712,000 for the year
ended December 31, 1997. The increase is due to purchases related to
strong fourth quarter, 1998 sales.
15
Net cash flows from investing activities totaled $905,000 as compared
to $1,353,000 for the year ended December 31, 1997. Acquisition of
property and equipment totaled $950,000 for the year ended December 31,
1998 as compared to $1,388,000 for the year ended December 31, 1997. The
decrease was due to reduced expenditures for dies and molds for ISI.
Cash flows from financing totaled $700,000 for the year ended December
31, 1998 as compared to $4,210,000 for the year ended December 31, 1997.
During 1997, Sirrom Capital provided funding of $4,250,000 to Teltronics.
Leases of fixed assets were $862,000 for the year ended December 31,
1998 as compared to $184,000 for the year ended December 31, 1997. The
increase is due to the lease of a new computer and production testing
equipment.
On February 13, 1997, the Company entered into a Debenture Purchase
Agreement and sold $4,250,000 aggregate principal amount of its
Subordinated Convertible Debentures Due on February 13, 2002 to Sirrom
Capital Corporation. The Debentures required interest at the rate of 11%
per annum, payable quarterly commencing May 1, 1997. Fees in connection
with the Debentures totaled $187,055. The Debentures were subordinated to
certain other indebtedness of the Company. Subject to and upon compliance
with certain provisions of the Agreement, the holder of the Debentures has
the right, at its option, at anytime, to convert the principal amount of
the Debenture, or any portion thereof, into shares of the Company's Voting
Common Stock, par value $.001 per share at a conversion price (subject to
adjustment under certain conditions) of $4.00 per share.
The Company entered into an agreement on February 25, 1998 with Sirrom
Capital. Pursuant to this agreement, the Company issued $2,500,000 of
Series B Preferred Stock and $1,750,000 of 12% Subordinated Secured
Debentures due February 13, 2002. The proceeds of this financing were used
to repurchase $4,250,000 of 11% Subordinated Convertible Debentures due on
February 13, 2002. In connection with the Subordinated Secured Debentures,
the Company issued 525,000 warrants to purchase the Company's Common Stock
at an exercise price of $2.75 per share. The warrants were recorded at
fair value and are being amortized to financing expense over the life of
the related obligation. These warrants are exercisable in whole, or in
part, at any time during a five year period beginning on the date of
issuance.
On March 29, 1999, the Company amended and restated the $1,750,000 of
Subordinated Secured Debentures originally entered into on February 25,
1998 and due February 13, 2002. The Debentures have a revised maturity of
$500,000 on April 30, 2000 and $1,250,000 on February 13, 2002.
The Company borrowed $1,280,000 from Sirrom Capital under a Loan and
Security Agreement between the Company and Sirrom Capital dated February
25, 1998 ("Loan Agreement") and delivered its: (i) Secured Senior
Subordinated Promissory Note in the principal amount of $1,000,000 with
interest at 12% per annum maturing in February, 1999, the proceeds of which
were used for working capital of the Company and (ii) Secured Senior
Subordinated Promissory Note in the principal amount of $280,000 with
interest at 12% per annum maturing in October, 2000, the proceeds of which
were used to pay an equipment loan made to the Company by CIT. The Company
issued 365,000 warrants to purchase the Company's Common Stock at an
exercise price of $2.75 per share. The warrants were recorded at fair
value and are being amortized to financing expense over the life of the
related obligation. These warrants are exercisable in whole, or in part,
at any time during a five year period beginning on the date of issuance.
On March 29, 1999, the Company amended and restated the $1,000,000
Loan Agreement originally entered into on February 25, 1998 and originally
due February 25, 1999. The Loan Agreement has a revised maturity of April
30, 2000. If the Loan is not repaid by September 30, 1999, the interest
rate increases from 12% to 13.5%. This Loan has been classified as long-
term debt at December 31, 1998.
In addition, the Company is exploring the possibility of other equity
financing.
16
CURRENT OUTLOOK
The PBX/ACD "Vision" product line was reintroduced in 1997. Vision
development had been neglected by the previous owners and was behind
technologically compared to other switches. The Company continues to
invest in engineering resources to modernize the product line. The Company
entered into a distributor agreement with a major Regional Bell Operating
Company and other distributors and this should contribute positively to
sales for this product line during 1999. It also provides the Company and
other distributors with the confidence that the Vision product has
viability. The product line will continue to require investment in
modernizing and integrating more exterior software products to enhance its
computer telephony interface and its ACD features.
The Company's business in CENTRALINK 911 is also a very important
market for the Vision switch. The Company believes this business should
continue to grow during 1999.
The Remote Maintenance business continues to attract new customers.
Once a customer purchases the Company's centralized software, continuing
SEB sales can be expected. The Company invested in modernizing its
original centralized software product IRIS, from a UNIX based product to a
Windows NT based product. This new platform should increase sales and the
majority of customers are upgrading to IRISnGEN.
Interactive Solutions, the Company's majority owned subsidiary, is
continuing to develop the voice driven, multimedia, Pentium (R), mobile
computer. Pre-production units were produced during 1997, the majority of
which were used as development tools and are being evaluated by a number of
customers. Production units of this product are now available and have
been FCC Part 15 approved. Beta trials with major customers have
commenced. There are indications that the product is well accepted. There
can be no assurances that any major orders will be forthcoming.
YEAR 2000 READINESS DISCLOSURE
The Company is preparing for the impact of the arrival of the Year
2000 on its business. The "Year 2000 Issue" is a term used to describe the
problems created by systems that are unable to accurately interpret dates
after December 31, 1999. These problems are derived predominantly from the
fact that many software programs have historically categorized the "year"
in a two-digit format. The Year 2000 Issue creates potential risks for the
Company, including potential problems in the Company's products as well as
in the Information Technology ("IT") and non-IT systems that the Company
uses in its business operations. The Company may also be exposed to risks
from third parties with whom the Company interacts who fail to adequately
address their own Year 2000 Issues.
The Company is pursuing an organized program to assure the Company's
products, production equipment and information systems and related
infrastructure will be year 2000 compliant. The Company's Year 2000
program includes four phases: (1) an audit and assessment phase designed to
identify Year 2000 issues; (2) a modification and testing phase designed to
correct year 2000 issues internally; (3) a purchase phase designed to
correct Year 2000 issues externally; and (4) an implementation and test
phase to install and test the system for Year 2000 compliance for external
purchases.
The Company has completed the audit and assessment phases for all
products. The modification of all products and related testing was
completed by December 31, 1998. Selected older and discontinued products
are not Year 2000 compliant and customers have been advised. The Company
has established an Internet site as contemplated by the Year 2000 Readiness
Disclosure Act to assist customers and provide information related to the
Year 2000 Issue. The cost to update products for year 2000 compliance was
not significant and was completed in conjunction with ongoing development
efforts.
The Company has completed the audit and assessment of production
equipment and related infrastructure. Such equipment and infrastructure is
year 2000 compliant.
17
The Company has completed an audit and assessment of the Year 2000
issue for the computer system. The Company's computer system is not Year
2000 compliant. This could cause a system failure or miscalculations,
causing operation disruption and a temporary inability to process
transactions, send invoices or engage in similar normal business
activities.
The Company has leased a new computer system that is year 2000
compliant. This system cost $570,000 and was received in August and
September, 1998. Internal costs are expected to increase $100,000 per year
due to the computer system installation. The external installation and
training costs are estimated to be $130,000 and the installation is
estimated to be completed by June 30, 1999, which would be prior to any
significant impact of the Year 2000 on its operating systems. Training and
installation costs of $60,000 related to the new computer system have been
incurred as of December 31, 1998. The $130,000 will be paid from operating
cash flow. The system installation should not defer any additional systems
projects.
The Company has initiated formal communications with its significant
suppliers to determine the extent to which its raw materials are vulnerable
to the Year 2000 Issue. If any suppliers indicate that they are not Year
2000 compliant, the Company plans to develop contingency plans to address
the issue.
There can be no assurance that the Company will be completely
successful in its efforts to address Year 2000 Issues. If the Company's
products are not Year 2000 compliant, the Company could suffer lost sales
or other negative consequences, including, but not limited to, diversion of
resources, damage to the Company's reputation, increased service and
warranty costs and litigation, any of which could materially adversely
affect the Company's business operations or financial statements.
The Company is also dependent on third parties, such as its customers,
suppliers, service providers and other business partners. If these or
other third parties fail to adequately address Year 2000 Issues, the
Company could experience a negative impact on its business operations or
financial statements. For example, the failure of certain of the Company's
principal suppliers to have Year 2000 compliant systems could impact the
Company's ability to manufacture and/or ship its products or to maintain
adequate inventory levels for production.
At the present time, the Company does not have a contingency plan to
operate in the event that its business systems, products and raw materials
are not Year 2000 compliant. If testing scheduled for the first and second
quarters of 1999 suggests that there is a significant risk that the
computer system, products and raw materials might not be Year 2000
compliant, the Company anticipates developing a contingency plan.
Notice: Various statements in this discussion of year 2000 are forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements include statements of the Company's
expectations, statements with regard to schedules, cost and expected
completion dates and statements regarding expected Year 2000 compliance.
These forward-looking statements are subject to various risk factors which
may materially affect the Company's efforts to achieve Year 2000
compliance. These risk factors include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
install the new computer system on a timely basis, the ability to source
Year 2000 compliant raw materials, and the completion of product
modifications. The Company is attempting to reduce the risks by utilizing
an organized approach, extensive testing, and allowance of ample
contingency time to address issues identified by tests.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had no holdings of derivative financial or commodity
instruments at December 31, 1998. The Company is exposed to financial
market risks, including changes in interest rates and foreign currency
exchange rates. All borrowings under the Company's bank line of credit
agreement bear interest at a variable rate based on the prime rate. An
increase in interest rates of 100 basis points would not significantly
impact the Company's net income. All of the Company's business is
transacted in U.S. dollars. Accordingly, foreign exchange rate
fluctuations should not have a significant impact on the Company.
18
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Page
Report of Independent Certified Public Accountants................20
Independent Auditors' Report......................................21
Consolidated Balance Sheets - December 31, 1998 and 1997..........22
Consolidated Statements of Operations for Years Ended
December 31, 1998, 1997 and 1996.............................23
Consolidated Statements of Shareholders' Equity (Deficiency)
for the Years Ended December 31, 1998, 1997 and 1996.........24
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996.................25
Notes to consolidated Financial Statements........................27
Item 14(a)2:
Schedule II - Valuation and Qualifying Accounts..............55
19
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
Teltronics, Inc.
We have audited the accompanying consolidated balance sheets of Teltronics,
Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity (deficiency), and cash flows
for each of the two years in the period ended December 31, 1998. Our
audits also included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Teltronics, Inc. at December 31, 1998 and 1997 and the
consolidated results of its operations and its cash flows for each of the
two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
February 26, 1999, except for
Notes 10 and 11 as to which
the date is March 29, 1999.
20
To the Board of Directors and Shareholders of Teltronics, Inc.
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Teltronics, Inc. and Subsidiaries
for the year ended December 31, 1996. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). These
consolidated financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of Teltronics, Inc. and Subsidiaries for the year
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
/s/ Millward & Co.
