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, 2002
[ ] 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
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(State or other jurisdiction of (IRS Employer Identification Number)
Incorporation or organization)
2150 Whitfield Industrial Way, Sarasota, Florida 34243
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(Address of principal executive offices) (Zip Code)
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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 ].
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12-b-2.) Yes [ ] No [ X ]
The aggregate market value on the OTC Bulletin Board of the Registrant's common
stock held by non-affiliates, computed by reference to the average bid and asked
price of the common stock on the OTC Bulletin Board as of the last business day
of Teltronics' most recently completed second fiscal quarter (June 28, 2002),
was approximately $1,717,244. 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.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of March 24, 2003, 5,930,241 shares of the Registrant's common stock, par
value $.001, were issued and outstanding.
Exhibit index appears on pages 60-61.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 10
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 10
HOLDERS - Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 11
ITEM 6. SELECTED FINANCIAL DATA 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
ITEM 8. FINANCIAL STATEMENTS 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 47
ITEM 11. EXECUTIVE COMPENSATION 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 52
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 54
ITEM 14. CONTROLS AND PROCEDURES 54
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 55
SIGNATURES 57
CERTIFICATIONS 58
2
PART I
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ITEM 1. BUSINESS
References in this report to the "Company," "Teltronics," "we," "our"
or "us" mean Teltronics, Inc. together with its subsidiaries, except where the
context otherwise requires. 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 can generally be identified as such
because the context of the statement will include words such as we "believe,"
"anticipate," "expect," or words of similar import. Similarly, statements that
describe our future plans, objectives, strategies or goals are also
forward-looking statements. These forward-looking statements involve a number of
risks and uncertainties that may materially adversely affect the anticipated
results. Such risks and uncertainties include, but are not limited to, the
timely development and market acceptance of products and technologies,
competitive market conditions, successful integration of acquisitions, the
ability to secure additional sources of financing, the ability to reduce
operating expenses and other factors described in the Company's filings with the
Securities and Exchange Commission. Shareholders, potential investors and other
readers are urged to consider these factors carefully in evaluating the
forward-looking statements made herein and are cautioned not to place undue
reliance on such forward-looking statements. The forward-looking statements made
herein are only made as of the date of this Form 10-K and we disclaim any
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
General
Teltronics, Inc., a Delaware corporation, designs, installs, develops,
manufactures and markets electronic hardware and application software products,
and engages in electronic manufacturing services primarily in the
telecommunication industry.
On May 18, 2000, the Company acquired substantially all of the assets
of Telident, Inc., a Minnesota corporation engaged in the design, manufacture
and marketing of hardware and software systems utilizing enhanced 911 network
technology to communicate with public safety 911 contact points. The Company
markets these products to a wide variety of businesses, including colleges,
universities, nursing homes, hospitals, government offices, primary and
secondary educational institutions, and hospitality establishments. See Business
- - Teltronics Segment - Emergency Response Systems.
On June 30, 2000, the Company acquired certain equipment, inventory and
intellectual property rights related to the 20-20(R) switching system and
associated products of the Communications Products Division ("CPD") of Harris
Corporation ("Harris"). The 20-20 product is a digital switch capable of
supporting up to 9,600 ports/desktops. See Business - Teltronics Segment -
Digital Switching Systems.
In July 2002, the Company sold ownership of its Interactive Solutions,
Inc. ("ISI") subsidiary and converted all debt and obligations owed to the
Company by ISI to 50,000 shares of Series A Preferred stock of ISI. In
connection with the sale of ISI, the Company's common stock ownership of ISI was
reduced from 85% to 15%.
Operating Segments
Management utilizes criteria provided in Statement of Financial
Accounting Standards No. 131 to define its operating segments. This standard
defines an operating segment as a component of an enterprise (1) which engages
in business activities from which it earns revenues and incurs expenses, (2)
whose operating results are regularly reviewed by the enterprises chief
operating decision maker ("CODM") and (3) for which discrete financial
information is available.
The Company's operations are classified into three reportable segments,
Teltronics, Inc., ISI and Mexico. As further described in Note 1 to the
Company's consolidated financial statements, ISI was sold in July 2002.
Operating segment data for 2002, 2001 and 2000 are summarized in Note 19 in the
notes to the Consolidated Financial Statements in Part II and are incorporated
herein by reference.
3
Our Strategy
Because of the downturn in the telecommunications and electronics
industries in 2002, we embarked on a series of restructuring and cost-cutting
activities to further streamline our operations and activities around our core
products in an attempt to strengthen our financial position.
Our activities included the following: (1) eliminating some marginally
profitable or non-strategic business segments, which included selling our ISI
business segment in July 2002, (2) assessing our product portfolio and
associated research and development ("R&D"), (3) streamlining the rest of our
operations to support those reassessments and (4) eliminating positions to
reduce personnel costs where appropriate. In making these decisions, we have
taken and continue to take into account the needs of our largest customers. We
cannot assure you that these restructuring and cost-cutting activities will be
effective. If current economic conditions continue for an extended period of
time, we believe that this will have a material adverse effect on our operating
results and financial condition.
Our strategy focuses on meeting the needs of telecommunications
customers through our four distinct product groups:
o Intelligent Systems Management
o Digital Switching Systems
o Customer Contact Management Systems
o Emergency Response Systems
We also manufacture our own products. We believe this enables
us to be more responsive to our customers as well as providing an additional
source of revenue through our ability to provide electronic manufacturing
services. We have invested in facilities that will allow us to expand our
manufacturing for our existing product lines and accommodate an increase in
electronic manufacturing services business.
TELTRONICS, INC. SEGMENT
Intelligent Systems Management
In the early 1980's, telecommunications sales & service providers were
looking for ways to differentiate themselves. Competitive pressures
significantly eroded margins on sales of Private Automated Branch Exchange
("PABX") hardware, and interconnects began to concentrate more on service to
address decreasing revenues and margins. This initiative led to the development
of enhanced service offerings to their customers, and the Teltronics alarms
monitoring, or Intelligent Systems Management ("ISM") product line was designed
to capitalize on this new strategy. The ISM products maintained a leadership
role in alarms monitoring for voice networks throughout the `80' s & `90's, but
the new century ushered in expanded technologies, new challenges, emerging
markets, network convergence; but most of all, new opportunities.
The current focus of Teltronics' ISM business unit is to adapt our
outlook to take advantage of these service opportunities and maintain the a
leadership position in this market. Our new model, of our old standard, the Site
Event Buffer ("SEB") product line, along with an enhanced version of the
IRISnGEN(TM) management platform; allows us to expand our offering into the
world of data communications, and gives us the opportunity to bring more than 17
years of experience to bear on new problems and solutions for large private data
networks.
Site Event Buffer-II(R) ("SEB-II"). The SEB-II monitors remotely
located elements in voice or data communications networks.
The SEB-II product, our workhorse in Voice networks for more than 12
years, can simultaneously monitor up to four telecom or datacom elements while
also monitoring environmental conditions. In addition to fault/alarm reporting
and secure access 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, Private Automated Branch
Exchange ("PABX") traffic information and data network element usage statistics.
By using IRISnGEN, this data may be retrieved and processed into useful reports.
4
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 ("SEB-I") with a product that offers increased functionality, twice
the data storage capacity, and support for additional elements.
In late 1993, the Company commenced development of certain
sophisticated computer scripts, written in a high-level language, that may be
used to create a dialogue between the SEB-II and the monitored element. This
dialogue allows the SEB-II to clear fault conditions present in the 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.
The SEB-II remains a mainstay of the ISM product line and the installed
base exceeds 100,000 units. Management anticipates that the SEB-II will continue
to be popular for several years.
SEBjr.(TM) The SEBjr. was introduced to penetrate a new segment of the
market. SEBjr. is an affordable system for monitoring smaller, less expensive
elements, yet provides virtually all of the features of the SEB-II.
SEBjr. is positioned to allow service companies to offer complete end-to-end
monitoring of a wide variety of elements. With the introduction of SEBjr.,
Teltronics' ISM product line was able to penetrate a market where previously
automated monitoring was not cost effective.
Site Event Buffer Enterprise Agent ("SEBea(TM)") Introduced in the
fourth quarter of 2002, the SEBea represents the third generation of remote
monitoring products in the ISM product line. The SEBea is based on a
significantly more powerful computing engine and introduces a data network
interface. We believe these features make the SEBea ideally suited for managing
datacom elements found in modern enterprise networks.
The SEBea supports all features of previous generations of SEB products
while offering services as a Simple Network Management Protocol ("SNMP") Proxy
Agent, SNMP Segment Manager and greatly expanded environmental monitoring
through a range of internal sensors. In addition, the SEBea can monitor up to
ten directly attached elements (serial) and a wide range of network elements
(Ethernet/IP/SNMP).
This new system is designed to serve as the agent for many elements in
a selected network segment while also acting as a secure access point for both
end users and service companies. Standard features allow the SEB to query
network elements, execute powerful screening and correlation mechanisms and then
report faults to IRISnGEN or to a customer's network management system.
A powerful new scripting engine, based on an industry standard
language, allows the Company to offer a wide range of solution packs to address
ever changing system management needs. These scripting tools are also available
to customers who wish to create their own customized solutions.
The SEBea has opened doors into the data communications market for the
Company. It is anticipated that these new markets represent a major growth area
for the ISM product line.
IRISnGEN. The IRISnGEN system is a comprehensive software package used
by service companies 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 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 software, the service company
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 company 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.
5
Building on the success of the UNIX based IRIS(TM) 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 98(TM) or Windows NT(R) Workstation can
access the system. The system has a relational database designed to support the
organization of a typical telecom service company 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, and alarm
forwarding 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 companies
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 Traffic. This optional IRISnGEN software module is a traffic
analysis system that allows service companies to perform traffic studies on
NORTEL SL-1(R) and Meridian-1 PABX(R) systems. The information created by this
application assists the service company in "fine tuning" their customer's PABX
to operate more efficiently. The IRISnGEN Traffic system has proven to be a very
effective revenue generator for service companies. The system allows the service
company to identify PABX enhancements that can be sold to the end-user to
improve PABX performance.
Digital Switching Systems
20-20(TM) Switching Systems. The 20-20 family of switching products was
acquired on June 30, 2000, from Harris Corporation. The 20-20 is a digital
switching system that has been deployed in mission critical applications
throughout the world. 20-20 may be expanded up to 9,600 ports for very large
applications and is generally cost effective down to about 300 ports. The 20-20
may be configured for fully redundant common control when system availability is
critical, such as in large call centers or critical government applications. A
variant of the 20-20 is used in FAA ground-to-air and ground-to-ground
applications where down time must be in the order of less than 5 seconds in a
year. Known for its robust computer-telephony interface ("CTI") the 20-20 has
been used by systems integrators throughout the world for large custom
applications as well as "local dial tone" in small central office applications.
The 20-20 has been certified and homologated in over 60 countries world
wide. International signaling and transmission protocols have been developed,
including international flavors of ISDN and SS7, to permit its use virtually
anywhere in the world. The Company continues to invest in engineering
development to maintain and expand capabilities to include IP Telephony
convergence. With the introduction of IP Telephony gateways, the more than
15,000 20-20 end users can upgrade their systems, allowing them to retain the
existing 20-20 system investments. Teltronics will continue to focus on
developing practical, cost-effective solutions and applications for the 20-20
customers.
Customer Contact Management Systems
OmniWorks(R) (formerly known as ContactWorks(TM)). This product was
also a part of the 20-20 acquisition of June 30, 2000. OmniWorks is a WindowsNT
client-server based, sophisticated multi-media customer contact and management
system, or a "call center", for use by enterprise operations whose mission
includes receiving or launching large numbers of telephone calls, and the
product also has the capability of receiving or launching large quantities of
emails, or accommodating real time web-based responses to product/services
queries through "chat" sessions. The system detects information about callers,
organizes the calls according to predetermined priorities, places the calls in
"queues" to be serviced by employees, and may even route the calls based on the
"skills" of the call handlers ("skills-based routing"). The database of the
current product is Sequel(R) and may be fully redundant on separate servers.
OmniWorks is a relatively new product with most of its deployments over the past
two years.
6
Originally designed towork with the 20-20 as its "switching fabric", the
Company's goal is to migrate OmniWorks towards switch-independence, and
ultimately it should be able to be deployed behind virtually any switch type in
the industry.
OmniWorks may be deployed in small call centers with only a few agents
or call handlers, or it may be used in large, complex applications with hundreds
of agents. While OmniWorks will be available to any of the Company's
distribution partners with support from its professional services group, it is
anticipated that most of the OmniWorks sales will come directly from larger
users with sophisticated IT requirements and infrastructures.
Emergency Response Systems
Telident Enterprise Systems. Teltronics believes it occupies a unique
position in the telecommunications industry by marketing a comprehensive product
line that addresses both the public safety and private business sectors of E911
marketplace. In the public safety systems sector our Telident ANI Controller
products offer a complete solution to the emergency services agencies of states,
counties and municipalities. These products are designed to ensure timely and
accurate response to 911 calls. Over 900 Public Service Answering Points
("PSAP") throughout the country use these systems to protect lives and property.
In the business sector the Telident Enterprise Systems product line
provides life saving information about 911 calls made by users of PBXs and other
telephone systems. Few people realize that emergency response personnel may find
it impossible to locate a 911 caller in a multi-building business or on a
college campus. This life-threatening problem is the result of a public E911
system that never contemplated modern telecommunications technology such as
PBXs, wireless extensions, and Voice Over IP. The Telident Enterprise Systems
products are designed to ensure that emergency personnel receive the information
needed to quickly and accurately locate a 911 caller. Our Station Translation
System(TM), and Database Maintenance software are installed in over 1,000
businesses of all sizes.
Electronic Manufacturing Services
Teltronics provides contract electronic manufacturing services for
companies in the telecommunications, industrial control, test and measurement
and other computer-related industries. Services include design and test ability
reviews, 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 to
ISO Q9001 - 2000, BABT 340. The manufacturing facility is also UL registered.