Millward & Co., CPAs
Fort Lauderdale, Florida
March 13, 1997
21
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
--------------------------
1998 1997
--------------------------
CURRENT ASSETS:
Cash $ 136,467 $ 435,538
Accounts receivable, net 4,755,963 4,823,382
Inventories, net 3,863,371 6,149,307
Prepaid expenses and other current assets 307,413 615,743
----------- -----------
Total current assets 9,063,214 12,023,970
----------- -----------
PROPERTY AND EQUIPMENT, NET 4,422,722 3,666,881
----------- -----------
OTHER ASSETS 944,833 361,913
----------- -----------
Total assets $14,430,769 $16,052,764
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 4,184,639 $ 4,718,031
Current portion of capital
lease obligations 315,605 205,019
Accounts payable 2,913,161 5,610,101
Accrued expenses and other
current liabilities 981,329 1,541,228
----------- -----------
Total current liabilities 8,394,734 12,074,379
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 2,870,887 4,468,322
Capital lease obligations,
net of current portion 546,401 221,909
----------- -----------
Total long-term liabilities 3,417,288 4,690,231
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIENCY):
Common stock, $.001 par, 40,000,000
shares authorized, 3,478,139 and
3,866,013 issued and outstanding at
December 31, 1998 and 1997, respectively 3,480 3,867
Non-voting common stock, $.001 par,
5,000,000 shares authorized, zero shares
issued and outstanding 0 0
Preferred Series A stock, $.001 par value,
100,000 shares authorized, 100,000
shares issued and outstanding at
December 31, 1998 and 1997 100 100
Preferred Series B Convertible Stock,
$.001 par value, 25,000 shares
authorized, 25,000 shares issued and
outstanding at December 31, 1998 25 0
Additional paid-in-capital 16,443,371 14,434,772
Accumulated deficit (13,828,229) (13,959,085)
Unpaid shares issued pursuant to
Employee Stock Payment Plan 0 (1,191,500)
----------- -----------
Total shareholders'
equity (deficiency) 2,618,747 (711,846)
----------- -----------
Total liabilities and shareholders'
equity (deficiency) $14,430,769 $16,052,764
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
22
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
NET SALES $26,794,674 $34,673,407 $28,878,016
Cost of goods sold 15,345,711 23,647,743 19,518,540
----------- ----------- -----------
Gross profit 11,448,963 11,025,664 9,359,476
----------- ----------- -----------
OPERATING EXPENSES:
General and administrative 3,397,926 4,872,743 5,138,491
Sales and marketing 4,701,769 4,809,949 4,872,353
Research and development 3,057,061 2,428,234 1,390,919
----------- ----------- -----------
11,156,756 12,110,926 11,401,763
----------- ----------- -----------
Income/loss from operations 292,207 (1,085,262) (2,042,287)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest (904,682) (1,110,530) (547,743)
Financing (443,778) (135,793) (42,250)
Litigation costs (58,346) (189,645) (323,094)
Gain on dispositions 1,248,250 0 0
Other 247,205 33,850 9,703
----------- ----------- -----------
88,649 (1,402,118) (903,384)
----------- ----------- -----------
Income/(loss) before
income taxes 380,856 (2,487,380) (2,945,671)
Income tax expense 0 0 0
----------- ----------- -----------
NET INCOME (LOSS) 380,856 (2,487,380) (2,945,671)
Dividends on Preferred
Series B Convertible Stock 250,000 0 0
----------- ----------- -----------
Income (loss) attributable
to common shareholders $ 130,856 $(2,487,380) $(2,945,671)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE
(BASIC AND DILUTED) $ .04 $ (.74) $ (1.05)
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
23
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
COMMON STOCK PREFERRED STOCK
----------------- ---------------
SHARES AMOUNT SHARES AMOUNT
--------- ------ ------ ------
Balance,
December 31, 1995 2,610,168 $2,611 0 $ 0
Shares issued for
acquisition of net
assets of Shared
Resource Exchange, Inc. 750,000 750 0 0
Issuance of stock on
exercise of options 4,000 4 0 0
Issuance of stock on
exercise of warrants 1,845 2 0 0
Issuance of Series A
Preferred Stock 0 0 100,000 100
Net loss 0 0 0 0
--------- ------ ------- ----
Balance,
December 31, 1996 3,366,013 3,367 100,000 100
Shares issued pursuant
to Employee Stock
Payment Plan 500,000 500 0 0
Net loss 0 0 0 0
--------- ------ ------- ----
Balance,
December 31, 1997 3,866,013 3,867 100,000 100
Cancellation of unpaid
shares issued pursuant
to Employee Stock
Payment Plan (450,500) (450) 0 0
Additional shares issued
for acquisition of net
assets of Shared Resource
Exchange, Inc. 62,626 63 0 0
Issuance of Series B
Preferred Stock 0 0 25,000 25
Dividends paid on Series B
Preferred Stock 0 0 0 0
Warrants issued 0 0 0 0
Net income 0 0 0 0
--------- ------ ------- ----
Balance,
December 31, 1998 3,478,139 $3,480 125,000 $125
========= ====== ======= ====
UNPAID
EMPLOYEE
ADDITIONAL STOCK
PAID-IN (ACCUMULATED PAYMENT
CAPITAL DEFICIT) PLAN SHARES TOTAL
----------------------------------------------------
Balance,
December 31, 1995 $10,861,593 $ (8,526,034) $ 0 $2,338,170
Shares issued for
acquisition of
net assets of
Shared Resource
Exchange, Inc. 2,286,750 0 0 2,287,500
Issuance of stock
on exercise of
options 6,496 0 0 6,500
Issuance of stock
on exercise of
warrants 5,533 0 0 5,535
Issuance of Series
A Preferred Stock 24,900 0 0 25,000
Net loss 0 (2,945,671) 0 (2,945,671)
----------- ------------ ----------- ----------
Balance,
December 31, 1996 13,185,272 (11,471,705) 0 1,717,034
Shares issued pursuant
to Employee Stock
Payment Plan 1,249,500 0 (1,191,500) 58,500
Net loss 0 (2,487,380) 0 (2,487,380)
----------- ------------ ----------- ----------
Balance,
December 31, 1997 14,434,772 (13,959,085) (1,191,500) (711,846)
Cancellation of un-
paid shares issued
pursuant to
Employee Stock
Payment Plan (1,191,050) 0 1,191,500 0
Additional shares
issued for acqui-
sition of net assets
of Shared Resource
Exchange, Inc. 130,074 0 0 130,137
Issuance of Series B
Preferred Stock 2,499,975 0 0 2,500,000
Dividends paid on
Series B Preferred
Stock 0 (250,000) 0 (250,000)
Warrants issued 569,600 0 0 569,600
Net income 0 380,856 0 380,856
----------- ------------ ----------- ----------
Balance,
December 31, 1998 $16,443,371 $(13,828,229) $ 0 $2,618,747
=========== ============ =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
24
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income/(loss) $ 380,856 $(2,487,380) $(2,945,671)
Adjustments to reconcile
net income (loss) to net
cash flows used in
operating activities:
Bad debt expense 84,957 590,078 60,011
Provision for obsolete
inventory 456,868 528,389 0
Depreciation and
amortization 1,015,963 628,485 789,981
Amortization of intangibles 0 0 161,528
Gain on dispositions (1,248,520) 0 0
Gain on sale of assets (118) 0 0
Amortization of deferred
financing costs 238,534 0 0
Changes in operating assets and
liabilities, net of
dispositions:
Accounts receivable (1,138,200) 284,021 (2,316,761)
Inventories (148,043) 964,509 (1,755,165)
Prepaid expenses and other
current assets (113,525) (86,817) (335,821)
Accounts payable 397,904 (2,711,775) 4,733,607
Accrued expenses and
other liabilities (20,796) (131,046) 138,532
---------- ----------- -----------
Net cash flows used in
operating activities (94,120) (2,421,536) (1,469,759)
---------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of property
and equipment (950,261) (1,387,627) (442,829)
Increase in other assets (105,552) 34,610 (83,280)
Proceeds from dispositions 150,000 0 0
Proceeds from sale of assets 1,000 0 0
Cash received in acquisition
of Shared Resource Exchange,
Inc. net assets 0 0 195,917
---------- ----------- -----------
Net cash flows used in
investing activities (904,813) (1,353,017) (330,192)
---------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net change in cash overdraft 0 (25,180) 25,180
Net proceeds from line of credit 1,160,623 255,781 1,909,067
Loan proceeds 1,381,157 4,250,000 0
Principal repayments of loans,
notes and leases (1,591,918) (353,135) (411,585)
Dividends on Series B
Preferred Stock (250,000) 0 0
Cash received from stock
issuance 0 82,625 12,910
---------- ----------- -----------
Net cash flows provided by
financing activities 699,862 4,210,091 1,535,572
---------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (299,071) 435,538 (264,379)
Cash and cash equivalents -
beginning of year 435,538 0 264,379
---------- ----------- -----------
Cash and cash equivalents -
end of year $ 136,467 $ 435,538 $ 0
========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
25
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31,
------------------------------------
1998 1997 1996
------------------------------------
SUPPLEMENTAL NONCASH FINANCING
AND INVESTING ACTIVITIES:
Issuance of Series B Preferred
Stock in exchange for
long-term debt $2,500,000 $ 0 $ 0
========== ========== ==========
Cancellation of unpaid shares
issued pursuant to Employee
Stock Payment Plan $1,191,500 $ 0 $ 0
========== ========== ==========
Lease of fixed assets $ 862,212 $ 183,914 $ 305,382
========== ========== ==========
Issuance of warrants $ 569,600 $ 0 $ 0
========== ========== ==========
Issuance of note receivable $ 241,121 $ 0 $ 0
========== ========== ==========
Issuance of common stock for
Purchase of net assets of
Shared Resource Exchange, Inc. $ 130,137 $ 0 $2,287,500
========== ========== ==========
Issuance of shares pursuant to
Employee Stock Payment Plan
at an average price of
$2.50 per share $ 0 $1,250,000 $ 0
========== ========== ==========
Subscription receivable for
issuance of Series A
Preferred Stock $ 0 $ 0 $ 24,125
========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 945,254 $1,017,757 $ 583,802
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
26
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
Teltronics, Inc. ("Teltronics" or "Company"), a Delaware corporation,
designs, develops, manufactures and markets electronic hardware and
application software products, and engages in contract manufacturing for
the telecommunication industry. Through its majority owned subsidiary,
Interactive Solutions, Inc. ("ISI") it has also engaged in the design and
manufacturing of a small, Pentium (R) powered, multimedia computer for the
mobile computer industry.
The accompanying consolidated financial statements include the accounts of
the Company and is comprised of its wholly-owned subsidiaries TTG
Acquisition Corp. and TELTRONICS/SRX, Inc., and its 80% formerly owned
subsidiary AT Supply, Inc. ("AT Supply"), and its 85% owned subsidiary
Interactive Solutions, Inc. ("ISI"). AT Supply was sold on March 6, 1998.
All significant intercompany transactions and balances have been eliminated
in consolidation.
On September 23, 1996, the Company, through its wholly-owned subsidiary,
Teltronics/SRX, Inc. ("Teltronics/SRX"), acquired substantially all the
assets of Shared Resource Exchange, Inc., which designs, manufactures,
markets, sells and supports digital voice and data transmission systems.
The Company's revenues are derived primarily from sales to customers
throughout the United States.
On April 18, 1996, Interactive Solutions, Inc. ("ISI"), a Delaware
corporation formed by the Company and an 85% owned subsidiary of the
Company, acquired certain assets and technology from Interactive Solutions,
LLC, a Kentucky limited liability company and its three members (the
"Members") pursuant to an Agreement of Sale dated March 27, 1996.
For the year ended December 31, 1998 and 1997, losses applicable to the 15%
minority interest of ISI exceeded the minority interest in the equity
capital and the losses accordingly, are included in the determination of
net income. However, to the extent of future earnings, if any, the Company
shall be credited to the extent of such losses that were previously
absorbed.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to
be cash equivalents.
CONCENTRATION OF CREDIT RISK - The Company's largest customer was 13%, 13%
and 6% of sales in 1998, 1997 and 1996, respectively. In 1998 three
additional customers were 12%, 11% and 10% of sales. No other single
customer accounted for more than 10% of the Company's sales in 1997 or
1996. The Company's principal customers includes Regional Bell Operating
Companies, independent telephone companies, alternative service providers
and telecommunication companies located throughout the United States.
INVENTORIES - Inventories are stated at the lower of cost or market. Costs
are determined principally on the weighted average method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided over the estimated useful lives (three to ten
years) of the respective assets using the straight-line method for
financial reporting purposes and accelerated methods for income tax
purposes.
27
INCOME TAXES - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rate is recognized
in income in the period that includes the enactment date. Deferred tax
assets are reduced to estimated amounts to be realized by use of a
valuation allowance.
NET INCOME (LOSS) PER SHARE - Basic net income (loss) per share is computed
by dividing net income (loss), adjusted for preferred stock dividends, by
the weighted average number of issued common shares outstanding during the
applicable period. Diluted net income (loss) per share is computed by
dividing net income (loss), adjusted for preferred stock dividends, by the
weighted average number of issued common shares, adjusted for potential
common shares. Potential common shares consist of convertible preferred
stock, stock options (vested and unvested) and warrants and are computed
using the treasury stock method. Potential common shares for 1998 relating
to convertible preferred stock were anti-dilutive and were not included in
the calculation of diluted loss per share.
REVENUE RECOGNITION - Revenues from product sales are recognized when the
product is shipped. Beginning January 1, 1998, the Company has recognized
revenue from software product sales in accordance with the American
Institute of Certified Public Accountants' Statement of Position 97-2,
Software Revenue Recognition ("SOP 97-2") as amended by Statement of
Position 98-4, Deferral of the Effective Date of a Provision of SOP 97-2.
Revenue is recognized from licenses of the Company's software products when
the contract has been executed, the product(s) have been shipped,
collectibility is probable and the software license fees are fixed or
determinable. In the event that the contract provides for multiple
elements (i.e., software products, upgrades/enhancements, postcontract
customer support, consulting services, etc.), the total fee is allocated to
these elements based on "vendor-specific objective evidence" of fair value.
If any portion of the software license fees is subject to forfeiture or
refund, the company will postpone revenue recognition until the contingency
has been removed. Revenue from support and maintenance activities is
recognized ratably over the term of the maintenance period and the
unrecognized portion is recorded as deferred revenue. Prior to January 1,
1998, the Company recognized revenue in accordance with the American
Institute of Certified Public Accountants' Statement of Position 91-1,
Software Revenue Recognition.
RESEARCH AND DEVELOPMENT - Research and development costs are expensed as
incurred.
STOCK BASED COMPENSATION - The Company accounts for its stock based
compensation under the provisions of Accounting Principles Board Opinion
No. 25 ("APB No. 25"), Accounting for Stock Issued to Employees, and
presents disclosures required by Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123") Accounting for Stock- Based
Compensation.
WARRANTY - The Company provides currently for the estimated cost which may
be incurred under product warranties. The Company provides a limited
warranty on its products, for a period from 3 to 18 months (depending on
the product), under which the Company agrees to repair or replace, in the
Company's sole discretion, units defective in material or workmanship,
provided the equipment has not been subjected to alteration or abuse.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with the current year's presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS - In March 1998, the American
Institute of Certified Public Accountants issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal use". Among other provisions, the SOP requires that
entities capitalize certain internal-use software costs once certain
criteria are met. The SOP is effective for financial statements for fiscal
years beginning after December 15, 1998. Implementation of this statement
is not expected to impact the Company's financial position, results of
operations or cash flows.
28
NOTE 3 - ACQUISITIONS
On April 18, 1996, Interactive Solutions, Inc. ("ISI"), a Delaware
corporation formed by the Company and an 85% owned subsidiary of the
Company, acquired certain assets and technology from Interactive Solutions,
LLC, a Kentucky limited liability company and its three members (the
"Members") pursuant to an Agreement of Sale dated March 27, 1996. Pursuant
to the Agreement, ISI acquired all of Interactive's and its Members' rights
to and in certain technology for a small, self-contained, voice activated,
portable, Pentium (R) processor driven, multimedia computer ("Technology")
and other Purchased Assets described in the Agreement. The remaining 15%
ownership of ISI is held by two officers and a Director of the Company. At
December 31, 1998 and 1997, ISI had a deficiency in assets.
On September 20, 1996, the Company's wholly-owned subsidiary,
Teltronics/SRX acquired substantially all of the assets and certain
liabilities of Shared Resource Exchange, Inc. (the "Seller"), a Delaware
corporation located in Dallas, Texas. This transaction has been accounted
for as a purchase.
The Company delivered an aggregate of 750,000 restricted shares (including
100,000 shares to discharge certain debt) of its voting common stock for
substantially all of the assets and selected liabilities of the Seller.
The holders of these restricted shares have been granted certain
registration rights under a Registration Rights Agreement which allows them
to elect to have their shares registered if the Company proposes to
register any of its securities under the Securities Act of 1933, as
amended, in an offering for cash. On December 22, 1998, the Company issued
an additional 62,626 shares of restricted common stock to settle all claims
with the Seller. In addition, the Company released the restriction on the
750,000 shares of common stock issued in 1996 as part of the acquisition.
NOTE 4 - DISPOSITIONS
On March 6, 1998, the Company sold the assets and liabilities of AT Supply,
a majority owned subsidiary. The subsidiary was sold to the minority owners of
the subsidiary for $424,836 in cash and a note receivable for $200,000.
Interest on the note receivable is payable at 12% and principal and interest
are due monthly over three years starting April 1, 1998. The note receivable
is secured by a second lien on assets and is personally guaranteed by the
principals of the buyer. The buyer paid $972,450 at closing to terminate
all liens and security interests with the Company's principal lender. The
buyer assumed responsibility for payment of all liabilities. The Company
recognized a gain on the disposition of AT Supply of $1,148,250 during the
year ended December 31, 1998. Revenues and net income for AT Supply were
$1,278,000 and $6,000, respectively for year ended December 31, 1998.
Revenues and net loss were $9,293,000 and $608,000, respectively for the
year ended December 31, 1997.
On April 23, 1998, the company sold the customer list and maintenance and
support agreements for the ORBi-TEL for Windows and non-Unix call
accounting product lines to MDR Telemanagement Limited. These product
lines were sold for $100,000 in cash, a contingent consideration payable in
one year of $112,000 and a 30% commission based on sales, payable monthly
for one year. The gain on the sale is $100,000 and the contingent gain of
$112,000 and 30% commission will be recorded when realized. Revenues for
these product lines were $82,000 for the year ending December 31, 1998 and
$299,000 for the year ended December 31, 1997.
NOTE 5 - NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income
(loss), adjusted for preferred stock dividends, by the weighted average
number of issued common shares outstanding during the applicable period.
Diluted net income (loss) per share is computed by dividing net income
(loss), adjusted for preferred stock dividends, by the weighted average
number of issued common shares, adjusted for potential common shares.
Potential common shares consist of convertible preferred stock, stock
options (vested and unvested) and warrants and are computed using the
treasury stock method. Potential common shares for 1998 relating to
convertible preferred stock were anti-dilutive and were not included in the
calculation of diluted loss per share.
29
The following table sets forth the computation of basic and diluted
earnings per share:
1998 1997 1996
--------------------------------------
BASIC
Net income (loss) $ 380,856 $(2,487,380) $(2,945,671)
Preferred dividends (250,000) 0 0
---------- ----------- -----------
Income (loss) attributable
to common shareholders $ 130,856 $(2,487,380) $(2,945,671)
========== =========== ===========
Weighted average shares
outstanding 3,417,744 3,382,223 2,817,586
========== =========== ===========
Net income (loss) per share $ .04 $ (.74) $ (1.05)
========== =========== ===========
DILUTED
Net income (loss) $ 380,856 $(2,487,380) $(2,945,671)
Preferred dividends (250,000) 0 0
---------- ----------- -----------
Income (loss) attributable
to common shareholders $ 130,856 $(2,487,380) $(2,945,671)
========== =========== ===========
Weighted average shares
outstanding 3,417,744 3,382,223 2,817,586
Net effect of dilutive stock
options using the treasury
stock method 72,719 0 0
Net effect of dilutive
warrants using the
treasury stock method 31,891 0 0
---------- ----------- -----------
Dilutive potential
common shares 3,522,354 3,382,223 2,817,586
========== =========== ===========
Net income (loss) per share $ .04 $ (.74) $ (1.05)
========== =========== ===========
NOTE 6 - ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1998 and 1997 is as follows:
December 31,
--------------------------
1998 1997
--------------------------
Accounts receivable $ 4,865,963 $ 5,503,309
Less allowance for doubtful accounts (110,000) (679,927)
----------- -----------
Accounts receivable, net $ 4,755,963 $ 4,823,382
=========== ===========
The provision for doubtful accounts was $84,957, $590,078 and $60,011 for
the years ended December 31, 1998, 1997 and 1996, respectively.
30
NOTE 7 - INVENTORIES
The major classes of inventories at December 31, 1998 and 1997 are as
follows:
December 31,
--------------------------
1998 1997
--------------------------
Raw materials $ 2,909,470 $ 2,580,421
Work-in-progress 825,631 789,227
Finished goods 1,204,018 3,398,739
Allowance for obsolete inventory (1,075,748) (619,080)
----------- ----------
$ 3,863,371 $ 6,149,307
=========== ===========
Provisions for obsolete inventories were $456,868, $528,389, and zero for
the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 8 - PROPERTY AND EQUIPMENT
The major classifications of property and equipment at December 31, 1998
and 1997 are as follows:
December 31,
--------------------------
1998 1997
--------------------------
Machinery and equipment $ 2,973,069 $ 2,465,261
Furniture and fixtures 2,803,215 2,450,836
Equipment under capital lease 2,635,132 1,792,551
Leasehold improvements 293,123 293,123
----------- -----------
8,704,539 7,001,771
Accumulated depreciation and amortization (4,281,817) (3,334,890)
----------- -----------
$ 4,422,722 $ 3,666,881
=========== ===========
Depreciation and amortization expense was $1,015,963, $628,485 and $789,981
for the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 9 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at December 31, 1998 and
1997 are as follows:
December 31,
--------------------------
1998 1999
--------------------------
Payroll $ 604,407 $ 846,998
Deferred income 159,757 130,175
Other 217,165 564,055
----------- ----------
$ 981,329 $1,541,228
=========== ==========
31
NOTE 10 - DEBT
Debt at December 31, 1998 and 1997 consists of the following:
December 31,
-------------------------
1998 1997
-------------------------
Bank line of credit - On July 23, 1997, the
Company's principal lender, The CIT
Group/Credit Finance, Inc. ("CIT") entered
into a Ninth Amendment to the Company's Line
of Credit Facility and Term Loan. The
Amendment reduced the interest rate from 2.5%
to 2.0% above prime rate, increased maximum
availability from $4,950,000 to $7,000,000,
increased the prepayment penalty for any pay-
ment prior to October 28, 1998 from 1% to
1.5%, extended the Initial Term to
October 28, 2000, and added ISI as a co-
borrower on the Line of Credit Facility and
Term Loan. On December 22, 1998, the
Ninth Amendment was changed, reducing the
maximum availability to $5,500,000.
Substantially all of the Company's present and
future assets, except for fixed assets, are
pledged as collateral with borrowings limited
to certain gross availability formulas based
on accounts receivable and inventory as
defined in the agreement. The facility
provides for minimum loan fees, unused line
fees and renewal term fees. The outstanding
borrowings are classified as a current
liability. During 1998 and 1997, the Company
incurred minimum loan fees of $70,000.
A director of the Company has personally
guaranteed a portion of the facility. At
December 31, 1998 and 1997, the Company had
$1,502,324 and $2,246,249, available
respectively, pursuant to this facility.
The availability of this unused line of
credit is restricted based on the
availability formulas above. $ 3,997,676 $ 4,463,451
Subordinated Secured Debentures - payable
in quarterly interest payments only at 12%
and due February 13, 2002. Collateralized
by a first lien on property and equipment
and second lien on all other assets. On
March 29, 1999, the Debentures maturities
were revised to $500,000 on April 30, 2000
and $1,250,000 on February 13, 2002. 1,750,000 0
Senior Secured loan - payable in quarterly
payments at 12% and due February 25, 1999.
Collateralized by a first lien on property
and equipment and a second lien on all
other assets. On March 29, 1999, the loan
maturity was revised to April 30, 2000.