Through our quality certifications, 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.
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. We believe that Teltronics'
electronic manufacturing services business will enable 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.
Trademarks, Patents and Copyrights
We rely on patent, trademark, trade secret and copyright laws both to
protect our intellectual property, including our proprietary technology, and to
protect us against claims from others. We believe that we have direct
intellectual property rights covering substantially all our material
technologies. We currently hold 32 patents and numerous pending patent
applications in the United States. We consider our patents relating to our
digital switching products to be the most important to our business. The patents
relating to our digital switching systems expire on various dates between 2005
and 2019. We also have approximately 26 registered trademarks in the United
States, of which we consider 20-20 and SEBea to be our most valuable. We license
some technology from third parties that we use in providing manufacturing
services to our customers. We believe that such licenses are generally available
on commercial terms from a number of licensors. Generally, the agreements
governing such technology grant us non-exclusive licenses regarding the subject
technology and terminate upon a material breach by us.
7
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.
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 believed to be firm at December 31, 2002 was
approximately $21 million, as compared to $22 million at December 31, 2001. The
Company's backlog is for orders that have scheduled deliveries or maintenance
over the next twelve months, and are not an indication that the Company is
unable to fulfill these requirements. Given the nature of our relationships with
our customers, we allow our customers to reschedule deliveries, and therefore,
backlog is not necessarily indicative of our future financial results.
Seasonality
The Company has experienced seasonality due in part to purchasing
tendencies of our customers during the fourth and first quarters of each year.
Consequently, results for the fourth and first quarters of each year are not as
strong as results during the other quarters. The revenues of the Company
continued to be impacted by the general slowdown of telecommunications
expenditures in 2002.
Customers
Our core strategy is to establish and maintain long-term relationships
with leading telecommunications customers. A small number of customers have
historically represented a major portion of our net sales. The table below sets
forth the respective portion of net sales for the applicable period attributable
to our customers who individually accounted for more than 10% of our net sales
in any respective period:
Years Ended December 31,
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2002 2001 2000
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New York City Board of Education 23% 39% 20%
IBM 17% -- --
No other customers exceeded 10% of total sales in 2002, 2001 and 2000.
In fiscal year 2002, two customers accounted for 40% of our net sales.
We expect to continue to depend upon a relatively small number of customers for
a significant percentage of our net revenue. The historic percentages in the
table above are not necessarily indicative of the percentage of net sales that
we may receive from any customer in the future.
8
Competition
The telecommunications network industry is highly competitive. The
Company has one significant competitor with its ISM product group, Ion Networks,
Inc. The Company has many competitors in the Digital Switching Systems product
group with the dominant players being Lucent and NORTEL. 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.
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, 2002, 2001 and 2000 were $4,563,000, $5,703,000 and
$4,932,000, respectively.
Regulatory
Federal Communications Commission. The Company must comply with certain
regulatory guidelines. 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.
Environmental. We are subject to a variety of federal, state, local and
foreign environmental regulations relating to the use, storage, discharge and
disposal of hazardous chemicals used during our manufacturing process. Although
we believe that we are currently in substantial compliance with all material
environmental regulations, any failure to comply with present and future
regulations could subject us to future liabilities or the suspension of
production. In addition, such regulations could restrict our ability to expand
our facilities or could require us to acquire costly equipment or to incur other
significant expense to comply with environmental regulations.
Employees
As of December 31, 2002, the Company employed 284 personnel.
Available Information
Copies of Teltronics' Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, are available free of charge through Teltronics' website
(www.teltronics.com) as soon as reasonably practicable after we electronically
file the material with, or furnish it to, the Securities and Exchange
Commission. The information on our website is not, and shall not be deemed to
be, a part of this report or incorporated into any other filings we make with
the Securities and Exchange Commission.
9
ITEM 2. PROPERTIES
We lease our corporate headquarters and principal facility in Sarasota,
Florida. The leased facility consists of approximately 72,000 square feet,
approximately 36,000 square feet of which are used for laboratories and offices.
Our lease expires in August 2005, and may be extended by the Company
for two five year periods. Our lease also includes an additional single story
building located in the same vicinity. This building consists of approximately
7,500 square feet.
The Company also leases offices in several locations under leases
expiring at various dates. We believe that our existing facilities are suitable
and adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is involved in legal actions arising in
the ordinary course of business. With respect to these matters, management
believes that it has adequate legal defenses or has provided adequate accruals
for related costs such that the ultimate outcome will not have a material
adverse effect on the Company's future financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not Applicable.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock has traded on the OTC Bulletin Board since
April 1, 2002, following the delisting of the common stock from the Nasdaq
SmallCap Market. On November 20, 2001, we received a Nasdaq Staff Determination
indicating that the Company had failed to comply with the net tangible
assets/shareholders' equity requirement as set forth in Marketplace Rule 4310
(c) (02) (B). On February 14, 2002, the Nasdaq Staff also notified the Company
that it failed to comply with the minimum bid price requirement for continued
listing on the Nasdaq SmallCap Market as set forth in Marketplace Rule 4310 (c)
(4). As a result, our common stock was subject to delisting from the Nasdaq
SmallCap Market. Although we appealed the Nasdaq's determination, we were not
successful in our request for continued inclusion on the Nasdaq SmallCap Market
pursuant to an exception to the foregoing listing requirements. Accordingly, our
common stock was delisted from the Nasdaq SmallCap Market as of the opening of
business on April 1, 2002. Our common stock currently trades on the
Over-the-Counter Bulletin Board under the symbol "TELT." Before April 1, 2002,
the Company's common stock was quoted on the Nasdaq SmallCap Market under the
same symbol. As a result of our delisting, an investor could find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, our common stock.
The following table sets forth, for the fiscal quarters indicated, (i)
the high and low sales prices per share as reported on the Nasdaq SmallCap
Market where our stock traded before the April 1, 2002 delisting and (ii) the
high and low bid quotations for the Company's common stock as reported on the
OTC Bulletin Board. OTC Bulletin Board quotations reflect inter-dealer prices,
without retail mark-up, mark-down, or commission and may not necessarily
represent actual transactions.
COMMON STOCK
-------------------------------------------------------
2002 2001
-------------------------- -------------------------
High Low High Low
-------------------------- -------------------------
PERIOD
------
1st Quarter $0.90 $0.35 $3.03 $0.97
2nd Quarter 0.66 0.25 2.06 1.15
3rd Quarter 0.46 0.21 1.75 0.80
4th Quarter 0.35 0.09 1.74 0.65
On March 24, 2003, the last reported sales price for the Company's
common stock as reported on the OTC Bulletin Board was $0.26 per share. As of
March 1, 2003, there were approximately 3,496 shareholders of record of the
Company's common stock.
The Company historically has not paid cash dividends on its common
stock. The Company intends to retain all of its earnings for the future
operation and growth of its business and does not intend to pay cash dividends
in the foreseeable future. Additionally, certain covenants in our financing
agreements restrict the payment of cash dividends. See Note 11 of the Notes to
our Consolidated Financial statements in Part II. The terms of our preferred
stock restrict the payment of dividends on our common stock.
On February 25, 1998, the Company issued 890,000 warrants to purchase
its common stock at an exercise price of $2.75 per share to Finona Mezzanine
Capital Corporation in connection with its Senior Secured Loans in the amount of
$1,000,000. In connection with the Third Amended and Restated Senior Secured
Promissory Note relating to the Senior Secured Loans, the Company adjusted the
exercise price of the warrants to $1.00 per share and extended the exercise
period to February 26, 2004. The warrants are exercisable in whole, or in part,
at any time before February 26, 2004.
11
On April 22, 2002, the terms of the Preferred Series B Convertible
stock were modified, whereby the annual dividend rate increased from $12 per
share to $16 per share, payable quarterly, effective February 26, 2002. As a
result of this modification, on February 26, 2002, the annual dividend rate
increased from $12 per share to $16 per share, payable quarterly. The annual
dividend rate will increase to $18 per share on February 27, 2004 and to $20 per
share on February 27, 2005. The Company modified the conversion price on
April 22, 2002 for the Preferred Series B Convertible stock from $2.75 to $1.75
per share in conjunction with Third Amended and Restated Senior Secured
Promissory Note. Commencing in May 2002, the Company has the right to redeem the
Preferred Series B Convertible stock in full at 100% of the face value plus
accrued and unpaid dividends.
The Company issued 40,000 shares of Preferred Series C Convertible
stock to Harris Corporation in March 2002 in connection with the Master
Restructuring Agreement. The Preferred Series C Convertible stock provides for a
$10 per share annual dividend, payable quarterly beginning May 15, 2002. The
annual dividend increases to $20 per share beginning April 1, 2007. The holder
of the Preferred Series C Convertible stock has the right at its option to
convert to the Company 's common stock at $2.75 per share subject to adjustment.
The Company has the right to redeem all or a portion of the then outstanding
Preferred Series C Convertible stock at any time for 100% of the face value plus
accrued and unpaid dividends.
In connection with our financial advisory and investment banking
agreement entered into in September 2002 with Atlantic American Capital
Advisors, LLC, the Company issued warrants to purchase 300,000 shares of its
common stock at an exercise price of $1.00 per share. The exercise period of the
warrants is five years.
The above described issuances of warrants and modifications of warrants
and preferred stock terms were consummated in privately negotiated transactions
in reliance on exemptions pursuant to Section 4(2) under the Securities Act of
1933, as amended, and Rule 506 promulgated thereunder.
The information relating to our equity compensation plans required by
this item is included in Item 12 under the heading "Equity Compensation Plans"
and incorporated by reference herein.
12
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data was
derived from the Company's audited financial statements and 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.
2002 2001 2000 (3)(4) 1999 (2) 1998 (1)
-----------------------------------------------------------------------------------------
Statement of Operations Data:
Net sales $ 54,387,056 $ 64,091,276 $ 43,204,303 $ 32,644,534 $ 26,794,674
Gross profit 19,643,603 21,235,655 19,451,813 15,990,827 11,448,963
Total operating expenses 22,597,533 25,801,872 18,782,010 13,662,235 11,156,756
-----------------------------------------------------------------------------------------
Income (loss) from operations (2,953,930) (4,566,217) 669,803 2,328,592 292,207
-----------------------------------------------------------------------------------------
Other income (expense):
Interest (1,258,056) (1,612,331) (1,295,604) (855,246) (904,682)
Financing (343,424) (403,226) (328,252) (331,578) (443,778)
Litigation costs (63,075) (15,150) (368,530) (77,220) (58,346)
Gain on dispositions -- -- -- 111,614 1,248,250
Other 24,780 (17,677) (116,260) 67,462 247,205
-----------------------------------------------------------------------------------------
Total other income (expense) (1,639,775) (2,048,384) (2,108,646) (1,084,968) 88,649
-----------------------------------------------------------------------------------------
Net income (loss) $ (4,609,316) $ (6,650,864) (1,485,181) 1,243,624 380,856
=========================================================================================
Net income (loss) available
to common shareholders $ (5,111,494) $ (6,802,364) $ (1,636,681) $ 1,024,367 $ 130,856
=========================================================================================
Net income (loss) per share:
Basic $ (0.93) $ (1.38) $ (0.36) $ 0.27 $ 0.04
=========================================================================================
Diluted $ (0.93) $ (1.38) $ (0.36) $ 0.25 $ 0.04
=========================================================================================
Shares used to compute amount:
Basic 5,482,845 4,932,909 4,484,495 3,844,470 3,417,744
Diluted 5,482,845 4,932,909 4,484,495 4,113,092 3,522,354
Balance Sheet Data:
Working capital $ 1,187,075 $ 4,736,775 $ 4,540,001 $ 805,259 $ 668,480
Total assets 18,148,711 26,292,848 29,531,467 15,794,841 14,430,769
Current portion of long- 2,193,401 4,630,142 6,212,894 5,592,822 4,500,244
term debt and capital
lease obligations
Long-term debt and capital 8,641,785 9,035,711 7,311,426 1,509,662 3,417,288
lease obligations, less
current portion
Total shareholders' equity
(deficiency) $ (2,608,646) $ (1,963,530) $ 4,403,131 $ 3,824,979 $ 2,618,747
(1) Reflects the disposition of AT Supply, Inc. on March 6, 1998.
(2) Reflects the acquisition of assets of Cascade Technology Corporation on
February 19, 1999.
(3) Reflects the acquisition of assets of Telident, Inc. on May 18, 2000.
(4) Reflects the acquisition of the 20-20(R) product line from Harris
Corporation on June 30, 2000.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 can generally be identified as such because the
context of the statement will include words such as we "believe," "anticipate,"
"expect," or words of similar import. Similarly, statements that describe our
future plans, objectives, strategies or goals are also forward-looking
statements. These forward-looking statements involve a number of risks and
uncertainties that may materially adversely affect the anticipated results. Such
risks and uncertainties include, but are not limited to, the timely development
and market acceptance of products and technologies, competitive market
conditions, successful integration of acquisitions, the ability to secure
additional sources of financing, the ability to reduce operating expenses, and
other factors described in the Company's filings with the Securities and
Exchange Commission. Shareholders, potential investors and other readers are
urged to consider these factors carefully in evaluating the forward-looking
statements made herein and are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements made herein are only
made as of the date of this Form 10-K and we disclaim any obligation to publicly
update such forward-looking statements to reflect subsequent events or
circumstances.
General Overview
The Company focuses on two major telecommunications markets. The first
is the monitoring of alarms from PBXs, voice mail systems and data networks.