If the loan is not repaid by September 30,
1999, the interest rate increases from 12%
to 13.5% 1,000,000 0
Senior Secured loan - payable in monthly in-
stallments of $10,272, including interest at
12% with a final payment due October 1, 2000.
Collateralized by a first lien on property
and equipment and a second lien on all
other assets. 222,893 0
Notes payable - officer, payable upon demand
with interest accruing at 8% per annum. 54,596 50,412
Unsecured note payable to insurance company -
payable in monthly installments of $7,858,
including interest at 8.5% per annum with a
final payment due April, 1999. 30,361 0
Subordinated Convertible Debentures payable
in quarterly interest payments only at 11%
and due February, 2002. The Debentures are
subordinated to certain other indebtedness
of the Company. 0 4,250,000
Term loan agreement - payable in monthly
principal installments of $10,272 and due
October 1, 2000. Interest is payable monthly
at 2% above the prime rate. Collateralized by
substantially all the assets of the Company. 0 290,300
Note payable - bank, payable in monthly in-
stallments of $7,323 including interest at
10.5% per annum with a final payment due
October, 1998. Collateralized by production
equipment. 0 69,159
Note payable - bank, payable in monthly
installments of $6,760 including interest at
14% per annum, with a final payment due July,
1998. Collateralized by production equipment. 0 44,374
Unsecured note payable to insurance company -
in monthly installments of $2,158, including
interest at 9.75% per annum with a final
payment due in September, 1998. 0 18,657
----------- -----------
7,055,526 9,186,353
Less current portion 4,184,639 4,718,031
----------- ----------
Long-term portion $ 2,870,887 $4,468,322
=========== ==========
On February 25, 1998, the Company issued $1,750,000 of Subordinated Secured
Debentures (the "Debentures"). The proceeds of the Debentures were used
for the partial repayment of the $4,250,000 Convertible Debentures issued
on February 13, 1997. Interest is paid at 12% per annum, payable quarterly
starting May 1, 1998. The Debentures are due February 13, 2002 and fees
paid in connection with the Debentures totaled $8,750. The Debentures do
not have a prepayment penalty and are collateralized by a first lien on
fixed assets and a second lien on all other assets. The Holder of the
Debentures received 525,000 warrants to purchase the Company's Common Stock
at an exercise price of $2.75 per share. These warrants are exercisable in
whole, or in part, at any time during a five-year period beginning on the
date of issuance. The Debentures contain certain financial covenants,
including restrictions which could affect future funding of ISI by the
Company.
On March 29, 1999, the Company amended and restated the $1,750,000 of
Subordinated Secured Debentures originally entered into on February 25,
1998 and due February 13, 2002. The Debentures have a revised maturity of
$500,000 on April 30, 2000 and $1,250,000 on February 13, 2002.
On February 25, 1998, the Company entered into senior Secured Loans
("Loans") for $1,000,000 and $280,000. The proceeds of the Loans were used
for working capital ($1,000,000) and to repay the $290,300 term loan
agreement. Interest is paid at 12% per annum. The $1,000,000 loan is due
February 25, 1999 and interest is payable quarterly starting May 15, 1998.
The monthly principal and interest payment on the $280,000 loan is $10,272
starting May 15, 1998 and the note is due October 1, 2000. Fees paid in
connection with these Loans totaled $32,000. The Loans do not have a
prepayment penalty and are collateralized by a first lien on property and
equipment and a second lien on all other assets. The holder of the Loans
received 365,000 warrants to purchase the Company's Common Stock at an
exercise price of $2.75 per share. These warrants are exercisable in whole
or in part, at any time during a five-year period beginning on the date of
issuance. The Loan contains certain financial covenants, including
restrictions which could affect future funding of ISI by the Company.
On March 29, 1999, the Company amended and restated the $1,000,000 Loan
Agreement originally entered into on February 25, 1998 and originally due
February 25, 1999. The Loan Agreement has a revised maturity of April 30,
2000. If the Loan is not repaid by September 30, 1999, the interest rate
increases from 12% to 13.5%. This Loan has been classified as long-term
debt at December 31, 1998.
Future maturities as of December 31, 1998 are as follows:
1999 $ 4,184,639
2000 1,120,887
2001 0
2002 1,750,000
2003 0
-----------
$ 7,055,526
===========
33
The covenants in the Loan And Security Agreement with CIT restrict certain
sales of assets; mergers and acquisitions; borrowings and guarantees;
dividends and redemptions; creation of liens; and transactions with
affiliates.
The covenants in the Debenture Purchase Agreement for the Subordinated
Secured Debentures and Senior Secured Loans restrict certain sales of
assets; mergers and acquisitions; borrowings and guarantees; dividends and
redemptions; creation of liens; investments; issuance of subsidiary shares;
and transactions with affiliates. During the year ended December 31, 1998,
the Company was in violation of one of these covenants. The Company has
obtained a waiver of this violation from the creditor.
NOTE 11 - CAPITAL LEASE OBLIGATIONS
Leased assets include machinery and equipment. The present value of future
minimum lease payments pursuant to the leases and the corresponding
liability have been recorded in the financial statements as property and
equipment under capital lease obligations. Interest on these obligations
range from approximately 8% to 12%.
Leased property under capital leases at December 31, 1998 and 1997 consists
of the following:
December 31,
--------------------------
1998 1997
--------------------------
Machinery and equipment cost $ 2,635,132 $ 1,792,551
Less: accumulated depreciation (1,275,195) (1,011,049)
----------- -----------
Net book value $ 1,359,937 $ 781,502
=========== ===========
The future minimum lease payments under capital leases together with the
present value of the net minimum lease payments at December 31, 1998 are as
follows:
FISCAL YEAR
1999 $ 386,950
2000 349,787
2001 255,257
2002 12,472
-----------
Total minimum lease payments 1,004,466
Less: amount representing interest (142,460)
-----------
Present value of minimum lease payments 862,006
Less: current portion (315,605)
-----------
Long-term capital lease obligations $ 546,401
===========
On March 25, 1999, the Company entered into an agreement to refinance the
leasing of equipment in the amount of $128,839 originally due April 22,
1999. The lease is payable in monthly installments of $4,157 including
interest at 10% starting April 1999. This lease matures on March 25, 2002
and is collateralized by the leased equipment. This lease has been
classified as current portion and long-term capital lease obligations at
December 31, 1998.
34
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at their carrying amount which
approximates fair value because of the short-term maturity of those
instruments. The carrying amount of long-term debt approximates fair value
because there have not been any significant changes in market conditions or
specific circumstances since the instruments were recorded at fair value.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company sponsors a savings plan ("401(k) plan") which covers
substantially all employees of the Company. The 401(k) plan does not
require the Company to match participant contributions and no contributions
were made during 1998, 1997 and 1996.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
(A) EMPLOYMENT AGREEMENTS - The Company entered into five year
employment agreements with the Company's President and CEO and its Senior
Vice President of Business Development commencing January 1, 1995. The
President's agreement was an amendment and restatement of a prior agreement
which he entered into with the Company in July, 1993. Each employment
agreement established a base annual salary of $225,000 subject to annual
increases of $25,000 per year. Either the Company or the employee may
terminate the employment agreements upon the occurrence of certain events.
The President's employment agreement contains covenants restricting the
employee from competing for a period of two years after termination of the
agreement. If the Company terminated either of the President or Senior Vice
President, the terminated employee would be entitled to severance equal to
one year's base salary. In addition, the employees are eligible to participate
in any stock option plan that may be adopted by the Company.
The Company entered into a three year employment agreement with its
Executive Vice President and Chief Operating Officer commencing October 14,
1996. The agreement provides for an annual salary of $180,000 and is
terminable prior to expiration upon the occurrence of certain events.
The Company entered into a one year employment agreement with its Vice
President Finance, Secretary and Treasurer commencing May 1, 1997 and
amended June 23, 1998. The agreement provides for an annual salary of
$105,000 and is terminable prior to expiration upon the occurrence of
certain events.
(B) OPERATING LEASES - The Company leases its manufacturing
facilities, including land and building, under a 15 year operating lease
expiring August 31, 2005.
The terms of the lease provide the Company with an option at any time
during the lease term to purchase the property at the greater of its fair
market value or $4,320,000. The Company has the option to renew the lease
for up to two additional five-year periods. The Company is responsible for
paying all taxes, insurance and maintenance cost relating to the leased
property. The lease provides for an adjustment in the annual rent based on
changes in the Consumer Price Index, limited to a minimum of the prior
year's rent and a maximum of 6%.
The Company also leases various equipment under operating leases expiring
in one to two years.
35
Future minimum lease payments for all noncancellable operating leases at
December 31, 1998 are as follows:
1999 $ 787,868
2000 711,010
2001 696,038
2002 602,370
2003 602,370
Thereafter 1,003,950
-----------
$ 4,403,606
===========
Rental expense for operating leases totaled approximately $744,000,
$637,000, and $637,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(C) LEGAL PROCEEDINGS - From time to time the Company may become a
party to litigation which arises in the normal course of business. There
is no litigation pending, or to the Company's knowledge, threatened which,
if determined adversely, would have a material adverse effect upon the
business or financial condition of the Company.
On January 28, 1998, an action was commenced against the Company by Kelley
Drye & Warren, LLP seeking approximately $172,000 for legal fees incurred
by Shared Resource Exchange, Inc. ("SRX") in connection with the sale of
substantially all of its assets to the Company in September, 1996. The
Plaintiff claims that the Company agreed to pay all of its fees under the
Agreement of Sale entered into between SRX and the Company on September 20,
1996. On December 28, 1998, the Court approved a stipulation among the
parties dismissing the action with prejudice. This action was settled as
part of the issuance of 62,626 shares of restricted common stock which
settled all claims between SRX and the Company.
NOTE 15 - SHAREHOLDERS' EQUITY (DEFICIENCY)
The total number of shares of all classes of capital stock which the
Company has the authority to issue is 50,000,000 shares divided into three
classes of which 5,000,000 shares, par value $.001 per share are designated
Preferred stock, 40,000,000 shares, par value $.001 per share are
designated Common stock and 5,000,000 shares, par value $.001 per share,
are designated Non-Voting Common stock.
(A) COMMON STOCK - On May 15, 1997, the Company issued 500,000 shares
of its Common Stock registered on Form S-8 to an escrow agent for the
benefit of its employees for future services under the Company's Employee
Stock Payment Plan in an aggregate amount of $1,250,000. The shares were
held under an Escrow Agreement. As the shares were sold, proceeds were
placed in an escrow account and used to fund the Company's payroll. During
1997, $58,500 was received from the Escrow Agent. As of December 31, 1997,
the Company recorded the $1,191,500 as a reduction in shareholders' equity.
The shares were issued at the fair market value and no expense was recorded
under this arrangement. On February 16, 1998, the remaining 450,500 shares
were cancelled.
(B) PREFERRED STOCK - During the year ended December 31, 1996, the
Company sold 100,000 shares of its $.001 par value Series A Preferred Stock
to its Director and Senior Vice President of Business Development for $.25
per share for an aggregate consideration of $25,000. Such shares are
restricted securities and subject to resale restrictions including the
right of the Company to approve or disapprove any sale, transfer or
disposition to any third party not controlled by the Director.
Additionally, each share is entitled to 400 votes and is not entitled to
any dividends. Accordingly, this would give the Senior Vice President
voting control of the Company. At December 31, 1996, the Company recorded
a subscription receivable of $24,125, which was subsequently collected.
36
On February 16, 1998, the Company reduced the number of authorized shares
designated as Series A Preferred Stock from 250,000 to 100,000 such shares.
On February 16, 1998, the Company authorized 25,000 shares of Series B
Convertible Preferred Stock at a par value of $.001 per share.
On February 25, 1998, the Company issued $2,500,000 of Series B Convertible
Preferred Stock. The Company issued 25,000 shares at a par value of $.001
per share. The proceeds were used for the partial repayment of the
$4,250,000 Convertible Debentures issued on February 13, 1997. The Series
B Convertible Preferred Stock provides for a $12 per share annual dividend,
payable quarterly starting May 15, 1998. The dividend increases to $20
after four years. Fees paid in connection with this Preferred Stock
totaled $12,500. The holder of the Series B Convertible Preferred Stock
has the right at its option to convert to the Company's Common Stock at
$2.75 per share. The Series B Convertible Preferred Stock cannot be called
for two years and after two years, only if the twenty-day average bid price
of the Company's common stock exceeds $5.50 per share. After four years,
the Company has the right to redeem the Series B Convertible Preferred
Stock in full at 100% of the face value plus accrued and unpaid dividends.
The Series B Convertible Preferred Stock contains certain financial
covenants.
(C) WARRANTS - On February 25, 1998, the Company issued 890,000
warrants to purchase the Company's common stock at an exercise price of
$2.75 per share. These warrants are exercisable in whole, or in part, at
any time during a five year period beginning on the date of issuance. The
fair value of the warrants was recorded as deferred financing costs and
totaled $569,600. This amount is being amortized to financing expense over
the life of the Subordinated Secured Debentures and Senior Secured Loans.
(D) EMPLOYEE STOCK PAYMENT PLAN - The Employee Stock Payment Plan was
established for the purpose of issuance of shares to participants for full
payment of wages and/or benefits for services rendered or to be rendered as
employees of the Company. This Plan has been registered on Form S-8. At
December 31, 1997, 211,100 shares were reserved for possible future
issuance under the Employee Plan. On February 16, 1998, the Company
cancelled the remaining 211,100 shares.
(E) CONSULTANT STOCK PAYMENT PLAN - The Company reserved an aggregate
of 440,000 shares of its common stock for possible issuance under a
Consultant Stock Payment Plan ("Consultant Plan") established for the
purpose of issuance of shares to consultants in full satisfaction of
compensation and/or expenses for services rendered or to be rendered as
consultants to the Company. This Plan has registered its shares pursuant
to a Form S-8. As of December 31, 1997, 105,000 shares were reserved for
possible future issuance to consultants. On February 16, 1998, the Company
cancelled the remaining 105,000 shares.
(F) INCENTIVE STOCK OPTION PLAN - The Company adopted an Incentive
Stock Option Plan ("Plan") to enhance the Company's ability to retain the
services of outstanding personnel and encourage such employees to have a
greater financial investment in the Company. The Plan authorized the Board
of Directors to grant incentive stock options under the Internal Revenue
Code of 1986, as amended, to key employees of the Company or its
subsidiaries. The Plan will terminate August 8, 2005 unless terminated
earlier by the Board of Directors or extended by the Board with approval of
the stockholders. The Plan authorizes the Board to grant stock options
intended to qualify as incentive stock options under the Internal Revenue
Code of 1986, as amended and are limited to 1,250,000 shares of the
Company's common stock. The term of an option shall be fixed by the Board.
The option price shall not be less than the fair market value of the
Company's Common Stock on the date of grant, unless the grantee is the
holder of more than 10% of the voting power of all classes of stock of the
Company, in which case the option price shall not be less than 110% of the
fair market value of the stock on the date of grant.
37
The following table summarizes certain weighted average data for options
outstanding and currently exercisable as of December 31, 1998:
Outstanding Exercisable
---------------------------------------------
Weighted Average
---------------------- Weighted
Remaining Average
Exercise Exercise Contractual Exercise
Price Range Shares Price Life Shares Price
-----------------------------------------------------------------------
$1.63 - $2.88 285,000 $1.96 7.6 235,000 $1.81
$3.00 - $4.50 66,000 3.50 7.9 66,000 3.50
$5.50 - $5.50 550,000 5.50 7.6 550,000 5.50
------- --- -------
901,000 7.6 851,000
======= === =======
The per share weighted average fair value of options granted during the
years ended December 31, 1998, 1997 and 1996 were $1.99, $1.57 and $3.94,
respectively. All options were granted at not less than the fair market
value at date of grant. All options are exercisable over periods ranging
from five to ten years from the date of grant unless employment is
terminated. Options totaling 345,000 shares were available for grant at
December 31, 1998. The Company has adopted the disclosure-only provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly,
no compensation cost has been recognized for the Plan. Had compensation
costs for the Plan been determined based on the fair value at the grant
dates for the awards consistent with the provisions of SFAS No. 123, the
Company's net profit (loss) and net profit (loss) per share would have been
adjusted to the pro forma amounts indicated below.
For purposes of pro forma disclosures, the fair value for options was
estimated at the date of grant using the Black-Scholes option pricing
model. Information regarding the Company's Stock Option Plan is summarized
below:
Weighted Average Assumptions:
1998 1997 1996
--------- ----------- -----------
Risk-free interest rates 6.4% 5.8% 6.7%
Weighted average expected life
of the options 5.0 years 5.0 years 5.0 years
Volatility factor of the
expected market price
of the Company's Common Stock 85% 95% 94%
Dividend yield None None None
Profit (loss) as reported $380,856 $(2,487,380) $(2,945,671)
Pro forma net profit (loss) $275,038 $(4,093,380) $(4,350,671)
Pro forma net profit (loss)
per share:
Basic and diluted $0.01 $(1.21) $(1.54)
38
Weighted average exercise prices for option activity:
Number of Weighted Average
Shares Exercise Price
--------------------------------
Outstanding, December 31, 1995 210,000 $1.63
Granted 644,000 5.24
Exercised (4,000) 1.63
Forfeited (50,000) 1.63
Expired 0 .00
------- -----
Outstanding, December 31, 1996 800,000 $4.54
Granted 124,000 2.09
Exercised 0 .00
Forfeited (53,000) 3.23
Expired 0 .00
------- -----
Outstanding, December 31, 1997 871,000 $4.27
Granted 50,000 2.84
Exercised 0 .00
Forfeited (20,000) 1.66
Expired 0 .00
------- -----
Outstanding, December 31, 1998 901,000 $4.24
======= =====
Exercisable, December 31, 1998 851,000 $4.33
======= =====
The pro forma information is based on options granted which varies from
year-to-year and is not necessarily indicative of pro forma information for
future periods.
NOTE 16 - RELATED PARTY TRANSACTIONS
The following is a summary of transactions with related parties:
(A) PREPAID LEASE GUARANTEE - A Director personally guaranteed a
portion of the Company's obligations to the lessor over the term of the
lease. The Company agreed to pay 6% of the total future value of the lease
payments, excluding executory costs, as consideration for this guarantee.
This amount was paid during 1991. The cost of the guarantee to the
Company, 6% of $7,000,000 or $420,000 has been deferred as a financing cost
(prepaid lease guarantee) in the accompanying financial statements and is
amortized on a straight line basis over the term of the lease. Accumulated
amortization of this amount at December 31, 1998 and 1997 was $234,108 and
$205,308, respectively.
(B) OFFICE SUBLEASE - A company owned by a Director and principal
shareholder of the Company rents offices from the Company and was billed
$51,721 and $19,280 in 1998 and 1997, respectively. In addition, the
Company provided the company owned by the Director with services and this
company was billed $87,232 in 1997, and no services were provided in 1998.
39
NOTE 17 - INCOME TAXES
The following is a reconciliation of income tax expense recognized to that
computed by applying the federal statutory rate of 34% in 1998, 1997 and
1996 to income before income taxes:
Years ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- -----------
Federal tax at the
statutory rate $ 129,491 $ (845,709) $(1,030,985)
State income taxes net of
federal tax benefit 24,558 (87,240) 0
Change in valuation allowance
for deferred tax asset (229,842) 1,112,902 1,030,985
Change in effective tax rate 0 (212,545) 0
Other items 75,793 32,592 0
----------- ----------- ------------
$ 0 $ 0 $ 0
=========== =========== ============
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Due to the uncertain nature of
the ultimate realization of deferred tax assets based upon the Company's
financial performance and the potential expiration of the net operating
loss carryforward, the Company has established a valuation allowance
against its deferred tax assets. The Company will recognize the benefits
associated with the deferred tax assets only as reassessment demonstrates
they are realizable. Realization is entirely dependent upon future
earnings in specific tax jurisdictions. While the need for this valuation
allowance is subject to periodic review, if the allowance is reduced, the
tax benefits will be recorded in future operations as a reduction of the
Company's income tax expense.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
Years ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
Deferred tax assets:
Net operating loss
carryforward $ 3,255,488 $ 3,267,771 $ 2,470,362
Accrued vacation 118,420 155,843 120,689
Inventory 499,668 425,136 225,469
Deferred revenue 0 0 88,325
Bad debt reserve 41,393 260,748 43,837
Accrued expenses 29,163 67,095 0
----------- ----------- -----------
3,944,132 4,176,593 2,948,682
Valuation allowance (3,683,264) (3,913,106) (2,800,204)
Deferred tax liabilities:
Depreciation (232,991) (232,149) (119,330)
Software costs (27,877) (31,338) (29,148)
----------- ----------- -----------
Net deferred tax asset $ 0 $ 0 $ 0
=========== =========== ===========
During the years ended December 31, 1998 and 1997, the Company recorded a
valuation allowance of $3,683,264, and $3,913,106, respectively, on its
deferred tax assets to reduce the total to an amount that management
believes will be realized. Realization of deferred tax assets is dependent
upon sufficient taxable income during the period that temporary differences
and carryforwards are expected to be available to reduce taxable income.
40
At December 31, 1998, for federal income tax purposes, the Company had a
federal net operating loss carryforward of approximately $8,466,000 and a
Florida state net operating loss carryforward of approximately $9,517,000,
which will expire in the years 2008 through 2018. Such net operating
losses are available to offset future taxable income.
NOTE 18 - SUBSEQUENT EVENTS
On February 19, 1999, the Company acquired certain assets and the
technology of Cascade Technology Corporation ("Cascade"). The Company
acquired all of Cascade's rights to and in certain technology for a
DiscoverMATE (tm) panel link display, open sales orders and other purchased
assets described in the Agreement. The display is sold to Ford Visteon,
Chrysler, General Motors and Kelsey Hayes and other companies.
The Company delivered an aggregate of 126,383 restricted shares (including
52,117 shares in escrow for potential claims by the Company) of its voting
common stock for selected assets of Cascade. The holders of these
restricted shares have been granted certain registration rights under a
Registration Rights Agreement which allows them to elect to
have their shares registered if the Company proposes to register any of its
securities under the Securities Act of 1933, as amended, in an offering for
cash. In addition, the Company paid $57,000 at closing and issued a
non-interest bearing note for $47,913 that is due no later than May 19,
1999.
On March 29, 1999, the Company amended and restated the $1,000,000 Senior
Secured Loan ("Loan") originally entered into on February 25, 1998 and
originally due February 25, 1999. The Loan agreement has a revised
maturity of April 30, 2000. If the Loan is not repaid by September 30,
1999, the interest rate increased from 12% to 13.5%. This Loan has been
classified as long-term debt at December 31, 1998.
On March 29, 1999, the Company amended and restated the $1,750,000 of
Subordinated Secured Debentures originally entered into on February 25,
1998 and due February 13, 2002. The Debentures have a revised maturity of
$500,000 on April 30, 2000 and $1,250,000 on February 13, 2002.
On March 25, 1999, the Company entered into an agreement to refinance the
leasing of equipment in the amount of $128,839 originally due April 22,
1999. The lease is payable in monthly installments of $4,157 including
interest at 10% starting April 1999. This lease matures on March 25, 2002
and is collateralized by the leased equipment. This lease has been
classified as current portion and long-term capital lease obligations at
December 31, 1998.
NOTE 19 - FOURTH QUARTER ADJUSTMENTS
The Company recognized charges during the fourth quarter of 1997 totaling
approximately $686,000, which increased the cost of operations by $188,000
and general and administrative expense by $498,000. Charges to the cost of
operations were primarily related to a provision for obsolete inventory
based on information which became available during the fourth quarter of
1997. The charges to general and administrative expense included the
provision of allowances for doubtful accounts of approximately $498,000.