This market is referred to as the Intelligent Systems Management market for
which the product is sold directly to Service Companies to enable them to be
pro-active in maintaining their systems. Typical Service Companies are companies
such as Verizon, NextiraOne (formerly Williams Communications), Sprint,
MCIWorldcom and BellSouth. The Company maintains a sales force nationwide to
service these major customers. The Company has been successful in not only
increasing the number of products sold to these customers, but also finding new
Service Company customers. Typically the sales cycle would be six months to
eighteen months while the customer tests the product before installation. A new
customer would then purchase an IRISnGEN, which is a centralized piece of
software that monitors the alarms at the remote sites. At the remote sites, the
Company provides one of its SEB-II's or an Intelli.m@n(R), which is an alarms
management, monitoring, pro-active computerized device. The Company expects to
continue to invest in R & D to develop, not only next generation versions of the
centralized Windows(R) NT based software (IRISnGEN), but also the SEB hardware
with an anticipated SEB Enterprise Agent(TM) which became available in the
fourth quarter of 2002, and enables sophisticated monitoring of voice networks
and data networks in one box.
The second telecommunications market is in the Digital Switching
Systems arena which involves providing telephone switches to small and medium
size businesses as well as advanced ACD (Automatic Call Distribution). The
Company's premier product in this market is the 20-20 switch. This product was
acquired from Harris Corporation during 2000.
The 20-20 switch offers a price competitive solution from 300 lines to
just under 10,000. The 20-20 products are being sold both directly and through
distributors, particularly outside the USA.
The 20-20 switch is technically approved by, and has been installed in,
over 60 countries. Teltronics continues to support the international channel.
Harris invested in these markets for over 15 years. The distributors of the
20-20 switch are used to selling, installing and supporting their customers.
Teltronics, therefore has not set up additional overseas companies, and has
continued to supply and support the existing distributors.
Teltronics also has some significant direct customers, in particular
the New York City Board of Education, the City of New York Department of
Corrections and the Federal Bureau of Prisons. These installations are supported
by our organization in Whitestone, New York and Manhattan.
The Company also offers a Contact Center product, OmniWorks. The
product continues to be enhanced and the product now provides, web chat, e-mail,
and multimedia to the Contact Center.
The acquisition of the assets of Telident in 2000 provided the Company
with an end to end solution for the 911 market. The product provides the PSAP (
Public Safety Answering Point ) with the identification number of the caller,
when they are calling from a multistory or distributed campus. There are many
States that are now making it mandatory for real estate developers to provide
this solution with new installations.
14
The Company has been successful in manufacturing its own products, thus
reducing costs and increasing gross margins. To supplement its own business, the
Company also sells electronic manufacturing services to companies that require
high quality, but have low volume. This enables the Company to maximize its
production facility and more effectively absorb overhead costs.
The Company has experienced seasonality due in part to purchasing
tendencies of our customers during the fourth and first quarters of each year.
Consequently, results for the fourth and first quarters of each year are not as
strong as results during the other quarters. The revenues of the Company
continued to be impacted by the general slowdown of telecommunications
expenditures in 2002.
Acquisitions
On May 18, 2000, the Company acquired substantially all of the assets
and assumed certain liabilities of Telident, Inc., a Minnesota corporation
("Seller") located in Minneapolis, Minnesota. The Company acquired all of the
Seller's rights to and in certain technology for the identification or location
of emergency 911 telephone calls.
The Company delivered 662,500 shares of its $.001 par value voting
common stock for substantially all of the assets of the Telident. Registration
of the shares on Form S-4 was declared effective by the Securities and Exchange
Commission April 20, 2000.
On June 30, 2000, the Company acquired certain equipment, inventory and
intellectual property rights related to the 20-20 switching technology and
associated products of Harris Corporation Communications Products Division
located in Melbourne, Florida ("Harris"), under an Asset Sale Agreement dated
June 30, 2000 ("Agreement").
Under the Agreement, the Company acquired the assets and assumed
on-going support obligations for certain of Harris' Communications Products
Division customers. Refer to Note 11 of the consolidated financial statements
for additional disclosure.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements that have been
prepared under generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could materially differ from those estimates because the estimates represent
judgments made at specific dates for events that are ongoing. Critical
accounting policies have the potential to have the most significant impact on
the consolidated financial statements. We have disclosed all significant
accounting policies including our critical accounting policies in Note 2 to the
consolidated financial statements included in this Form 10-K. The consolidated
financial statements and the related notes thereto should be read in conjunction
with the following discussion of our critical accounting policies. Our critical
accounting policies and estimates are:
Revenue recognition. Teltronics generates revenues through different sources.
o Contract Manufacturing. Revenues from sales of product, including
our contract manufacturing business are recognized when the
product is shipped. The Company's policy is to recognize revenue
and related costs when the order has been shipped from our
facilities, which is also the same point that title passes under
the terms of the purchase order. Based on the Company's history of
providing contract manufacturing services, we believe that
collectibility is reasonably assured.
o Performance of Construction-Type Contracts. The Company's policy
is to recognize revenue and related costs on the construction-type
contracts in accordance with Statement of Position 81-1 Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts (SOP 81-1). SOP 81-1 provides two generally accepted
methods of accounting for construction or production type
contracts: (1) the percentage of completion method and (2) the
completed contract method. The determination of which of the two
methods is preferable should be based on a careful evaluation of
circumstances because the two methods should not be acceptable
alternatives for the same circumstances.
15
The percentage of completion method recognizes revenue and
related costs as work on a contract progresses. The progress
of a contract in terms of recognizing revenue and related
costs is based on satisfying the milestones for the specific
contract.
The completed contract method recognizes revenue and related
costs when the contract is completed and all costs and related
revenues are reported as deferred items in the balance sheet
until that time.
Our primary construction-type contracts are with the Board of
Education of the City of New York. We accepted the assignment
of a contract from Harris Corporation in connection with the
Company's acquisition of Harris Corporation's 20-20(R)
Switching Product Line in June 2000. This contract, with the
Board of Education of the City of New York ("the Board"),
specified that the Contractor (Teltronics) would provide
telephone systems and peripheral equipment and cabling
including systems maintenance and support.
o Maintenance and service. Revenue from support and
maintenance activities is recognized ratably over the term of
the maintenance period and the unrecognized portion is
included in deferred revenue. Costs from support and
maintenance activities are recognized when the related revenue
is recognized or when those costs are incurred, whichever
occurs first.
Allowance for doubtful accounts. A considerable amount of judgment is required
when we assess the ultimate realization of receivables, including assessing the
probability of collection and the current credit-worthiness of each customer.
For all customers, we recognize reserves for bad debts based on the length of
time the receivables are past due. We have evaluated our reserves based on the
recent downturn in the economy and have increased them as necessary. We may
record additional changes to our bad debt reserves in the future.
Slow moving inventory. We write down our slow moving inventory equal to the
difference between the carrying value of the inventory and the estimated market
value based on assumptions about future product life cycles, product demand and
market conditions. If actual product life cycles, product demand or market
conditions are less favorable than those projected by management, additional
inventory write-down may be required. For 2002, our provision for slow moving
inventory was increased primarily for certain legacy 20-20 products.
Impairment of Intangible and Long Lived Assets. Long-lived assets consist
primarily of fixed assets. We periodically evaluate the recovery of long-lived
assets when impairment indicators are present. Our judgments regarding the
existence of impairment indicators are based on legal factors, market
conditions, estimated future cash flows, expected useful life of long-lived
assets and the operational performance of our business. Future events could
cause us to conclude that impairment indicators exist and that long-lived assets
associated with our business are impaired.
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, at 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.
Contingencies and Litigation. We are subject to proceedings, lawsuits and other
claims related to class action lawsuits and other matters. We are required to
assess the likelihood of any adverse judgments or outcomes to these matters as
well as potential ranges of probable losses. A determination of the amount of
loss accrual required, in any, for these contingencies are made after careful
review of each individual issue. The required accruals may change in the future
due to new developments in each matter or changes in approach such as a change
in settlement strategy in dealing with these matters.
16
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, 2002, 2001 and 2000.
2002 2001 2000
---------------- -------------- -------------
Net sales 100.0% 100.0% 100.0%
Gross profit 36.1 33.1 45.0
Total operating expenses 41.5 40.2 43.4
---------------- -------------- -------------
Income (loss) from operations (5.4) (7.1) 1.6
---------------- -------------- -------------
Other income (expense):
Interest (2.3) (2.5) (3.0)
Financing (0.6) (0.6) (0.8)
Litigation costs (0.1) -- (0.8)
Other -- (0.1) (0.3)
---------------- -------------- -------------
Total other income (expense) (3.0) (3.2) (4.9)
---------------- -------------- -------------
(8.4) (10.3) (3.3)
Loss before income taxes
Income taxes -- (0.1) (0.1)
---------------- -------------- -------------
Net loss (8.4%) (10.4%) (3.4%)
================ ============== =============
Net Sales
Net sales decreased 15.1% for the year ended December 31, 2002 over the
same period last year and increased 48.3% for the year ended December 31, 2001
over December 31, 2000. The decrease in net sales from 2001 to 2002 is primarily
attributable to a slow-down in the telecommunications market as evidenced by a
decrease in net sales from the four largest customers in 2001 and 2002 of
approximately $5.2 million or 15.4%.
The increase in net sales for 2001 over 2000 is primarily due to a $20
million project with the City of New York Board of Education coupled with
service revenues related to this project.
Gross Profit Margin
Gross profit margin was 36.1% for 2002 as compared to 33.1% in 2001 and
45.0% in 2000. The improvement in our gross profit margin in 2002 as compared to
2001 is due to changes in product mix and an improvement in our project
management over those projects that require more attention due to the extended
nature of the project.
The decrease in gross profit margins from 2000 to 2001 reflects a shift
in our overall sales mix from the higher margin products to the lower margin
products
Operating Expenses
Operating expenses were $22.6 million in 2002, $25.8 million in 2001
and $18.8 million in 2000.
General and administrative expenses decreased $637,000 for the year
ended December 31, 2002 compared to 2001. The decrease was primarily related to
a reduction in the transition services provided by Harris Corporation related to
the 20-20 Switching Product Line in 2001, which was partially offset by a
$437,000 expense that represents the present value of our lease obligation for
our Dallas facility closed in December 2002.
Sales and marketing expenses decreased $1.2 million for the year ended
December 31, 2002 compared to 2001. The decrease was a result of the reduction
in work force implemented during 2001 and reduced commissions in 2002 that were
partially offset by personnel hired in December 2001 and January 2002.
17
Research and development expenses decreased $1.1 million for the year
ended December 31, 2002 as compared to 2001. The decrease was primarily due to
the reductions in work force implemented during 2001 that were partially offset
by costs associated with developing new products.
The increase in operating expenses in 2001 compared to 2000 is due
primarily to the acquisitions of the Telident 911 and Harris 20-20 Switching
Products in May and June of 2000, respectively. The major increases in general
and administrative expenses in 2001 over 2000 were attributable to an increase
in non-recurring transition services provided by Harris Corporation of
approximately $900,000; expenses related to the opening of our Mexico office of
$232,000, and an increase in our bad debt expense of approximately $191,000.
Sales and marketing expense increased approximately $4.6 million from 2000 to
2001. The primary factors explaining the increases are the expenses related to
the opening of our Mexico and UK office of approximately $450,000; an increase
in sales and marketing expenses for Interactive Solutions, Inc. of $340,000 and
increases in salaries and wages, occupancy and other expenses related to the
Harris 20-20 acquisition and Telident of approximately $3.8 million. The
increase in research and development expenses was approximately $772,000 from
2000 to 2001. All of this increase relates to salaries and wages and occupancy
costs related to the acquisition of the Harris 20-20 Switching Product Line.
Other Expenses
Other expenses were $1.6 million in 2002, $2.0 million in 2001 and $2.1
million in 2000. The decrease in other expense of $409,000 from 2001 to 2002 is
primarily from reductions in interest expense due to prime rate reductions and
an overall decrease in debt.
The decrease in other expense from 2000 to 2001 was due to the
litigation costs in 2000 related to the Intelliworxx settlement. This is offset
by an overall increase in interest expense. The total interest expense for the
Harris note was approximately $1.1 million in 2001 versus $400,000 in 2000. This
was partially offset by reduced interest expense on the Subordinated Secured
Debentures that were paid off in early 2001 of $725,000.
Liquidity and Capital Resources
Net cash flows provided by (used in) operating activities
- ---------------------------------------------------------
Net cash provided by operating activities was approximately $4.9 m
illion for the year ended December 31, 2002. The $4.9 million was comprised of
the following items: (1) net loss of $4.6 million, (2) non-cash expenses of $5.5
million, (3) a net decrease in operating assets of $5.1 million and (4) a net
decrease in operating liabilities of $1.1 million. The net decrease in operating
assets was primarily a result of a decrease in accounts receivable of $4.6
million. The net decrease in operating liabilities was primarily a result of a
decrease in accounts payable of $1.8 million caused by projects commencing in
2001 and completed in 2002 for IBM and improved cash flow as a result of the
reduction in accounts receivable. The non-cash expenses in 2002 of $5.5 million
were comprised primarily of the following items: (1) provision for slow moving
inventories of $2.3 million, (2) depreciation and amortization of $2.0 million
and (3) lease obligation expense of $437,000.
Net cash provided by operating activities was approximately $3.9
million for the year ended December 31, 2001. The $3.9 million was comprised of
the following items: (1) a net loss of $6.7 million, (2) non-cash expenses of
$3.1 million, (3) a decrease in operating assets of $1.9 million and (4) an
increase in operating liabilities of $5.6 million. The decrease in inventories
and increase in accrued expenses are related to projects completed for the Board
of Education during 2001. The increases in deferred revenue and costs and
estimated earnings in excess of billings on uncompleted contracts are also
related primarily to projects for the Board of Education and The City of New
York Department of Corrections that were started and not yet completed at
December 31, 2001. The non-cash expenses in 2001 of $3.1 million were comprised
primarily of the following items: (1) depreciation and amortization of $2.1
million, (2) shares issued for 401(k) match of $246,000 and (3) amortization of
deferred financing costs of $228,000.
Net cash used in operating activities was approximately $87,000 for the
year ended December 31, 2000. The $87,000 was comprised of the following items:
(1) a net loss of $1.5 million, (2) non-cash expenses of $3.1 million, (3) an
increase in operating assets of $6.6 million and (4) an increase in operating
liabilities of $4.9 million.
18
The increases in accounts receivable, inventories and deferred revenue were all
a result of increased business related to the acquisitions of the Harris
20-20(R) Switching Product Line and Telident during 2000. The increases in
accounts payable and accrued expenses and other current liabilities were due to
expenses related to these acquisitions. The non-cash expenses in 2000 of $3.1
million were comprised primarily of the following items: (1) depreciation and
amortization of $1.9 million, (2) provision for slow moving inventories of
$462,000 and (3) loss on disposal of property and equipment of $349,000.
Net cash flows provided by (used in) investing activities
- ---------------------------------------------------------
Net cash flows used in investing activities was approximately $918,000
for the year ended December 31, 2002. The Company purchased property and
equipment of $943,000, which was partially offset by $25,000 in proceeds from
the sale of property and equipment.
Net cash flows used in investing activities was approximately $1.5
million for the year ended December 31, 2001. The Company purchased property and
equipment of $1.5 million to support the increased operating activities related
to the Harris and Telident acquisitions.
Net cash flows provided by investing activities was approximately
$129,000 for the year ended December 31, 2000. The net cash flows provided were
a result of the cash received in the Telident acquisition of $762,000 that were
partially offset by acquisitions of property and equipment related to the Harris
and Telident acquisitions of $778,000 and a decrease in other assets of
$144,000.
Net cash flows used in financing activities
- -------------------------------------------
The net cash flows used in financing activities for the year ended
December 31, 2002 was approximately $3.2 million. The Company had net repayments
on its line of credit of $2.1 million and net principal payments of $686,000
primarily related to the repayment of $307,000 to Finova Mezzanine Capital Corp.
("Finova") and $328,000 to Harris Corporation. Additionally we paid dividends on
the Preferred Series B and C Convertible stock of $443,000. These uses of cash
were partially offset by proceeds from the issuance of Common stock under our
Employee Stock Purchase Plan of $114,000.
The net cash flows used in financing activities for the year ended
December 31, 2001 was approximately $2.4 million. The Company had net repayments
on its line of credit of $1.1 million and net principal payments of $1.4 million
primarily related to the repayment of $725,000 to Finova and $500,000 to Harris
Corporation. Additionally we paid dividends on the Preferred Series B
Convertible stock of $152,000. These uses of cash were partially offset by
proceeds from the issuance of common stock under our Employee Stock Purchase
Plan of $178,000.
The net cash flows used in financing activities for the year ended
December 31, 2000 was approximately $962,000. The Company had net principal
payments of $1.5 million primarily related to the repayment of $1 million to
Finova. Additionally, we paid dividends on the Preferred Series B Convertible
stock of $152,000. These uses of cash were partially offset by borrowings from
our line of credit of $642,000.
Liquidity
- ---------
As of December 31, 2002, we had cash and cash equivalents of
approximately $791,000, an increase of approximately $728,000 from cash and cash
equivalents held as of December 31, 2001. We had working capital of $1.2 million
at December 31, 2002 compared to working capital of approximately $4.7 million
at December 31, 2001. Historically, we have funded our operations through bank
credit lines and cash generated from operations.
As of December 31, 2002, our principal obligations were comprised
primarily of the following: (1) promissory note payable to Harris Corporation of
$8.9 million in which $429,000 is expected to be paid within the next twelve
months, (2) Bank line of credit payable to The CIT Group/Business Credit, Inc.
("CIT") of $1.0 million, and (3) Senior Secured Promissory Note payable to
Finova of $693,000 that matures on August 13, 2003.
19
As of December 31, 2002, we had a credit facility with CIT as described
in Note 11 to the consolidated financial statements. The credit facility has a
maximum credit limit of $5.5 million with an interest rate of 2.5% above prime.
The applicable margin (2.5%) may vary from 2.0% to 3.0% depending on the
Company's financial results for the year ended December 31, 2002 and year ending
December 31, 2003. The amount available under this credit facility at December
31, 2002 was $803,000 subject to restrictions based on availability formulas.
We believe that our cash balances and the cash flows generated by
operations should be sufficient to satisfy our anticipated cash needs for
working capital and capital expenditures for at least the next twelve months;
however, since our operating results may fluctuate significantly as a result of
a decrease in customer demand or the acceptance of our products, our ability to
generate positive cash flows from operations may be jeopardized. As a result, we
may require additional funds to support our working capital requirements, or for
other purposes, and may seek to raise such additional funds through public or
private equity financings or from other sources. We may not be able to obtain
adequate or favorable financing at that time. Any financing we obtain may dilute
your ownership interests. In addition, if our cash flows were to substantially
decrease, our long-lived assets or goodwill may become impaired and we would
have to record a charge for impairment, which may be material to our financial
position and results of operations.
A portion of our cash may be used to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
From time to time, in the ordinary course of business, we may evaluate potential
acquisitions of such businesses, products or technologies. We anticipate that
our cash requirements for investing activities for 2003 should not be
significant.
Our contractual obligations consist of operating leases for facilities,
debt financing and dividend requirements on our Preferred Series B and C
Convertible stock. The following table summarizes our fixed cash obligations as
of December 31, 2002 for the fiscal years ending December:
2008
and
2003 2004 2005 2006 2007 thereafter
--------------------------------------------------------------------------------------------
Operating leases $2,331,000 $1,986,000 $1,642,000 $ 406,000 $ 87,000 --
Debt financing 2,193,000 565,000 609,000 7,450,000 17,000 --
Prefered Series B and C
Convertible stock dividends 602,000 621,000 646,000 653,000 903,000 *
-----------------------------------------------------------------------------
Total contractual cash
obligations $5,126,000 $3,172,000 $2,897,000 $8,509,000 $1,007,000 --
=============================================================================
* Dividends payable to Harris on our Series C Preferred stock will
continue at the rate of $800,000 per year as long as such shares are
outstanding. Finova dividends on Series B Preferred stock will continue at the
rate of $252,000 per year as long as such shares are outstanding.
Teltronics does not engage in any off-balance sheet financing
arrangements. In particular, we do not have any interest in so-called limited
purpose entities, which include special purpose entities and structured finance
entities.
The Company has engaged the investment banking firm of Atlantic
American Capital Advisors, LLC, as financial advisor to assist the Company in
developing and exploring strategic opportunities, which may include raising
capital, mergers, acquisitions, strategic partnerships or joint ventures, and
various other services, all ultimately designed to maximize shareholder value.
There can be no assurances that any strategic alternative will be consummated.
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had no holdings of derivative financial or commodity
instruments at December 31, 2002. The Company is exposed to financial market
risks, including changes in interest 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
recorded in U.S. dollars. Accordingly, foreign exchange rate fluctuations should
not have a significant impact on the Company. The sum of the quarters does not
agree with the earnings per share schedule due to rounding and shares issued
during the year. As further described in Note 1 to the Company's consolidated
financial statements, ISI was sold in July 2002. The "As Adjusted" amounts in
the following table presents the Company's quarterly results of operations
excluding the operating results of ISI.
Quarterly Results of Operations (Unaudited)
2002 - as originally reported 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------------------------------------------------------------------------
Net sales $13,673,018 $16,661,792 $14,392,890 $9,659,356
Cost of goods sold 8,504,801 10,751,207 8,818,823 6,668,622
Net income (loss) (1,341,853) 412,336 47,228 (3,727,027)
Net income (loss) per share:
Basic (0.26) 0.05 (0.02) (0.67)
Diluted (0.26) 0.05 (0.02) (0.67)
2002 - as adjusted
Net sales $13,598,018 $16,577,792 $14,364,890 $9,630,356
Cost of goods sold 8,478,801 10,733,207 8,814,823 6,651,556
Net income (loss) (1,352,853) 376,336 64,228 (3,732,027)
Net income (loss) per share:
Basic (0.27) 0.04 (0.02) (0.67)
Diluted (0.27) 0.04 (0.02) (0.67)
2001 - as originally reported 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------------------------------------------------------------------------
Net sales $18,250,470 $25,827,568 $10,238,565 $ 9,774,673
Cost of goods sold 12,216,251 17,898,822 7,008,312 5,732,236
Net income (loss) (1,047,421) 771,252 (3,358,754) (3,015,941)
Net income (loss) per share:
Basic $ (0.23) $ 0.15 $ (0.68) $ (0.60)
Diluted $ (0.23) $ 0.13 $ (0.68) $ (0.60)
2001 - as adjusted
Net sales $18,140,470 $25,272,568 $9,908,565 $9,664,673
Cost of goods sold 12,178,251 17,678,822 6,907,312 5,681,822
Net income (loss) (750,421) 776,252 (3,246,754) (2,825,941)
Net income (loss) per share:
Basic (0.16) 0.15 (0.66) (0.56)
Diluted (0.16) 0.14 (0.66) (0.56)
21
ITEM 8. FINANCIAL STATEMENTS
Certain information required by this item is included in Item 7A of
Part II of this report under the heading "Quarterly Results of Operations
(Unaudited)" and is incorporated into this item by reference.
Index to Financial Statements
Financial Statements:
PAGE
Report of Independent Certified Public Accountants 23
Consolidated Balance Sheets - December 31, 2002 and 2001 24
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000 25
Consolidated Statements of Shareholders' Deficiency for the
Years Ended December 31, 2002, 2001 and 2000 26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 27-28
Notes to Consolidated Financial Statements 29-46
Financial Statement Schedule:
Item 15(a)2:
Schedule II - Valuation and Qualifying Accounts 56
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.
22
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.
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, shareholders' deficiency and cash flows for each of
the three years in the period ended December 31, 2002. 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 auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Teltronics, Inc.
and subsidiaries at December 31, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States. 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
Tampa, Florida
March 20, 2003
23
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
------------------------------------
2002 2001
------------------------------------
Current assets:
Cash and cash equivalents $ 791,020 $ 63,307
Accounts receivable, net 5,155,877 10,021,731
Costs and estimated earnings in excess of billings on uncompleted contracts 740,650 638,119
Inventories, net 6,187,196 9,175,567
Prepaid expenses and other current assets 427,904 314,363
---------------------------------
Total current assets 13,302,647 20,213,087
Property and equipment, net 4,076,265 5,163,007
Goodwill 241,371 241,371
Other intangible assets, net 253,575 335,814
Other assets 274,853 339,569
---------------------------------
Total assets $ 18,148,711 $ 26,292,848
=================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities:
Current portion of long-term debt $ 2,193,401 $ 4,550,645
Current portion of capital lease obligations -- 79,497
Accounts payable 4,356,985 6,181,434
Billings in excess of costs and estimated earnings on uncompleted contracts 1,347,685 125,783
Accrued expenses and other current liabilities 2,479,300 2,783,532
Deferred revenue 1,738,201 1,755,421
---------------------------------
Total current liabilities 12,115,572 15,476,312
---------------------------------
Long-term liabilities:
Long-term debt, net of current portion 8,641,785 9,034,748
Capital lease obligations, net of current portion -- 963
Other long-term liability -- 3,744,355
---------------------------------
Total long-term liabilities 8,641,785 12,780,066
---------------------------------
Commitments and contingencies
Shareholders' deficiency:
Common stock, $.001 par, 40,000,000 shares authorized,
5,930,241 and 5,105,844 issued and outstanding at
December 31, 2002 and 2001, respectively 5,930 5,106
Non-voting common stock, $.001 par, 5,000,000 shares authorized,
zero shares issued and outstanding -- --
Preferred Series A stock, $.001 par value, 100,000 shares authorized,
100,000 shares issued and outstanding 100 100
Preferred Series B Convertible stock, $.001 par value, 25,000 shares
authorized, 12,625 shares issued and outstanding 13 13
Preferred Series C Convertible stock, $.001 par value, 40,000 shares
authorized, 40,000 shares issued and outstanding 40 --
Additional paid-in-capital 23,812,232 19,277,099
Accumulated other comprehensive loss (72,560) (2,941)
Accumulated deficit (26,354,401) (21,242,907)
---------------------------------
Total shareholders' deficiency (2,608,646) (1,963,530)
---------------------------------
Total liabilities and shareholders' deficiency $ 18,148,711 $ 26,292,848
=================================
The accompanying notes are an integral part of these
consolidated financial statements.
24
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
---------------------------------------------------------
2002 2001 2000
---------------------------------------------------------
Net sales
Product sales and installation $ 46,209,415 $ 57,248,237 $ 39,982,218
Maintenance and service 8,177,641 6,843,039 3,222,085
---------------------------------------------------------
54,387,056 64,091,276 43,204,303
Cost of sales 34,743,453 42,855,621 23,752,490
---------------------------------------------------------
Gross profit 19,643,603 21,235,655 19,451,813
---------------------------------------------------------
Operating expenses:
General and administrative 5,893,108 6,530,161 4,643,464
Sales and marketing 10,748,955 11,937,045 7,330,849
Research and development 4,563,149 5,703,488 4,931,626
Depreciation and amortization 1,392,321 1,631,178 1,527,072
Loss on write-off of assets -- -- 348,999
---------------------------------------------------------
22,597,533 25,801,872 18,782,010
---------------------------------------------------------
Income (loss) from operations (2,953,930) (4,566,217) 669,803
---------------------------------------------------------
Other income (expense):
Interest (1,258,056) (1,612,331) (1,295,604)
Financing (343,424) (403,226) (328,252)
Litigation costs (63,075) (15,150) (368,530)
Other 24,780 (17,677) (116,260)
---------------------------------------------------------
(1,639,775) (2,048,384) (2,108,646)
---------------------------------------------------------
Loss before income taxes (4,593,705) (6,614,601) (1,438,843)
Income taxes (15,611) (36,263) (46,338)
---------------------------------------------------------
Net loss (4,609,316) (6,650,864) (1,485,181)
Dividends on Preferred Series B and C Convertible stock 502,178 151,500 151,500
---------------------------------------------------------
Net loss available to common shareholders $ (5,111,494) $ (6,802,364) $ (1,636,681)
=========================================================
Net loss per share:
Basic $ (0.93) $ (1.38) $ (0.36)
=========================================================
Diluted $ (0.93) $ (1.38) $ (0.36)
=========================================================
The accompanying notes are an integral part of these
consolidated financial statements.