This amount was related to accounts receivable originating primarily in the
third and fourth quarter of 1997, collection of which became doubtful in
the fourth quarter of 1997. Additionally, during the fourth quarter of
1997, $1,191,500 was reclassified from current assets to an increase in
shareholders' deficiency for unpaid shares issued pursuant to the Employee
Stock Payment Plan.
41
NOTE 20 - SEGMENT INFORMATION
The Company's operations are classified into two reportable segments,
Teltronics and ISI. Each reportable segment is staffed separately,
requires different technology and marketing strategies and sells to
different customers.
The accounting policies of the Segments are the same and are described in
the Summary of Significant Accounting Policies. Intersegment sales and
transfers are recorded at Teltronics' cost plus a normal margin for
electronic manufacturing. Corporate overhead is allocated between
Teltronics and ISI based on usage for administration expenses and net
investment for interest. Company management evaluates performance based on
segment profit, which is net income or (loss) before taxes, excluding
nonrecurring gains or losses.
42
The following table presents information about reportable segment
operations and assets.
Year ending December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
NET SALES
Teltronics:
Telecommunications $25,012,000 $25,702,000 $20,390,000
AT Supply distribution 1,278,000 9,293,000 8,443,000
ISI 739,000 209,000 45,000
Elimination of Intersegment sales (234,000) (531,000) 0
----------- ----------- -----------
Total sales $26,795,000 $34,673,000 $28,878,000
=========== =========== ===========
DEPRECIATION AND AMORTIZATION
Teltronics:
Telecommunications $ 739,000 $ 585,000 $ 923,000
AT Supply distribution 1,000 24,000 24,000
ISI 276,000 19,000 5,000
----------- ----------- -----------
Total depreciation and
amortization $ 1,016,000 $ 628,000 $ 952,000
=========== =========== ===========
INTEREST AND FINANCING COSTS
Teltronics:
Telecommunications $ 817,000 $ 607,000 $ 485,000
AT Supply distribution 32,000 305,000 105,000
ISI 499,000 334,000 0
----------- ----------- -----------
Total interest and
financing costs $ 1,348,000 $ 1,246,000 $ 590,000
=========== =========== ===========
SEGMENT PROFITS
Teltronics:
Telecommunications $ 997,000 $ 185,000 $(1,508,000)
AT Supply distribution 6,000 (608,000) (162,000)
ISI (1,870,000) (2,064,000) (1,276,000)
----------- ----------- -----------
Total (867,000) (2,487,000) (2,946,000)
Gain on dispositions 1,248,000 0 0
----------- ----------- -----------
Net income (loss)
before taxes $ 381,000 $(2,487,000) $(2,946,000)
=========== =========== ===========
SEGMENT ASSETS
Teltronics:
Telecommunications $13,086,000 $11,035,000 $12,433,000
AT Supply distribution 0 3,825,000 4,467,000
ISI 1,345,000 1,193,000 113,000
----------- ----------- -----------
Total segment assets $14,431,000 $16,053,000 $17,013,000
=========== =========== ===========
ACQUISITION OF PROPERTY
AND EQUIPMENT
Teltronics:
Telecommunications $ 409,000 $ 389,000 $ 368,000
AT Supply distribution 0 5,000 47,000
ISI 541,000 994,000 28,000
----------- ----------- -----------
Total acquisition of property
and equipment $ 950,000 $ 1,388,000 $ 443,000
=========== =========== ===========
(1) At Supply was sold on March 6, 1998. See Note 4 of the consolidated
financial statements.
43
Information on major customers is discussed in the Summary of Significant
Accounting Policies. Sales to foreign countries were insignificant. All
assets are located in the United States.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURE
No disagreements with accountants in any accounting and financial
disclosures occurred during the fiscal years ended December 31, 1998, 1997
and 1996. Accountants were changed during the fiscal year ended December
31, 1997 as previously disclosed and more fully described in the Form 8-K
report filed with the Securities and Exchange Commission on September 5,
1997.
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of all
directors and executive officers of the Company.
NAME AGE POSITION
Ewen R. Cameron 46 Director, President, Chief Executive
Officer and Assistant Secretary
Mark E. Scott 45 Vice President Finance, Secretary
and Treasurer
William L. Hutchison 53 Executive Vice President, and
Chief Operating Officer
Peter G. Tuckerman 52 Vice President Product Management
Robert B. Ramey 41 Vice President Electronic Manufacturing
Norman R. Dobiesz 51 Director and Senior Vice President
Business Development
Carl S. Levine 52 Director
Craig Macnab 43 Director
_______________
The Company's Directors will serve until the annual meeting of
stockholders or until their successors are elected and qualified.
EWEN R. CAMERON has served as President and Chief Executive Officer
since July 1993 and a Director since June 1994. Prior to that, Mr. Cameron
served as Managing Director of SRH plc, a European telecommunications and
computer maintenance company from 1989 to 1992. From January 1978 to
December 1989, Mr. Cameron served as Managing Director of Systems
Reliability Europe SA/NV, a wholly owned subsidiary of SRH plc based in
Brussels, Belgium. Mr. Cameron has spent the last 25 years in the computer
and telecommunications industry.
MARK E. SCOTT, Vice President of Finance joined the Company in May,
1997. Prior to this, Mr. Scott held senior financial positions with
Protel, Inc. from 1995 to 1997, Crystals International, Inc. from 1993 to
1995, RHM Holdings USA, Inc. from 1983 to 1993, Schoenfeld Industries from
1980 to 1983 and Arthur Andersen from 1976 to 1980. Mr. Scott received his
Bachelor of Arts degree in Accounting from the University of Washington in
1976, his Washington CPA certification in 1977 and his Florida CPA
certification in 1994.
WILLIAM L. HUTCHISON, Executive Vice President of the Company has been
involved in the telecommunications industry for 29 years having held
various outside plant and engineering positions with the Bell System and
United Telephone Company. He was a Product Manager for Pulsecom Division
of Harvey Hubbell, Inc., from 1970 to 1974 before leaving to form his own
company, ComDev, Inc., where he worked from 1974 through 1985, which in
1990 was acquired by the Company. He served as President and CEO and was a
founder of Voice Computer Technology from April 1984 through July 1990. He
also served as Vice President of Marketing for Shared Resource Exchange
from July 1989 through July 1992, Vice President of Marketing for Melita
International July 1992 through December 1994, and Vice President for
45
Computer Communications Systems from December 1994 through October 1996,
both leaders in emerging computer-telephony integrated technology
industries. Mr. Hutchison received an undergraduate degree from Texas Tech
and holds an MBA from Emory University.
PETER G. TUCKERMAN, Vice President Product Management, joined the
Company in September of 1977. Since that time he has served in various R &
D, Marketing and Product Management roles. Prior to joining the Company
he was a principal in MicroWare, Inc., a developer of custom microcomputer
software for telecommunications applications.
ROBERT B. RAMEY joined the Company as Vice President, Manufacturing
Operations in January 1995. Prior to joining the Company Mr. Ramey served
twelve years with Loral Data Systems, a Defense and Commercial electronic
equipment manufacturer. Mr. Ramey has held diverse management positions
including, Manufacturing Engineering, Industrial Engineering, Program
Management, Telecommunications Production, Surface Mount Assembly and Total
Quality Management. Mr. Ramey has been in the electronics industry over 15
years.
NORMAN R. DOBIESZ has served as a Director of the Company since
October 25, 1991 and is the Company's Senior Vice President, Business
Development. Mr. Dobiesz has developed substantial financial and general
management experience as a principal stockholder and executive of a group
of privately held companies controlled by Mr. Dobiesz. Mr. Dobiesz is a
principal stockholder of the Company.
CARL S. LEVINE has served as a Director of the Company since July 27,
1988. Mr. Levine is an attorney who has been engaged in private practice
in New York, New York from 1977 to 1981, and in Garden City, New York from
1981 to June 1985. Mr. Levine is presently the senior partner in the law
firm of Carl S. Levine & Associates, Roslyn, New York. He specializes
primarily in the practice of energy, environmental and tax law. Prior to
entering private practice, Mr. Levine was employed as counsel for New York
Regional Office of the United States Department of Energy.
CRAIG MACNAB has served as a Director of the Company since February
13, 1997. Mr. Macnab was appointed Director as nominee of Sirrom Capital
Corporation ("Sirrom") in connection with the issuance of an aggregate
$4,250,000 of 11% Subordinated Convertible Debentures due February 13, 2002
to Sirrom pursuant to a Debenture Purchase Agreement. The Debenture
Purchase Agreement requires that the Company's Board of Directors be
expanded to five members, including a nominee to be selected by Sirrom.
Since January 1997, Mr. Macnab has been the President of Tandem Capital,
Inc. which invests in micro-cap public companies. From 1993 to 1996, Mr.
Macnab served as the general partner of MacNiel Advisors, Inc., the general
partner of three private funds that invested in the publicly traded
securities of small public companies. From 1987 to 1993, Mr. Macnab was a
partner of J.C. Bradford & Co., a regional brokerage firm, jointly
responsible for the merger and acquisition department and a private
mezzanine capital fund. The Company has been notified that Sirrom is being
purchased. The purchaser will not designate a voting member to the
Company's Board of Directors. Accordingly, Mr. Macnab resigned in March,
1999.
46
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the annual and long-term compensation
paid or accrued by the Company during the years indicated to the Chief
Executive Officer and its other highest paid executive officers whose total
salary and bonus exceeded $100,000 for the year ended December 31, 1998
(collectively, the "Named Officers").
Annual Compensation
----------------------------------------------
Other
Annual
Name and Compen-
Principal Position Year Salary Bonus sation
- -----------------------------------------------------------------------
Ewen R. Cameron 1998 $287,532 $ --- ---
President & CEO 1997 253,284 --- ---
1996 248,272 --- ---
William L. Hutchison 1998 $191,638 $ --- ---
Executive Vice Presi- 1997 184,800 --- ---
dent & COO 1996 33,277 --- ---
Norman R. Dobiesz 1998 $287,209 $ --- ---
Senior Vice President 1997 253,173 --- ---
Business Development 1996 248,434 --- ---
Mark E. Scott 1998 $108,530 $7,000 ---
Vice President Finance 1997 59,181 --- ---
Robert B. Ramey 1998 $107,376 $7,000 ---
Vice President Manu- 1997 102,320 --- ---
facturing Operations 1996 88,474 --- ---
Long Term Compensation
--------------------------------------------------
Awards Payouts
----------------------- --------
Securities All
Restricted Underlying Other
Name and Stock Options/ LTIP Compen-
Principal Position Year Awards SARs(#) Payouts sation
- --------------------------------------------------------------------------
Ewen R. Cameron 1998 --- --- --- ---
President & CEO 1997 --- --- --- ---
1996 --- 500,000 --- ---
William L. Hutchison 1998 --- --- --- $ 7,828
Executive Vice Presi- 1997 --- 30,000 --- 14,451
dent & COO 1996 --- 20,000 --- 7,721
Norman R. Dobiesz 1998 --- --- --- ---
Senior Vice President 1997 --- --- --- ---
Business Development 1996 --- --- --- ---
Mark E. Scott 1998 --- --- --- $14,879
Vice President Finance 1997 --- 30,000 --- ---
Robert B. Ramey 1998 --- --- --- ---
Vice President Manu- 1997 --- --- --- ---
facturing Operations 1996 --- --- --- ---
_______________________________
(1) Certain personal benefits that aggregate less than ten percent
(10%) of the total cash compensation of any of the executive
officers or which cannot be readily ascertained are not included.
(2) Does not include $25,000 earned in each year and accrued by each of
Messrs. Cameron and Dobiesz, but not paid during 1998 and 1997.
(3) William L. Hutchison was hired October 10, 1996. All other
compensation consists of relocation expenses.
(4) Mark E. Scott was hired May 1, 1997. All other compensation
consists of relocation expenses.
EMPLOYMENT AGREEMENTS
The Company entered into five (5) year employment agreements with Ewen
Cameron, President, Chief Executive Officer and Assistant Secretary, and
Norman R. Dobiesz, Senior Vice President, Business Development commencing
January 1, 1995. Mr. Cameron's agreement was an amendment and restatement
of a prior agreement which he entered into with the Company in July 1993.
Each employment agreement provides for a base annual salary of $225,000
subject to annual increases of $25,000 per year. Either of the Company or
the employee may terminate the employment agreements upon the occurrence of
certain events. Mr. Cameron's employment agreement contains a
covenant restricting him from competing for a period of two years after
termination. If the Company terminates the employment of Mr. Cameron or
Mr. Dobiesz, the terminated employee will be entitled to severance equal to
one year's base salary.
On October 14, 1996, the Company entered into a three (3) year
employment agreement with William L. Hutchison, the Company's Executive
Vice President, Chief Operating Officer and Assistant Secretary. The
employment agreement provides for an annual salary of $180,000 and is
terminable prior
47
to expiration of its stated term upon the occurrence of certain events. If
Mr. Hutchison's employment agreement is terminated prior to its scheduled
expiration without cause or for failure to adequately perform, in the
Company's judgment, the services, duties and responsibilities assigned by
the Company, whether or not such failure is intentional, Mr. Hutchison will
be entitled to severance equal to six (6) month's salary.
On May 1, 1997, the Company entered into a one (1) year employment
agreement with Mark E. Scott, the Company's Vice President Finance,
Secretary and Treasurer. This agreement was amended June 23, 1998. The
employment agreement provides for an annual salary of $105,000 and is
terminable prior to expiration of its stated term upon the occurrence of
certain events. If Mr. Scott's employment agreement is terminated prior to
its scheduled expiration without cause, Mr. Scott will be entitled to a
severance equal to six (6) month's salary.
1995 INCENTIVE STOCK OPTION PLAN
The Company adopted an Incentive Stock Option Plan, as amended
("Plan") to enhance the Company's ability to retain the services of
outstanding personnel and encourage such employees to have a greater
financial investment in the Company. The Plan authorizes the Board of
Directors to grant incentive stock options under the Internal Revenue Code
of 1986, as amended, to key employees of the Company or its subsidiaries.
At the date of this Form 10-K there are approximately fifty employees
eligible to participate in the Plan. The Plan is administered by the Board
of Directors which has full power and authority to designate Participants,
to determine the terms and provisions of respective option agreements
(which need not be identical) and to interpret the provisions of the Plan.
The Plan became effective May 16, 1995, was amended July 30, 1996 and will
terminate August 8, 2005 unless earlier terminated by the Board of
Directors or extended by the Board with approval of the stockholders.
An aggregate of 1,250,000 shares of the Company's Common Stock may be
issued or transferred to grantees under the Plan. If there is a stock
split, stock dividend or other relevant change affecting the Company's
shares, appropriate adjustments will be made in the number of shares that
may be issued or transferred in the future and in the number of shares and
price of all outstanding grants made before such event. The option price
shall not be less than the fair market value of the Company's Common Stock
on the date of grant, unless the grantee is the holder of more than 10% of
the voting power of all classes of stock of the Company, in which case the
option price shall not be less than 110% of the fair market value of the
stock on the date of grant.
Options may be exercised solely by the Participant or his or her legal
representative during his or her employment with the Company, or any
subsidiary, or after his or her death by the person or persons entitled
thereto under his or her will or the laws of descent and distribution. In
the event of termination of employment for any reason other than death,
permanent disability as determined by the Board, or retirement with the
consent of the Company, Options may not be exercised by the Participant or
his or her legal representative and shall lapse effective upon the earlier
to occur of (i) notice of employment termination or (ii) last day of
employment with the Company or any Subsidiary.
During 1998, the Company issued options to purchase 50,000 shares to
non-executive employees. During 1998, the Company cancelled options
previously granted to non-executive employees to purchase 20,000 shares of
common stock. In each case, unless the recipient of a grant was the holder
of more than 10% of the Company's issued and outstanding Common Stock, the
fair market value of the Common Stock on the date of grant determined the
exercise price.
48
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees or Base Expiration
Name Granted (#) in Fiscal Year Price ($/Sh) Date
- --------------------------------------------------------------------------
None --- --- --- ---
________________________________
(1) Represents options only. No SARs have been granted.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
Number of Value of
Securities Under- Unexercised
lying Unexercised In-the-Money
Options/SARs at Options/SARs
FY-Ended (#) at FY-End ($)
Shares
Acquired
On Exer- Value Exercisable/ Exercisable/
Name cise(#) Realized($) Unexercisable Unexercisable
- ---------------------------------------------------------------------------
Ewen R. Cameron 0 0 18,000/12,000 $8,220/$5,480
200,000/300,000 $0/$0
Norman R. Dobiesz 0 0 18,000/12,000 $5,340/$3,559
William L. Hutchison 0 0 12,000/18,000 $0/$0
4,000/16,000 $327/$1,306
Mark E. Scott 0 0 6,000/24,000 $490/$1,960
Robert B. Ramey 0 0 12,000/8,000 $980/$653
_________________
(1) None of the options granted to Mr. Cameron in 1996 to purchase
500,000 shares were in-the-money at December 31, 1998 because they are
exercisable at $5.50 per share, a price greater than the fair market
value of the Company's Common Stock on such date.
(2) None of these options granted to Mr. Hutchison in 1996 to purchase
30,000 shares were in-the-money at December 31, 1998 because they are
exercisable at $3.50 per share, a price greater than the fair market
value of the Company's Common Stock on such date.
DIRECTOR COMPENSATION
On August 12, 1996, the Company adopted a policy to compensate members
of its Board of Directors in the amount of $2,500 for each meeting and
reimburse expenses for attending meetings of the Board of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the
beneficial ownership of all of the Company's outstanding voting securities
by each person owning five percent (5%) or more of such shares, by each
director, by each executive officer listed in Item 10 of this Report on
Form 10-K, and by all directors and officers as a group as of February 26,
1999. Unless otherwise indicated, it is assumed that all shares are
directly owned and that the holders thereof have sole voting and investment
power with respect thereto.
49
AMOUNT AND
TITLE NATURE OF PERCENTAGE
NAME OF BENEFICIAL OF BENEFICIAL OF
OWNER AND ADDRESS CLASS OWNERSHIP CLASS
- -----------------------------------------------------------------------------
DIRECTORS AND OFFICERS
Norman R. Dobiesz Common Stock 1,432,097 39.7%
2150 Whitfield Industrial Way Series A 100,000 100%
Sarasota, Florida 34243 Preferred Stock
Carl S. Levine Common Stock 2,240
1800 Northern Blvd.
Roslyn, New York 11576
Ewen R. Cameron Common Stock 3,360
2150 Whitfield Industrial Way
Sarasota, Florida 34243
William L. Hutchison <4> Common Stock 0
2150 Whitfield Industrial Way
Sarasota, Florida 34243
Craig Macnab Common Stock 0 0
500 Church Street, Suite 200
Nashville, Tennessee 37219
Sirrom Capital Corporation Series B 25,000 100%
500 Church Street, Suite 200 Preferred Stock
Nashville, Tennessee 37219
Mark E. Scott Common Stock 0
2150 Whitfield Industrial Way
Sarasota, Florida 34243
Robert B. Ramey Common Stock 1,800
2150 Whitfield Industrial Way
Sarasota, Florida 34243
All Directors and Officers Common Stock 1,439,497 39.9%
as a Group (8 persons)
GREATER THAN 5% OWNERSHIP
Shared Resource Exchange Common Stock 668,226 18.5%
3480 Lotus Drive
Plano, Texas 75075
_____________________________
(1) Does not include (i) an aggregate of 345,000 shares of Common Stock
which may be issued upon exercise of incentive stock options granted
under the Company's 1995 Incentive Stock Option Plan; (ii) possible
issuance of up to 1,799,091 shares of Common Stock subject to
adjustment, which may be issued upon: (a) conversion of the Series B
Preferred Stock, and (b) the exercise of 890,000 Warrants issued to
Sirrom Capital exercisable at a price of $2.75 per share, subject to
adjustment. See BUSINESS - GENERAL.
(2) Director of the Company.
50
(3) Includes 56,000 shares owned by virtue of 100% ownership of H & N
Management Co., Inc. ("H&N"), 1,295,000 shares owned by virtue of 100%
ownership of W&D Consultants, Inc., and 4,455 shares owned by virtue
of 67% ownership of Whitfield Capital of Sarasota, Inc. Excludes:
(i) 100,000 shares of Series A Preferred Stock owned by Mr. Dobiesz,
and (ii) 30,000 shares which may be issued upon exercise of incentive
stock options by Mr. Dobiesz.
(4) Executive Officer of the Company named in Item 10 of this Report on
Form 10-K.
(5) Beneficially owns less than 1% of the Company's outstanding Common
Stock.
(6) Does not include up to 50,000 shares which may be issued upon
exercise of incentive stock options by Mr. Levine.
(7) Does not include up to 530,000 shares which may be issued upon
exercise of incentive stock options by Mr. Cameron.
(8) Does not include up to 50,000 shares which may be issued upon
exercise of incentive stock options by Mr. Hutchison.
(9) Does not include up to 30,000 shares which may be issued upon
exercise of incentive stock options by Mr. Scott.
(10) Does not include up to 20,000 shares which may be issued upon
exercise of incentive stock options by Mr. Ramey.
(11) Does not include 5% minority ownership in ISI.
CHANGE OF CONTROL. The holders of the Series B Preferred Stock have the
right to elect a majority of the Board of Directors of the Company if and
whenever four quarterly dividends (whether or not consecutive) payable on
the Series B Preferred Stock shall be in arrears.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective January 1, 1995 the Company entered into five (5) year
employment agreements with Ewen Cameron, President & CEO, and Norman R.
Dobiesz, Senior Vice President Business Development. See EXECUTIVE
COMPENSATION - Employment Agreements.
The Company has an outstanding note payable to an officer, which is
payable on demand with interest accruing at 8% per annum. The balance at
December 31, 1998 and 1997 was $54,596 and $50,412, respectively.
During the year ended December 31, 1996, the Company sold 100,000
shares of its $.001 par value Series A Preferred Stock to its Director and
Senior Vice President of Business Development for $.25 per share for an
aggregate consideration of $25,000. Such shares are restricted securities
and subject to resale restrictions including the right of the Company to
approve or disapprove any sale, transfer or disposition to any third party
not controlled by the Director. Additionally, each share is entitled to
400 votes and is not entitled to any dividends. Accordingly, this would
give the Director voting control of the Company.
A Director personally guaranteed a portion of the Company's
obligations to the lessor over the term of the lease. The Company agreed
to pay 6% of the total future value of the lease payments, excluding
executory costs, as consideration for this guarantee. This amount was paid
during 1991. The cost of the guarantee to the Company, 6% of $7,000,000 or
$420,000 has been deferred as a financing cost (prepaid lease guarantee) in
the accompanying financial statements and is amortized on a straight line
basis over the term of the lease. Accumulated amortization of this amount
at December 31, 1998 and 1997 was $234,108 and $205,308, respectively.
A company owned by a Director and principal shareholder of the Company
rents offices from the Company and was billed $51,721 in 1998 and $19,280
in 1997. In addition, the Company provided the Company owned by the
Director with services and this company was billed $87,232 in 1997, and no
services were provided in 1998.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements:
The financial statements filed as part of this report are listed
on the Index to Consolidated Financial Statements on Page 19.
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts is on page 55.
All other consolidated financial statement schedules have been
omitted because the required information is shown in the
consolidated financial statements or notes thereto or they are
not applicable.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the fourth quarter of
fiscal year ended December 31, 1998.