25
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
COMMON STOCK PREFERRED STOCK
-------------------------------------------------
ADDITIONAL
PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 4,054,522 $ 4,056 112,625 $ 113 $ 16,624,672
Comprehensive loss:
Net loss -- -- -- -- --
Comprehensive loss
Options exercised 6,000 6 -- -- 10,494
Shares issued for acquisition of Telident 662,500 663 -- -- 2,072,963
Shares issued for 401(k) match 38,269 38 -- -- 130,669
Dividends on Preferred Series B Convertible stock -- -- -- -- --
-------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 4,761,291 4,763 112,625 113 18,838,798
Comprehensive loss:
Net loss -- -- -- -- --
Foreign currency -- -- -- -- --
Comprehensive loss
Shares issued for 401(k) match 190,056 189 -- -- 245,444
Shares issued under Employee Stock Purchase Plan 139,497 139 -- -- 177,722
Shares issued for litigation settlement 15,000 15 -- -- 15,135
Dividends on Preferred Series B Convertible stock -- -- -- -- --
-------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 5,105,844 5,106 112,625 113 19,277,099
Comprehensive loss:
Net loss -- -- -- -- --
Foreign currency -- -- -- -- --
Comprehensive loss
Shares issued for 401(k) match 576,667 576 -- -- 240,271
Shares issued under Employee Stock Purchase Plan 247,730 248 -- -- 113,702
Modification of exercise price and exercise period
of warrants -- -- -- -- 160,200
Warrant issued as compensation for financial advisor -- -- -- -- 21,000
Conversion of other long-term liability and certain
accrued expenses to Preferred Series C Convertible
stock -- -- 40,000 40 3,999,960
Dividends on Preferred Series B and C Convertible stock -- -- -- -- --
-------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 5,930,241 $ 5,930 152,625 $ 153 $ 23,812,232
===================================================================
ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED
LOSS DEFICIT TOTAL
-------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ -- $ (12,803,862) $ 3,824,979
Comprehensive loss:
Net loss -- (1,485,181) (1,485,181)
--------------
Comprehensive loss (1,485,181)
Options exercised -- -- 10,500
Shares issued for acquisition of Telident -- -- 2,073,626
Shares issued for 401(k) match -- -- 130,707
Dividends on Preferred Series B Convertible stock -- (151,500) (151,500)
-------------------------------------------------------
BALANCE, DECEMBER 31, 2000 -- (14,440,543) 4,403,131
Comprehensive loss:
Net loss -- (6,650,864) (6,650,864)
Foreign currency (2,941) -- (2,941)
--------------
Comprehensive loss (6,653,805)
Shares issued for 401(k) match -- -- 245,633
Shares issued under Employee Stock Purchase Plan -- -- 177,861
Shares issued for litigation settlement -- -- 15,150
Dividends on Preferred Series B Convertible stock -- (151,500) (151,500)
-------------------------------------------------------
BALANCE, DECEMBER 31, 2001 (2,941) (21,242,907) (1,963,530)
Comprehensive loss:
Net loss -- (4,609,316) (4,609,316)
Foreign currency (69,619) -- (69,619)
--------------
Comprehensive loss (4,678,935)
Shares issued for 401(k) match -- -- 240,847
Shares issued under Employee Stock Purchase Plan -- -- 113,950
Modification of exercise price and exercise period
of warrants -- -- 160,200
Warrant issued as compensation for financial advisor -- -- 21,000
Conversion of other long-term liability and certain
accrued expenses to Preferred Series C Convertible
stock -- -- 4,000,000
Dividends on Preferred Series B and C Convertible stock -- (502,178) (502,178)
-------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ (72,560) $ (26,354,401) $ (2,608,646)
=======================================================
The accompanying notes are an integral part of these
consolidated financial statements.
26
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000
---------------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (4,609,316) $ (6,650,864) $ (1,485,181)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for doubtful accounts 226,462 191,360 89,199
Provision for slow moving inventories 2,290,080 63,414 462,246
Depreciation and amortization 2,023,334 2,129,282 1,924,974
Amortization of other intangible assets and goodwill 82,239 183,742 66,496
Amortization of deferred financing costs 222,650 227,676 98,835
(Gain) loss on disposal of property and equipment (18,593) -- 348,999
Fair value of Common stock issued for 401(k) match 240,847 245,633 130,707
Fair value of Common stock issued for litigation settlement -- 15,150 --
Lease obligation expense 437,173 -- --
Changes in operating assets and liabilities:
Accounts receivable 4,639,392 381,372 (5,317,768)
Costs and estimated earnings in excess of billings on (102,531) (638,119) --
uncompleted contracts
Inventories 698,291 2,255,333 (1,098,925)
Prepaid expenses and other current assets (113,541) (81,521) (228,597)
Other assets 23,266 4,656 --
Accounts payable (1,824,449) 791,089 2,110,061
Billings in excess of costs and estimated earnings on 1,221,902 125,783 --
uncompleted contracts
Accrued expenses and other current liabilities (544,859) 4,247,960 2,241,844
Deferred revenue (17,220) 421,854 570,565
---------------------------------------------------
Net cash flows provided by (used in) operating activities 4,875,127 3,913,800 (86,545)
---------------------------------------------------
INVESTING ACTIVITIES:
- --------------------
Acquisition of property and equipment (943,019) (1,451,460) (778,010)
Proceeds from disposal of property and equipment 25,020 899 500
Decrease in other assets -- -- 143,953
Cash received in acquisition of Telident, Inc. -- -- 762,321
---------------------------------------------------
Net cash flows provided by (used in) investing activities (917,999) (1,450,561) 128,764
---------------------------------------------------
FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit (2,145,074) (1,069,940) 642,285
Net principal repayments on loans, notes and capital leases (685,593) (1,388,704) (1,462,976)
Dividends paid on Preferred Series B and C Convertible (443,079) (151,500) (151,500)
stock
Proceeds from issuance of common stock 113,950 177,861 10,500
---------------------------------------------------
Net cash flows used in financing activities (3,159,796) (2,432,283) (961,691)
---------------------------------------------------
Effect of exchange rate changes on cash (69,619) (2,941) --
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents 727,713 28,015 (919,472)
Cash and cash equivalents - beginning of year 63,307 35,292 954,764
---------------------------------------------------
Cash and cash equivalents - end of year $ 791,020 $ 63,307 $ 35,292
===================================================
The accompanying notes are an integral part of these consolidated
financial statements.
27
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2002 2001 2000
---------------------------------------------------------
SUPPLEMENTAL NONCASH FINANCING AND
- ----------------------------------
INVESTING ACTIVITIES:
- --------------------
Conversion of other long-term liability to Preferred
Series C Convertible stock $ 3,744,355 -- --
Conversion of certain accrued expenses to Preferred
Series C Convertible stock $ 255,645 -- --
Unpaid dividends on Preferred Series B and C
Convertible stock included in accrued expenses $ 59,099 -- --
Reclassification of certain accrued expenses to
long-term debt -- $ 2,600,177 --
Reclassification of certain accrued expenses to
other long-term liability -- 3,744,355
Issuance of note in purchase of assets of Harris
Communications Products Division -- -- $ 6,884,355
Issuance of common stock for purchase of assets of 2,073,626
Telident, Inc. -- --
Accrued interest converted into note payable -- -- 212,268
Lease of equipment -- -- 142,914
SUPPLEMENTAL DISCLOSURES:
- ------------------------
Interest paid $ 1,265,373 $ 1,443,554 1,318,832
Income taxes paid $ 32,697 $ 12,797 46,339
The accompanying notes are an integral part of these
consolidated financial statements.
28
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
Teltronics, Inc. ("Teltronics" or "Company"), a Delaware corporation, designs,
develops, installs, manufactures and markets electronic hardware and application
software products, and engages in electronic manufacturing services primarily in
the telecommunication industry.
The accompanying consolidated financial statements include the accounts of the
Company and are comprised of its wholly-owned subsidiaries TTG Acquisition Corp.
and Teltronics, S.A. de C.V. In July 2002, the Company sold ownership of its
Interactive Solutions, Inc. ("ISI") subsidiary and converted all debt and
obligations owed to the Company by ISI to 50,000 shares of Series A Preferred
stock of ISI, which were pledged as collateral to Finova Mezzanine Capital Inc.
In connection with the sale of ISI, the Company's common stock ownership of ISI
was reduced from 85% to 15%. Management of the Company has determined the value
of the Series A Preferred stock to not be material, as a result, no gain on the
sale of ISI was recognized. The Company's sale of ISI enables the Company to
focus on our core business. All significant intercompany transactions and
balances have been eliminated in consolidation.
On May 18, 2000, the Company acquired substantially all of the assets and
technology of Telident, Inc., including Telident's rights to and in certain
technology for enhanced 911 technology hardware and software systems that
communicate with public safety 911 contact points. The Company sells these
products to a wide variety of businesses, and health and educational
institutions.
On June 30, 2000, the Company acquired certain equipment, inventory and
intellectual property rights relating to the 20-20(R) switching system and
associated products of Harris Corporation. The 20-20(R) product is a digital
switch capable of supporting up to 9,600 ports/desktops that the Company sells
to large businesses, and health and educational institutions.
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
with maturities of three months or less at the date of purchase to be cash
equivalents.
Concentration of Credit Risk - The Company's largest customer was 23%, 39% and
20% of sales in 2002, 2001 and 2000, respectively. The second largest customer
was 17% of sales in 2002. In 2001 and 2000, only the Company's largest customer
accounted for more than 10% of the Company's sales. The Company has accounts
receivable from federal, state and city governmental agencies, independent
telephone companies, alternative service companies and telecommunication
companies primarily located in the United States. The Company does not believe
that there are substantial credit risks associated with those receivables. The
Company does not require any form of collateral from its customers.
Accounts receivable are recorded at their net realizable value. A considerable
amount of judgment is required when we assess the ultimate realization of
receivables, including assessing the probability of collection and the current
credit-worthiness of each customer. For all customers, we recognize reserves for
bad debts based on the length of time the receivables are past due. We have
evaluated our reserves based on the recent downturn in the economy and have
increased them as necessary. We may record additional changes to our bad debt
reserves in the future. We will charge off outstanding balances only after all
collections efforts have been exhausted.
29
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounting for Stock-based Compensation - Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, encourages,
but does not require, companies to record compensation cost for stock-based
employee compensation plans based on the fair value of options granted. The
Company has chosen to account for stock based compensation using the intrinsic
value method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, because the grant price equals the market price on the date of
grant for options issued by the Company, no compensation expense is recognized
for stock options issued to employees.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
Accounting for Stock Based Compensation - Transition and Disclosure, which
amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent
disclosures about the effects of stock-based compensation.
Had compensation cost for the Company's stock options been recognized based upon
the estimated fair value on the grant date under the fair value methodology
prescribed by SFAS No. 123 (see Note 16), as amended by SFAS No. 148, the
Company's net loss and net loss per share would have been as follows:
Years Ended December 31,
---------------------------------------------------------------
2002 2001 2000
--------------------- ------------------- --------------------
Net loss - as reported $(4,609,316) $(6,650,864) $(1,485,181)
Net loss - pro forma (4,830,491) (6,854,020) (1,546,648)
Net loss per share:
Basic - as reported $ (0.93) $ (1.38) $ (0.36)
Basic - pro forma (0.97) (1.42) (0.38)
Diluted - as reported $ (0.93) $ (1.38) $ (0.36)
Diluted - pro forma (0.97) (1.42) (0.38)
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and the
Company's experience.
Inventories - Inventories are stated at the lower of cost or market. Costs are
determined principally on the weighted average method. Shipping and handling
costs are included in cost of goods sold in the accompanying consolidated
statements of operations.
Property and Equipment - Property and equipment are stated at cost. Depreciation
and amortization are 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.
30
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill - In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized but instead be tested for
impairment at least annually. Goodwill and intangible assets acquired after June
30, 2001, however, are subject immediately to the non-amortization and
amortization provisions of this Statement. The Company fully adopted the
provisions of SFAS No. 142 effective January 1, 2002. The following table
presents the effect of SFAS No. 142 on net loss and net loss per share had the
accounting standard been in effect for the years ended December 31, 2001 and
2000:
Years Ended December 31,
----------------------------------------------
2001 2000
-------------------- -------------------
Net loss - as reported $(6,650,864) $(1,485,181)
Goodwill amortization 21,871 12,704
-------------------- -------------------
Net loss - adjusted $(6,628,993) $(1,472,477)
==================== ===================
Basic loss per share of common stock
Net loss - as reported $ (1.38) $ (0.36)
Goodwill amortization -- --
-------------------- -------------------
Net loss - adjusted $ (1.38) $ (0.36)
==================== ===================
Diluted loss per share of common stock
Net loss - as reported $ (1.38) $ (0.36)
Goodwill amortization -- --
-------------------- -------------------
Net loss - adjusted $ (1.38) $ (0.36)
==================== ===================
Income Taxes - 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.
Revenue Recognition
Contract Manufacturing. Revenues from sales of product, including our contract
manufacturing business are recognized when the product is shipped. The Company's
policy is to recognize revenue and related costs when the order has been shipped
from our facilities, which is also the same point that title passes under the
terms of the purchase order. Based on the Company's history of providing
contract manufacturing services, we believe that collectibility is reasonably
assured.
Performance of Construction-Type Contracts. The Company's policy is to recognize
revenue and related costs on the construction-type contracts in accordance with
Statement of Position 81-1 Accounting for Performance of Construction-Type and
Certain Production-Type Contracts (SOP 81-1). SOP 81-1 provides two generally
accepted methods of accounting for construction or production type contracts:
(1) the percentage of completion method and (2) the completed contract method.