(c) Exhibits:
3.1 Restated Certificate of Incorporation of Registrant, as amended.
Filed as Exhibit 3.1 to Teltronics' Definitive Proxy Statement
filed June 24, 1996
3.2 By-Laws of the Registrant, as amended. Filed as Exhibit 3.2 to
Teltronics' Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996.
3.3 Certificate of Designations of Preference of Series A Preferred
Stock of Teltronics, Inc. filed with the Delaware Secretary of
State on August 19, 1996. Filed as Exhibit 3.3 to Teltronics'
Form 8-K filed October 4, 1996.
3.4 Certificate of Designations Establishing Series of Shares and
Articles of Amendment of Teltronics, Inc., filed with the Delaware
Secretary of State on February 24, 1998. Filed as Exhibit 3.4 to
Teltronics' Form 8-K filed March 9, 1998.
3.5 Amended Designation of Teltronics, Inc. filed with the Delaware
Secretary of State on February 25, 1998. Filed as Exhibit 3.5 to
Teltronics' Form 8-K filed March 9, 1998.
10.1* Amendment dated December 22, 1998, to Ninth Amendment to Loan and
Security Agreement and First Note Modification Agreement dated
July 23, 1997 between The CIT Group/Credit Finance, Inc. and
Teltronics, Inc., AT Supply, Inc. and Interactive Solutions, Inc.
10.2 Amended and Restated Employment Agreement between the Company and
Ewen Cameron dated January 1, 1995. Filed as Exhibit 10.127 to
Teltronics' Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994.
10.3 Employment Agreement between the Company and Norman R. Dobiesz
dated January 1, 1995. Filed as Exhibit 10.128 to Teltronics'
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994.
10.4 Teltronics Employee Stock Payment Plan, as amended dated November
12, 1993. Filed as Exhibit 10.132 to Teltronics' Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994.
10.5 Subscription Agreement between the Company and W&D Consultants,
Inc. dated May 11, 1995. Filed as Exhibit 10.135 to Teltronics'
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1994.
10.6 Specimen of Stock Option Agreement. Filed as Exhibit 10.136 to
Teltronics' Report on Form 10-QSB for the three month period ended
June 30, 1995.
10.7 Teltronics, Inc. 1995 Incentive Stock Option Plan. Filed as
Exhibit 10.137 to Teltronics' Definitive Proxy Statement filed
July 12, 1995.
52
10.8 Promissory Note between Barnett Bank of Manatee County, N.A. and
Teltronics, Inc. dated July 7, 1995. Filed as Exhibit 10.138 to
Teltronics' Report on Form 10-QSB for the three month period ended
September 30, 1995.
10.9 Purchase Agreement between SR Comms Management Ltd., and
Teltronics, Inc. dated October 2, 1995. Filed as Exhibit 10.139
to Teltronics' Report on Form 10-QSB for the three month period
ended September 30, 1995.
10.10 Memorandum of Agreement covering Technology Transfer dated March
11, 1996. Filed as Exhibit 10.142 to Teltronics' Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995.
10.11 Line Note #1 dated November 7, 1995 payable in the maximum
aggregate amount of $100,000 by AT Supply, Inc. to TTG Acquisition
Corp. Filed as Exhibit 10.143 to Teltronics' Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995.
10.12 Line Note #2 dated November 29, 1995 payable in the maximum
aggregate amount of $100,000 by AT Supply, Inc. to TTG
Acquisition Corp. Filed as Exhibit 10.144 to Teltronics' Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995.
10.13 Amended Loan and Security Agreement dated December 29, 1995 by
and among The CIT Group/Credit Finance, the Company and AT Supply,
Inc. Filed as Exhibit 10.145 to Teltronics' Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995.
10.14 Agreement of Sale dated as of March 27, 1996 among ISL, Inc.,
Interactive Solutions, LLC, Bruce W. Hanks, Kevin Rogers and
Michael Jonas. Filed as Exhibit 10.146 to Teltronics' Form 8-K
filed April 5, 1996.
10.15 Amendment to Agreement of Sale dated April 18, 1996 among ISL,
Inc., Interactive Solutions, LLC, Bruce W. Hanks, Kevin Rogers
and Michael Jonas. Filed as Exhibit 10.147 to Teltronics' Form
8-K/A-1 filed April 25, 1996.
10.16 Amendment to Loan and Security Agreement dated December 29, 1995
between The CIT Group/Credit Finance, AT Supply, Inc. and
Teltronics, Inc. dated May 14, 1996. Filed as Exhibit 10.148 to
Teltronics' Report on Form 10-QSB for the three month period
ended June 30, 1996.
10.17 Promissory Note between Barnett Bank of Manatee County, N.A. and
Teltronics, Inc. dated April 22, 1996. Filed as Exhibit 10.149 to
Teltronics' Report on Form 10-QSB for the three month period ended
June 30, 1996.
10.18 Stock Option Agreement dated as of October 15, 1996 among
Teltronics, Inc. and certain parties. Filed as Exhibit 10.150
to Teltronics's Report on Form 10-QSB for the three month period
ended September 30, 1996.
10.19 Term Note dated September 20, 1996 in the principal amount of
$490,423 delivered to Solectron Texas, L.P. Filed as an Exhibit
10.151 to Teltronics's Report on Form 10-QSB for the three month
period ended September 30, 1996.
10.20 Secured Promissory Note dated October 18, 1996 in the principal
amount of $616,300 delivered to The CIT Group/Credit Finance, Inc.
Filed as Exhibit 10.152 to Teltronics's Report on Form 10-QSB
for the three month period ended September 30, 1996.
10.21 Agreement of Sale dated September 19, 1996 by and among Shared
Resource Exchange, Inc., Teltronics/SRX, Inc. and Teltronics, Inc.
Filed as Exhibit 10.153 to Teltronics' Form 8-K filed
October 4, 1996.
10.22 Escrow Agreement made and entered into September 19, 1996 by and
among Shared Resource Exchange, Inc., Teltronics/SRX, Inc.,
Teltronics, Inc. and Sevin Rosen Bayless Management Company.
Filed as Exhibit 10.154 to Teltronics' Form 8-K filed
October 4, 1996.
10.23 Registration Rights Agreement among Shared Resource Exchange,
Inc., Teltronics, Inc. and certain parties dated as of September
19, 1996. Filed as Exhibit 10.155 to Teltronics' Form 8-K filed
October 4, 1996.
10.24 Debenture Purchase Agreement of Sirrom Capital Corporation and
Teltronics, Inc. dated February 11, 1997. Filed as Exhibit 10.156
to Teltronics' Form 8-K filed February 27, 1997.
10.25 11% Subordinated Convertible Debenture Due February 13, 2002,
issued by Teltronics, Inc. to Sirrom Capital Corporation.
Filed as Exhibit 10.157 to Teltronics' Form 8-K filed
February 27, 1997.
10.26 Ninth Amendment to Loan and Security Agreement and First Note
Modification Agreement dated July 23, 1997 between The CIT
Group/Credit Finance, Inc. and Teltronics, Inc., AT Supply, Inc.
and Interactive Solutions, Inc. Filed as Exhibit 10.158 to
Teltronics' Report on Form 10-QSB for the six month period ended
June 30, 1997.
53
10.27 Tenth Amendment to Loan and Security Agreement dated January 16,
1998 between The CIT Group/Credit Finance, Inc., Teltronics, Inc.,
AT Supply, Inc. and Interactive Solutions, Inc. Filed as Exhibit
10.159 to Teltronics' Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997.
10.28 Eleventh Amendment to Loan and Security Agreement dated February
25, 1998 between The CIT Group/Credit Finance, Inc., Teltronics,
Inc., AT Supply, Inc. and Interactive Solutions, Inc. Filed as
Exhibit 10.160 to Teltronics' Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
10.29 Preferred Stock Purchase Agreement between Sirrom Capital
Corporation (d/b/a Tandem Capital) and Teltronics, Inc. dated
February 25, 1998. Filed as Exhibit 10.161 to Teltronics' Form
8-K filed March 9, 1998.
10.30 Debenture Purchase Agreement between Sirrom Capital Corporation,
d/b/a Tandem Capital and Teltronics, Inc. dated February 25, 1998.
Filed as Exhibit 10.162 to Teltronics' Form 8-K filed
March 9, 1998.
10.31 12% Subordinated Secured Debenture Due February 13, 2002 issued by
Teltronics, Inc. to Sirrom Capital Corporation. Filed as Exhibit
10.163 to Teltronics' Form 8-K filed March 9, 1998.
10.32 Loan and Security Agreement between Sirrom Capital Corporation and
Teltronics, Inc. and its Subsidiaries dated February 25, 1998.
Filed as Exhibit 10.164 to Teltronics' Form 8-K filed
March 9, 1998.
10.33 Secured Senior Subordinated Promissory Note of Teltronics, Inc. in
the principal amount of $1,000,000 dated February 28, 1998
delivered to Sirrom Capital Corporation. Filed as Exhibit 10.165
to Teltronics' Form 8-K filed March 9, 1998.
10.34 Secured Senior Promissory Note of Teltronics, Inc. in the
principal amount of $280,000 dated February 26, 1998 delivered to
Sirrom Capital Corporation. Filed as Exhibit 10.166 to Teltronics'
Form 8-K filed March 9, 1998.
10.35 Common Stock Purchase Warrant covering 525,000 shares of Common
Stock of Teltronics, Inc. issued to Sirrom Capital Corporation
dated February 26, 1998. Filed as Exhibit 10.167 to Teltronics'
Form 8-K filed March 9, 1998.
10.36 Common Stock Purchase Warrant covering 365,000 shares of Common
Stock of Teltronics, Inc. issued to Sirrom Capital Corporation
dated February 26, 1998. Filed as Exhibit 10.168 to Teltronics'
Form 8-K filed March 9, 1998.
10.37 Registration Rights Agreement dated February 25, 1998 between
Teltronics, Inc. and Sirrom Capital Corporation. Filed as Exhibit
10.169 to Teltronics' Form 8-K filed March 9, 1998.
10.38 Agreement of Sale dated March 5, 1998 between AT Supply, Inc. and
AT2 Communications, Incorporated. Filed as Exhibit 10.170 to
Teltronics' Form 8-K filed March 19, 1998.
16.1 Letter regarding change in certifying accountant from James Moore
& Company to the SEC dated January 3, 1995. Filed as Exhibit 16.1
to Teltronics' Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994.
16.2 Letter regarding change in certifying accountant from KPMG Peat
Marwick LLP to the SEC dated February 28, 1995. Filed as Exhibit
16.2 to Teltronics' Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994.
21.1* List of Subsidiaries
27* Financial Data Schedule
________________
(*) Filed as an Exhibit to this Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
54
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
TELTRONICS, INC.
Additions Additions
Balance at Charged to Charged Balance at
Beginning Costs and to Other Deduc- end of
Description of Period Expenses Accounts tions Period
- ---------------------------------------------------------------------------
Allowance for
doubtful accounts:
Year ended
December 31, 1998 $679,927 $ 84,957 $ 0 $(654,884) $ 110,000
Year ended
December 31, 1997 125,250 590,078 0 (35,401) 679,927
Year ended
December 31, 1996 65,239 60,011 0 0 125,250
Allowance for
obsolete inventory:
Year ended
December 31, 1998 $619,080 $456,868 $(200) $ 0 $1,075,748
Year ended
December 31, 1997 90,491 528,389 200 0 619,080
Year ended
December 31, 1996 90,491 0 0 0 90,491
(1) Relates to the sale of AT Supply on March 6, 1998.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TELTRONICS, INC.
Dated: March 30, 1999 By: /s/ Ewen R. Cameron
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities on the dates indicated.
SIGNATURES TITLE DATE
/s/ Ewen R. Cameron Director, President and March 30, 1999
Chief Executive Officer
/s/ Mark E. Scott Vice President Finance, March 30, 1999
Secretary, Treasurer and
Principal Accounting Officer
/s/ Norman R. Dobiesz Director March 30, 1999
/s/ Carl S. Levine Director March 30, 1999
/s/ Craig Macnab Director March 30, 1999