The determination of which of the two methods is preferable should be based on a
careful evaluation of circumstances because the two methods should not be
acceptable alternatives for the same circumstances.
31
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The percentage of completion method recognizes revenue and related costs as work
on a contract progresses. The progress of a contract in terms of recognizing
revenue and related costs is based on satisfying the milestones for the specific
contract.
The completed contract method recognizes revenue and related costs when the
contract is completed as evidenced by written acceptance of the completed
contract by the customer and all costs and related revenues are reported as
deferred items in the balance sheet until that time.
Our primary construction-type contracts are with the Board of Education of the
City of New York. We accepted the assignment of a contract from Harris
Corporation in connection with the Company's acquisition of Harris Corporation's
20-20(R) Switching Product Line in June 2000. This contract, with the Board of
Education of the City of New York ("the Board"), specified that the Contractor
(Teltronics) would provide telephone systems and peripheral equipment and
cabling including systems maintenance and support.
Maintenance and Service. Revenue from support and maintenance activities is
recognized ratably over the term of the maintenance period and the unrecognized
portion is included in deferred revenue. Costs from support and maintenance
activities are recognized when the related revenue is recognized or when those
costs are incurred, whichever occurs first.
Research and Development - Research and development costs are expensed as
incurred.
Warranty - The Company provides currently for the estimated cost that may be
incurred under product warranties. Factors that affect the Company's warranty
liability include the number of installed units, historical and anticipated
rates of warranty claims, and cost per claim. 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.
Changes in the Company's product liability during the period are as follows:
Balance, beginning of the period $ 305,000
Warranties issued during the period 344,966
Settlements made during the period (302,566)
Changes in liability for pre-existing warranties
during the period, including expirations (32,400)
---------
Balance, end of the period $ 315,000
=========
Impairment of Long-Lived Assets - Effective January 1, 2002, our Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). This statement
requires the following three-step approach for assessing and recognizing the
impairment of long-lived assets: (1) consider whether indicators of impairment
of long-lived assets are present; (2) if indicators of impairment are present,
determine whether the sum of the estimated undiscounted future cash flows
attributable to the assets in question is less than their carrying amount; and
(3) if less, recognize an impairment loss based on the excess of the carrying
amounts of the assets over their respective fair values. In addition, SFAS No.
144 provides more guidance on estimating cash flows when performing a
recoverability test, requires that a long-lived asset to be disposed of other
than by sale (such as abandoned) be classified as "held and used" until it is
disposed of, and establishes more restrictive criteria to classify an asset as
"held for sale." The adoption of SFAS No. 144 did not have a material impact on
our consolidated financial statements since it retained the fundamental
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, related to the recognition and
measurement of the impairment of long-lived assets to be "held and used."
Reclassifications - Certain prior year amounts have been reclassified from sales
and marketing to cost of sales to conform with the current year's presentation.
32
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3 - ACQUISITIONS
Telident, Inc.
- --------------
On May 18, 2000, the Company acquired substantially all of the assets and
assumed certain liabilities of Telident, Inc., a Minnesota corporation
("Seller") located in Minneapolis, Minnesota. The Company acquired all of the
Seller's rights to and in certain technology for the identification or location
of emergency 911 telephone calls.
The Company delivered 662,500 shares of its $.001 par value voting common stock
for substantially all of the assets of the Seller.
The acquisition has been accounted for using the purchase method of accounting
and the results of operations of the acquired business are included in the
Company's results of operations from the date of acquisition. The purchase price
has been assigned to the net assets acquired based on management's estimate of
the fair value of such assets and liabilities at the date of acquisition as
follows:
Cash $ 762,321
Accounts receivable, net 610,998
Inventory, net 260,757
Prepaid expenses and other current assets 26,168
Property and equipment, net 240,234
Other assets 6,282
Goodwill and identifiable intangible assets 514,299
Accounts payable (76,792)
Accrued expenses and other current liabilities (239,505)
Deferred Income (28,146)
Long-Term debt (2,990)
------------------
Net assets acquired $ 2,073,626
==================
Harris Corporation 20-20(R) Switching Product Line
- --------------------------------------------------
On June 30, 2000, the Company acquired certain equipment, inventory and
intellectual property rights related to the 20-20(R) switching technology and
associated products of Harris Corporation Communications Products Division
located in Melbourne, Florida ("Harris"), under an Asset Sale Agreement dated
June 30, 2000 ("Agreement").
Under the Agreement, the Company acquired the assets and assumed on-going
support obligations for certain of Harris' Communications Products Division
customers in consideration for $6,884,355 paid for with a promissory note with
interest at 10.5% per annum.
The acquisition has been accounted for using the purchase method of accounting
and the results of operations of the acquired business are included in the
Company's results of operations from the date of acquisition. The purchase price
has been assigned to the net assets acquired based on management's estimate of
the fair value of such assets and liabilities at the date of acquisition as
follows:
Inventory, net $ 5,277,113
Property and equipment, net 3,083,025
Customer lists and patents 206,210
Note payable (6,884,355)
Accrued expenses and other current liabilities (1,629,993)
Accounts payable (52,000)
-------------------
Net assets acquired $ --
===================
33
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The unaudited pro forma results for the year ended December 31, 2000 presented
below include the effects of the acquisitions as if they had been consummated on
January 1, 2000. The unaudited pro forma financial information below is not
necessarily indicative of either future results of operations or results that
might have been achieved had the acquisitions been consummated at the beginning
of the year prior to acquisitions of Telident and Harris.
2000
-----------------------
Net sales $ 67,106,506
=======================
Net loss $ (44,909,028)
=======================
Net loss available to common shareholders $ (45,060,528)
=======================
Net loss per share -
Basic $ (9.53)
Diluted $ (9.53)
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
December 31,
----------------------------------------
2002 2001
------------------ ------------------
Costs incurred on uncompleted contracts $ 967,379 $ 770,551
Estimated earnings 950,926 534,505
------------------ ------------------
1,918,305 1,305,056
Less: Billings to date 2,525,340 792,720
------------------ ------------------
$ (607,035) $ 512,336
================== ==================
Included in accompanying consolidated
balance sheets under the following captions:
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 740,650 $ 638,119
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,347,685) (125,783)
------------------ ------------------
$ (607,035) $ 512,336
================== ==================
Costs and estimated earnings in excess of billings on uncompleted contracts
includes unbilled revenue of approximately $321,000 and $373,000 as of December
31, 2002 and 2001, respectively.
NOTE 5 - OTHER INTANGIBLE ASSETS
The Company's other intangible assets are as follows:
December 31,
--------------------------------------
2002 2001 Life
------------------- ---------------- ---------------------------
Customer List $ 202,332 $ 232,332 5 years
Patent 239,899 239,899 14 years, 7 months
------------------- ----------------
Total 442,231 472,231
Accumulated amortization (188,656) (136,417)
------------------- ----------------
$ 253,575 $ 335,814
=================== ================
34
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortization is provided over the estimated useful lives of the respective
assets using the straight-line method. As of December 31, 2001, the Company
recorded a charge for the remaining net book value related to goodwill and
other intangible assets from the Cascade acquisition in the amount of $85,418.
The charge is included in depreciation and amortization as shown in the
consolidated statements of operations and is also included in amortization of
intangibles as shown in the consolidated statements of cash flows.
Estimated amortization expense related to other intangible assets for each of
the five years in the period ending December 31, 2007 and thereafter is: 2003 -
$60,740; 2004 - $44,396; 2005 - $26,079; 2006 - $14,510; 2007 - $14,510;
thereafter - $93,340.
NOTE 6 - NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss, adjusted for
preferred stock dividends, by the weighted average number of issued common
shares outstanding during the applicable period. Diluted net loss per share is
computed by dividing net loss, adjusted for preferred stock dividends, by the
weighted average number of issued common shares and 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.
The following table sets forth the computation of basic and diluted net loss per
share:
2002 2001 2000
-------------------- ------------------- -------------------
Basic
Net loss $ (4,609,316) $ (6,650,864) $ (1,485,181)
Preferred dividends (502,178) (151,500) (151,500)
-------------------- ------------------- -------------------
Net loss available to common shareholders $ (5,111,494) $ (6,802,364) $ (1,636,681)
==================== =================== ===================
Weighted average shares outstanding 5,482,845 4,932,909 4,484,495
==================== =================== ===================
Net loss per share $ (0.93) $ (1.38) $ (0.36)
==================== =================== ===================
Diluted
Net loss $ (4,609,316) $ (6,650,864) $ (1,485,181)
Preferred dividends (502,178) (151,500) (151,500)
-------------------- ------------------- -------------------
Net loss available to common shareholders $ (5,111,494) $ (6,802,364) $ (1,636,681)
==================== =================== ===================
Weighted average shares outstanding 5,482,845 4,932,909 4,484,495
Effect of dilutive securities
Employee stock options -- -- --
Convertible preferred stock -- -- --
Warrants -- -- --
-------------------- ------------------- -------------------
Dilutive potential common shares 5,482,845 4,932,909 4,484,495
==================== =================== ===================
Net loss per share $ (0.93) $ (1.38) $ (0.36)
==================== =================== ===================
NOTE 7 - ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2002 and 2001 are as follows:
December 31,
--------------------------------------
2002 2001
------------------- ------------------
Accounts receivable $ 5,555,487 $ 10,491,591
Allowance for doubtful accounts (399,610) (469,860)
------------------- ------------------
$ 5,155,877 $ 10,021,731
=================== ==================
35
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 - INVENTORIES
The major classes of inventories at December 31, 2002 and 2001 are as follows:
December 31,
--------------------------------------
2002 2001
------------------- ------------------
Raw materials $ 3,195,656 $ 5,963,289
Work-in-process 979,036 1,136,911
Finished goods 2,012,504 2,075,367
------------------- ------------------
$ 6,187,196 $ 9,175,567
=================== ==================
The reserve for slow moving inventories was $2,151,000 and $1,235,000 as of
December 31, 2002 and 2001, respectively.
NOTE 9 - PROPERTY AND EQUIPMENT
The major classifications of property and equipment at December 31, 2002 and
2001 are as follows:
December 31,
--------------------------------------
2002 2001
------------------- ------------------
Machinery and equipment $ 7,267,083 $ 6,925,727
Furniture, fixtures and computers 4,081,815 3,904,697
Equipment under capital leases 425,152 425,152
Software 2,431,370 2,210,976
Leasehold improvements 469,977 512,396
------------------- ------------------
14,675,397 13,978,948
Accumulated depreciation and amortization (10,599,132) (8,815,941)
------------------- ------------------
$ 4,076,265 $ 5,163,007
=================== ==================
Depreciation and amortization expense was $2,023,334, $2,129,282 and $1,924,974
for the years ended December 31, 2002, 2001 and 2000, respectively. For the
years ended December 31, 2002, 2001 and 2000, depreciation and amortization
expense of $713,252, $681,846 and $464,398, respectively, was included in cost
of goods sold.
NOTE 10 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at December 31, 2002 and 2001 are
as follows:
December 31,
--------------------------------------
2002 2001
------------------- ------------------
Payroll $ 1,423,229 $ 1,334,929
Lease obligation 437,173 --
Other 618,898 948,603
Due to Harris Corporation -- 500,000
------------------- ------------------
$ 2,479,300 $ 2,783,532
=================== ==================
36
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 Accounting for Costs Associated with Exit or Disposal Activities. SFAS No.
146 required recognition of costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit or
disposal plan. Costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity. The
provisions of the new standard are effective for restructuring, exit or disposal
activities initiated after December 31, 2002; however, early application is
encouraged.
The Company leases office space for a research and development facility in
Dallas, Texas. The lease expires in December 2006. In December 2002, the Company
closed its facility in Dallas, Texas. Teltronics will continue to incur rental
costs under the Dallas lease agreement without receiving any future economic
benefit.
Teltronics has early adopted the provisions of SFAS No. 146 in 2002. As a
result, the Company had recorded an expense of approximately $437,000 that
represents the present value of our liability as of December 31, 2002. This
expense is reported as a general and administrative cost in our consolidated
statements of operations for 2002.
37
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11 - DEBT
Debt at December 31, 2002 and 2001 consists of the following:
December 31,
------------------------------
2002 2001
---- ----
Secured promissory note - payable to Harris Corporation in monthly installments of
$96,805 with interest at 8% commencing May 1, 2002 with a balloon payment of
$7,196,801 due May 2006. $ 8,868,717 $ 9,196,801
Bank line of credit - On December 22, 1998, the Company's principal lender, The CIT
Group/Business Credit, Inc. ("CIT") amended the Company's existing Line of Credit
Facility and Term Loan whereby, the interest rate was 2.0% above prime rate, maximum
credit was $5,500,000 and an early termination fee was assessed at 1.5%. On
October 28, 2000, the Line of Credit Facility was extended to October 28, 2002. A
director of the Company had personally guaranteed a portion of the facility. On
October 16, 2002, the Company entered into the Thirteenth Amendment to Loan and
Security Agreement (the "Amendment") with CIT. This Amendment extended the term
from October 28, 2002 to October 28, 2004 and modified the interest rate from
prime plus 2.0% to prime plus 2.5%. The applicable margin (2.5%) may vary from
2.0% to 3.0% depending on the Company's financial results for the year ended
December 31, 2002 and year ending December 31, 2003. At December 31, 2002, the
Company's interest rate was 6.75%. The maximum credit remained at $5,500,000
while the early termination fee was modified from 1.5% to 1.0% of the maximum
credit. In connection with this Amendment, CIT has released a director of the
Company from any and all obligations under any guaranty agreement or arrangement
in favor of CIT.
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. At December 31, 2002, the Company had $803,000 available, pursuant to
this facility. The availability of this unused line of credit is restricted
based on availability formulas. 1,013,416 3,158,490
Senior Secured Promissory Note - In May 2000, the Company amended and restated
the note to revise the maturity date to February 13, 2002. On September 30,
2002, the Company entered into a Fourth Amended and Restated Senior Secured
Promissory Note with a revised maturity date of August 13, 2003, interest at 14%
and monthly principal and interest payments of $55,000, commencing October 1,
2002. 693,477 1,000,000
Notes payable to finance companies, payable in monthly installments of
$5,600 with interest at approximately 5%. The notes mature through December
2007 and are collateralized by vehicles. 259,576 160,752
Notes payable - officer, payable upon demand with interest accruing at 8% per annum. -- 69,350
-------------------------------------
Total 10,835,186 13,585,393
Less current portion 2,193,401 4,550,645
-------------------------------------
Long-term portion $ 8,641,785 $ 9,034,748
=====================================
The Company maintains a promissory note to Harris Corporation ("Harris") related
to the acquisition of the 20-20(R) Product Line, which was restructured on March
27, 2002, under a Master Restructuring Agreement. Under this restructuring, the
principal and capitalized interest total was stated at $9,196,801. The Company
made principal payments of $500,000 during the three month period ended March
31, 2002, which was classified within accrued expenses and other current
liabilities as of December 31, 2001. Monthly payments of $96,805 in principal
and interest commenced in May 2002 and continue until May 2006 at which time a
balloon payment of the remaining unpaid balance of $7,196,801 will be due. The
interest rate is 8%. In conjunction with the restructuring, Harris agreed to
38
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
convert $4,000,000 of accrued expenses owed by the Company for additional
inventory and services provided in connection with the transition of the
20-20(R) Switching Product Line to the Company, to 40,000 shares of Preferred
Series C Convertible stock.
The Note is secured by a first lien on certain of the acquired assets and a lien
on the Company's other assets.
On February 25, 1998, the Company entered into Senior Secured Loans ("Loans")
for $1,000,000 and $280,000. Interest was initially paid quarterly starting May
15, 1998. On May 12, 2000, the Company amended and restated the $1,000,000 Loan
Agreement originally entered into on February 25, 1998 with Finova Mezzanine
Capital Corp. ("Finova") and originally due February 25, 1999 to extend the
maturity to February 13, 2002. On May 1, 2002, Finova and the Company entered
into a Third Amended and Restated Senior Secured Promissory Note. On September
30, 2002, Finova and the Company entered into a Fourth Amended and Restated
Senior Secured Promissory Note ("Note"). Under the terms of the Note, monthly
principal and interest payments of $55,000 are required commencing October 1,
2002 until August 13, 2003 at which time all outstanding principal and interest
is due. The interest rate was increased from 12% to 14%.
The Holder of the Loans previously received 890,000 warrants to purchase the
Company's Common stock at an exercise price of $2.75 per share. These warrants
were exercisable in whole, or in part, at any time during a five-year holding
period beginning on the date of issuance. In connection with the Third Amended
and Restated Senior Secured Promissory Note, Finova and the Company entered into
an Amended and Restated Stock Purchase Warrant that modified the terms of the
890,000 previously issued warrants to change the exercise price to $1.00 per
share and extend the exercise period to February 26, 2004. As a result of
modifying the exercise price and extending the exercise period of the 890,000
warrants, the Company recorded a deferred financing fee of $160,200 in May 2002.
This fee was expensed as a financing cost in our consolidated statements of
operations in 2002.
The covenants in the Secured Promissory Note, Loan and Security Agreement and
the Senior Secured Promissory Note 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.
Future maturities as of December 31, 2002 are as follows:
2003 $ 2,193,401
2004 565,284
2005 609,447
2006 7,449,998
2007 17,056
------------------
$ 10,835,186
==================
NOTE 12 - CAPITAL LEASE OBLIGATIONS
Leased property under capital leases at December 31, 2002 and 2001 consists of
the following:
December 31,
------------------------------------
2002 2001
---------------- ----------------
Machinery and equipment $ 425,152 $ 425,152
Accumulated amortization (326,295) (249,348)
---------------- ----------------
$ 98,857 $ 175,804
================ ================
39
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable and accounts payable are reflected in the consolidated
financial statements at their carrying amount which approximates fair value
because of the short-term maturity of those instruments. The note payable and
long-term debt reflect interest rates that are currently available to the
Company based on the financing arrangement and the collateral provided. As a
result, the carrying amount of the note payable and long-term debt approximates
fair value.
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Company sponsors a savings plan ("401(k) plan") which covers substantially
all employees of the Company. The Company made discretionary matching
contributions to the 401(k) plan by issuance of shares of the common stock of
the Company. During 2002, 2001 and 2000, the Company issued 576,667, 190,056 and
38,269 shares with a fair value of $240,847, $245,633 and $130,707,
respectively, in connection with the plan. Effective October 1, 2002, the
Company discontinued its discretionary matching contributions to the 401(k)
plan.
The Company also sponsors an employee stock purchase plan ("Purchase Plan")
under which employees of the Company and its subsidiaries are given an
opportunity to purchase Company Common Stock at a price equal to approximately
85% of fair market value. The Purchase Plan is intended to qualify under the
Internal Revenue Code of 1986, as amended and the 500,000 shares of common stock
funding the Plan have been registered on Form S-8. During 2002 and 2001, the
Company issued 247,730 and 139,497 shares with a fair value of $113,950 and
$177,861, respectively, in connection with the Purchase Plan. Effective January
1, 2003, the Purchase Plan was temporarily suspended.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
(A) Employment Agreements - The Company is party to employment agreements with
several of its officers that provide for annual base salaries, target bonus
levels, severance pay under certain conditions, and certain other benefits.
(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 offices in several locations under leases expiring at
various dates.
The Company also leases various equipment under operating leases expiring over a
period of five years.
Future minimum lease payments for all noncancellable operating leases at
December 31, 2002 are as follows:
2003 $ 2,331,139
2004 1,985,699
2005 1,641,609
2006 406,114
2007 86,672
-------------------
$ 6,451,233
===================
Rental expense for operating leases totaled approximately $2,373,000, $2,228,000
and $1,250,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
40
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(C) Legal Proceedings - The Company from time to time is involved in legal
actions arising in the ordinary course of business. With respect to these
matters, management believes that it has adequate legal defenses or has provided
adequate accruals for related costs such that the ultimate outcome will not have
a material adverse effect on the Company's future financial position or results
of operations.
(D) Tri-Link - On October 31, 2002, the Company and Tri-Link Technologies Inc.
("Tri-Link") entered into an Agreement of Purchase and Sale ("Agreement") with a
closing date on the earlier of May 1, 2003 or the fifth business day following
the earliest day on which Tri-Link and the Company have agreed in writing that
the Developed c Technology fully meets the specifications outlined in the
Agreement. The Agreement includes voice over internet protocol ("VoIP")
technology that is in the development stage. The Company will be acquiring the
existing Vortex Technology, the Developed Vortex Technology, and all tangible
and intangible assets associated with the existing Vortex Technology and the
Developed Vortex Technology.
The consideration for the assets to be purchased from Tri-Link will be
$2,500,000, of which $250,000 will be paid at closing with the remaining balance
of $2,225,000 being paid in quarterly installments of $187,500 with interest at
6.5%. Tri-Link shall be entitled, at its sole option, to convert at any time and
from time to time, increments of not less than $250,000 of the balance of the
purchase price then remaining unpaid into shares of the Company's voting common
stock at the rate of $1.00 per share. The total of all amounts that can be
converted is $750,000.
NOTE 16 - SHAREHOLDERS' EQUITY
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) Preferred stock - The Preferred Series A stock are restricted securities
owned by the Company's Director and Senior Vice President of Business
Development 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. 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.
The Preferred Series B Convertible stock provided for a $12 per share annual
dividend, payable quarterly and increasing to $20 in May 2002. On April 22,
2002, the terms of the Preferred Series B Convertible stock were modified,
whereby the annual dividend rate increased from $12 per share to $16 per share,
payable quarterly, effective February 26, 2002. The annual dividend rate will
increase to $18 per share on February 27, 2004 and to $20 per share on February
27, 2005. The holder of the Preferred Series B Convertible stock initially had
the right at its option to convert to the Company's Common stock at $2.75 per
share. The Company adjusted the conversion price on April 22, 2002 for the
Preferred Series B Convertible stock from $2.75 to $1.75 per share in
conjunction with Third Amended and Restated Senior Secured Promissory Note.
Commencing in May 2002, the Company has the right to redeem the Preferred Series
B Convertible stock in full at 100% of the face value plus accrued and unpaid
dividends. The Preferred Series B Convertible stock contains certain financial
covenants.
The Company issued 40,000 shares of Preferred Series C Convertible stock to
Harris Corporation in March 2002 in connection with the Master Restructuring
Agreement. The Preferred Series C Convertible stock provides for a $10 per share
annual dividend, payable quarterly beginning May 15, 2002. The annual dividend
increases to $20 per share beginning April 1, 2007. The holder of the Preferred
Series C Convertible stock has the right at its option to convert to the
Company's Common stock at $2.75 per share subject to adjustment. The Company has
the right to redeem all or a portion of the then outstanding Preferred Series C
Convertible stock at any time for 100% of the face value plus accrued and unpaid
dividends.
(B) Warrants - In connection with the Third Amended and Restated Senior Secured
Promissory Note, Finova and the Company entered into an Amended and Restated
Stock Purchase Warrant ("Warrant") that modified the terms of the 890,000
previously issued warrants to change the exercise price to $1.00 per share and
extend the exercise period to February 26, 2004.
41
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with our financial advisory and investment banking agreement
entered into in September 2002 with Atlantic American Capital Advisors, LLC, the
Company issued warrants to purchase 300,000 shares of its Common stock at an
exercise price of $1.00 per share. The exercise period of the warrants is five
years. As a result of issuing the warrants, the Company recorded a deferred
financing fee of $21,000 that was expensed as a financing cost in our
consolidated statements of operations in 2002.
(C) 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 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, to key employees of the Company or its
subsidiaries, and is limited to 2,500,000 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.
The following table summarizes certain weighted average data for options
outstanding and currently exercisable as of December 31, 2002:
Outstanding Exercisable
--------------------------------- --------------------------------
Weighted Average
---------------------------------
Weighted
Remaining Average
Exercise Exercise Contractual Exercise
Price Range Shares Price Life (yrs) Shares Price
---------------------------------------------------------------------- -------------------------------
$0.23 - $1.00 700,000 $0.99 8.1 146,000 $1.00
$1.63 - $3.03 457,000 2.07 5.8 303,200 1.92
$3.50 32,000 3.50 3.9 32,000 3.50
---------------------------------------------------- -------------------------------
1,189,000 $1.48 7.1 481,200 $1.75
==================================================== ===============================
The per share weighted average fair value of options granted during the years
ended December 31, 2002, 2001 and 2000 were $0.18, $0.85 and $2.29,
respectively. All options were granted at not less than the fair market value at
date of grant. Generally, stock options become exercisable over a five-year
graded vesting period and expire ten years from the date of grant. Options
totaling 1,301,000 shares were available for grant at December 31, 2002.
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:
2002 2001 2000
----------------- --------------- ---------------
Risk-free interest rates 6.3% 6.4% 6.4%
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 108% 99% 87%
Dividend yield None None None
42
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Weighted average exercise prices for option activity:
Number of Weighted Average
Shares Exercise Price
----------------------- ------------------------
Outstanding, December 31, 1999 1,012,000 $3.93
Granted 368,000 2.24
Exercised (6,000) 1.75
Forfeited (23,000) 1.88
Expired -- --
----------------- ------------------------
Outstanding, December 31, 2000 1,351,000 $3.52
Granted 697,000 1.00
Exercised -- --
Forfeited (187,000) 2.47
Expired -- --
----------------- ------------------------
Outstanding, December 31, 2001 1,861,000 $2.69
Granted 5,000 0.23
Exercised -- --
Forfeited (677,000) (4.81)
Expired -- --
----------------- ------------------------
Outstanding, December 31, 2002 1,189,000 $1.48
================= ========================
Exercisable, December 31, 2002 481,200 $1.75
================= ========================
NOTE 17 - RELATED PARTY TRANSACTIONS
The following is a summary of transactions with related parties, excluding those
that have been disclosed elsewhere in the notes to the consolidated financial
statements:
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 consolidated financial statements and is amortized on a straight
line basis over the term of the lease. Accumulated amortization of this amount
at December 31, 2002 and 2001 was $347,958 and $320,508, respectively.
Note Payable - Officer - The Company had an outstanding note payable to an
officer, which was paid in full plus interest at September 18, 2002 of $73,380.
The balance at December 31, 2001 and 2000 was $69,350 and $64,035, respectively.
43
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 18 - INCOME TAXES
The components of the income tax provision are as follows:
Years ended December 31,
-----------------------------------------------------------
2002 2001 2000
------------------- ------------------- -----------------
Current:
Federal $ -- $ -- $ 28,390
State 15,611 36,263 17,948
------------------- ------------------- -----------------
$ 15,611 36,263 46,338
Deferred:
Federal -- -- --
State -- -- --
------------------- ------------------- -----------------
-- -- --
------------------- ------------------- -----------------
$ 15,611 $ 36,263 $ 46,338
=================== =================== =================
The following is a reconciliation of income tax expense recognized to that
computed by applying the federal statutory rate of 34% in 2002, 2001 and 2000 to
loss before income taxes:
Years ended December 31,
-----------------------------------------------------------
2002 2001 2000
------------------- ------------------- -----------------
Federal tax at the statutory rate $ (1,524,667) $ (2,248,964) $ (489,207)
State income taxes, net of federal tax benefit (158,215) (234,411) (47,872)
Change in valuation allowance for deferred tax assets 1,640,119 2,381,082 512,016
Other items 58,374 138,556 71,401
------------------- ------------------- -----------------
$ 15,611 $ 36,263 $ 46,338
=================== =================== =================
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.
44
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant components of the Company's deferred tax assets and liabilities are
as follows:
December 31,
----------------------------------------
2002 2001
------------------- -----------------
Deferred tax assets:
Net operating loss carryforward $ 6,140,294 $ 4,899,320
Accrued vacation 218,691 235,685
Inventory 992,353 620,587
Alternative minimum tax credit -- --
Other 159,061 185,119
Bad debt reserve 88,034 220,333
Accrued expenses 291,495 96,173
------------------- -----------------
7,889,928 6,257,217
Valuation allowance (7,800,710) (6,160,591)
Deferred tax liabilities:
Fixed assets (16,442) (96,626)
Sales tax accrual (72,776) --
------------------- -----------------
Net deferred tax asset $ -- $ --
=================== =================
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the years ended December 31, 2002, 2001 and 2000, the Company recorded a
valuation allowance 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. The valuation allowance increased $1,640,119, $2,381,082 and $512,016 in
2002, 2001 and 2000, respectively.
At December 31, 2002, for federal income tax purposes, the Company had a net
operating loss carryforward of approximately $16,318,000, which will expire in
the years 2009 through 2022. Such net operating losses are available to offset
future taxable income.
45
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 19 - SEGMENT INFORMATION
The Company's operations are classified into three reportable segments,
Teltronics, ISI and Mexico. As further described in Note 1, ISI was sold in July
2002. 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. Company management
evaluates performance based on segment profit (loss), which is net income (loss)
before income taxes, excluding nonrecurring gains or losses.
The following table presents information about reportable segment operations and
assets.
Years ended December 31,
-----------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------
Net Sales
Teltronics $ 53,321,000 $ 61,971,000 $ 42,248,000
Mexico 850,000 1,015,000 --
ISI 216,000 1,105,000 956,000
-------------------------------------------------------
Total sales $ 54,387,000 $ 64,091,000 $ 43,204,000
=======================================================
Depreciation and Amortization
Teltronics $ 1,974,000 $ 2,079,000 $ 1,410,000
Mexico 8,000 5,000 --
ISI 41,000 45,000 515,000
-------------------------------------------------------
Total depreciation and amortization $ 2,023,000 $ 2,129,000 $ 1,925,000
=======================================================
Interest and Financing Costs
Teltronics $ 1,601,000 $ 2,016,000 $ 1,299,000
Mexico -- -- --
ISI -- -- 325,000
-------------------------------------------------------
Total interest and financing costs $ 1,601,000 $ 2,016,000 $ 1,624,000
=======================================================
Segment Profit (Loss)
Teltronics $ (4,718,000) $ (5,862,000) $ 601,000
Mexico 89,000 (149,000) --
ISI 35,000 (604,000) (2,040,000)
-------------------------------------------------------
Loss before income taxes $ (4,594,000) $ (6,615,000) $ (1,439,000)
=======================================================
Segment Assets
Teltronics $ 18,020,000 $ 25,937,000 $ 29,337,000
Mexico 129,000 227,000 --
ISI -- 129,000 194,000
-------------------------------------------------------
Total segment assets $ 18,149,000 $ 26,293,000 $ 29,531,000
=======================================================
Acquisition of Property and Equipment
Teltronics $ 943,000 $ 1,378,000 $ 752,000
Mexico -- 47,000 --
ISI -- 26,000 26,000
-------------------------------------------------------
Total acquisition of property and equipment $ 943,000 $ 1,451,000 $ 778,000
=======================================================
Information on major customers is discussed in the Summary of Significant
Accounting Policies. Sales to foreign countries were insignificant. All material
assets are located in the United States. It is not practical for the Company to
provide segment information by product, as this information is not currently
available.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
46
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 (1) Age Position
---- --- --------
Ewen R. Cameron 50 Director, President, Chief Executive Officer and Assistant Secretary
Patrick G. Min 44 Vice President Finance, Chief Financial Officer, Secretary and Treasurer
Peter G. Tuckerman 56 Vice President Product Management
Robert B. Ramey 45 Vice President Electronic Manufacturing
Norman R. Dobiesz 55 Director and Senior Vice President Business Development
Carl S. Levine 56 Director (2)
Gregory G. Barr 43 Director (2)
Richard L. Stevens 39 Director (2)
- ----------------
(1) William L. Hutchison served as Executive Vice President,
Chief Operating Officer and Assistant Secretary until
March 31, 2002.
(2) Audit Committee Members.
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 30 years in the computer and telecommunications
industry.
Patrick G. Min, CPA serves as Vice President of Finance, CFO, Secretary
and Treasurer. He joined the Company in August of 2001. He has over 18 years of
experience in the accounting profession. Mr. Min was employed by Ernst & Young
LLP for 12 years serving a variety of clients in both the public and private
sectors. He has also held executive financial positions in various industries in
both public and private companies. Mr. Min graduated with a Masters of
Accountancy from the University of Tennessee.
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 17 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.
47
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. Mr. Levine is presently the senior partner in the law
firm of Carl S. Levine & Associates, located in Jericho, 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.
Gregory G. Barr is currently Area President of Orion Bank (formerly
known as Gulf Coast National Bank), Fort Myers, Florida. Prior to that, Mr.
Barr was employed as Senior Vice President, Senior Lender for SouthTrust
Bank. From 1987 to 1997 Mr. Barr was employed by Barnett Bank, Inc. as Senior
Vice President and Commercial Banking Manager for Manatee County. Mr. Barr has
experience in Commercial Banking, Finance, Accounting and Capital Markets
transactions. He is a graduate of Salem State College, Salem, Massachusetts
holding a Bachelor of Science in accounting. Mr. Barr has served as a Director
of the Company since June 4, 1999.
Richard L. Stevens is the President of Richard L. Stevens, CPA, P.A.,
which provides tax compliance and consulting services to clients in a variety of
industries. Mr. Stevens also serves as Chief Financial Officer of Payless Car
Rental System, Inc., a car rental franchisor located in St. Petersburg, Florida.
From 1984 to 2000, Mr. Stevens held various management positions with the
international accounting firms of Grant Thornton, LLP, Coopers & Lybrand and
KPMG Peat Marwick. He has experience in taxation, accounting, capital
transactions and mergers and acquisitions. Mr. Stevens holds a B.S. in Business
Administration from the University of Louisville and is a Certified Public
Accountant.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors, and persons who own
more than 10% of a registered class of our equity securities to file reports of
ownership and changes in ownership of such securities with the SEC. Directors,
officers and greater than ten percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on its review of the copies of such forms received by it and
written representations from certain reporting persons that no Forms 5 were
required for them, the Company believes that during its most recently completed
fiscal year ended on December 31, 2002, all filing requirements applicable to
our directors, officers and greater than 10% shareholders were satisfied.
48
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth the annual and long-term compensation
paid by the Company during the years indicated to the Chief Executive Officer
and its five (5) other, most highly paid executive officers whose total salary
and bonus exceeded $100,000 for the year ended December 31, 2002 (collectively,
the "Named Officers").
Annual Compensation Long Term Compensation
------------------------------------------------------------------------------
Awards Payouts
-------------------------------------
Other Securities All
Annual Restricted Underlying Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Position Year Salary Bonus sation(1) Awards SARs(#) Payouts sation (3)
- ---------------------------------------------------------------------------------------------------------------------------
Ewen R. Cameron 2002 $376,998 -- -- -- -- -- $ 2,701
President & CEO 2001 377,399 -- -- -- 500,000 -- 2,625
2000 352,574 -- -- -- -- -- --
Norman R. Dobiesz 2002 376,998 -- -- -- -- --
Senior Vice President 2001 377,399 -- -- -- -- -- --
Business Development 2000 352,574 -- -- -- -- -- --
William L. Hutchison 2002 236,269 (2) -- -- -- -- 2,409
Executive Vice 2001 229,764 -- -- -- -- -- 2,399
President& COO 2000 215,000 $15,000 -- -- 15,000 -- --
Robert B. Ramey 2002 150,839 -- -- -- -- 1,666
Vice President 2001 130,024 -- -- -- -- -- 1,980
Manufacturing 2000 123,562 -- -- -- 15,000 -- --
Peter G. Tuckerman 2002 119,248 -- -- -- -- --
Vice President 2001 115,021 -- -- -- -- -- --
Product Management 2000 101,013 -- -- -- 5,000 -- --
Patrick G. Min 2002 157,248 -- -- -- -- -- 31,122 (4)
Vice President Finance, 2001 57,949 -- -- -- -- -- --
CFO, Secretary &
Treasurer
(1) Certain perquisites that aggregate less than the lessor of ten percent
(10%) of the total salary and bonus of any of the executive officers or
$50,000 are not included.
(2) William L. Hutchison served as Executive Vice President and COO of the
Company until March 31, 2002.
(3) Represents the Company 401(k) matching contribution.
(4) Represents various relocation expenses in addition to the Company 401(k)
matching contribution of $2,750.
Employment Agreements
Effective August 31, 2001 the Company amended and restated five year
employment agreements with Ewen R. Cameron, President and CEO and Norman R.
Dobiesz, Senior Vice President Business Development. Both agreements were
amendments and restatements of prior agreements which the Company entered into
with the employees as of January 1, 1999. Each employment agreement is renewable
for an additional five year period at the employee's option and provides for a
base salary of $325,000 subject to annual increases of $25,000. Either the
Company or the employee may terminate the employment agreements upon the
occurrence of certain events. If the Company terminates the employment of Mr.
Cameron or Mr. Dobiesz, the terminated employee will be entitled to severance
equal to the salary for the remaining term on the contract.
49
Effective September 9, 2002 the Company entered into three year
employment agreements with Robert B. Ramey, Vice President Manufacturing and
Patrick G. Min, Vice President Finance and CFO. Each employment agreement is
renewable for an additional three year period unless either the employee or the
Company sends notice of non-renewal to the other at least thirty days prior to
the expiration date of the term. The agreements provide for base salaries of
$132,000 and $155,000, respectively. Either the Company or the employee may
terminate the employment agreements upon the occurrence of certain events. If
the Company terminates the employment of Mr. Ramey or Mr. Min, the terminated
employee will be entitled to severance equal to one year's salary.
Employee Stock Purchase Plan
On October 23, 2000, the Shareholders ratified adoption of an Employee
Stock Purchase Plan ("ESPP") under which employees of the Company and its
subsidiaries are provided the opportunity to acquire common stock of the Company
under the Internal Revenue Code of 1986, as amended, at 85% of fair market
value. An aggregate of 112,773 common shares are available under the ESPP. The
ESPP became effective on June 19, 2000 upon adoption by the Company's Board of
Directors. During 2002, the Company issued an aggregate of 247,730 shares in
connection with this plan.
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 284 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 2,490,000 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. The
Company has registered all of shares issuable under this Plan on Form S-8.
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 2002, the Company issued options to purchase 5,000 shares to
non-executive employees. During 2001, the Company canceled options previously
granted to non-executive employees to purchase 127,000 shares of Common Stock
upon separation from the Company . The Company also canceled options previously
granted to executive employees to purchase 500,000 shares of Common Stock and
options previously granted to a non-employee director to purchase 50,000 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.
50
Option/SAR Grants in Last Fiscal Year
Number of Securities % of Total
Underlying Options/SARs Exercise
Options/SARs Granted to Employees or Base
Name Granted (#)(1) in Fiscal Year (1) Price ($/Sh) Expiration Date
- ---------------------------------------------------------------------------------------------------------------------------
-- -- -- -- --
- ------------------------------
(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 Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs
FY-Ended (#) at FY-End ($) (1)
-----------------------------------------------------
Shares
Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
---------------------------------------------------------------------------------------------------------------------
Ewen R. Cameron --- --- 30,000/0 $0/$0 (2)
--- --- 100,000/400,000 $0/$0 (2)
Norman R. Dobiesz --- --- 30,000/0 $0/$0 (3)
William L. Hutchison --- --- 30,000/0 $0/$0 (4)
--- --- 16,000/4,000 $0/$0 (4)
--- --- 4,000/6,000 $0/$0 (4)
--- --- 3,000/12,000 $0/$0 (4)
Peter G. Tuckerman --- --- 20,000/0 $0/$0 (5)
--- --- 2,000/3,000 $0/$0 (5)
Robert B. Ramey --- --- 20,000/0 $0/$0 (6)
--- --- 6,000/4,000 $0/$0 (6)
--- --- 6,000/9,000 $0/$0 (6)
Patrick G. Min --- --- 6,000/24,000 $0/$0 (7)
(1) Value is calculated using the difference between the option exercise
price and the year-end stock price, multiplied by the number of shares
subject to an option. The year-end stock price was $0.10 for each share
of our common stock.
(2) None of the options granted to Mr. Cameron were in-the-money at December
31, 2002 because they are exercisable at prices greater than the fair
market value of the Company's Common Stock on such date.
(3) None of the options granted to Mr. Dobiesz were in-the-money at December
31, 2002 because they are exercisable at prices greater than the fair
market value of the Company's Common Stock on such date.
(4) None of these options granted to Mr. Hutchison were in-the-money at
December 31, 2002 because they are exercisable at prices greater than the
fair market value of the Company's Common Stock on such date.
(5) None of the options granted to Mr. Tuckerman were in-the-money at
December 31, 2002 because they are exercisable at prices greater than the
fair market value of the Company's Common Stock on such date.
(6) None of the options granted to Mr. Ramey were in-the-money at December
31, 2002 because they are exercisable at prices greater than the fair
market value of the Company's Common Stock on such date.
(7) None of these options granted to Mr. Min were in-the-money at December
31, 2002 because they are exercisable at prices greater than the fair
market value of the Company's Common Stock on such date.
51
Director Compensation
On August 12, 1996, the Company adopted a policy which was amended on
August 13, 2002, to compensate non-employee members of its Board of Directors
and Audit Committee in the amount of $2,500 plus expenses for each meeting
attended in person and $1,500 for participating in each meeting via telephone
conference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
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 March 14, 2003. 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.
Amount and
Nature of
Name of Beneficial Beneficial
Owner and Address Title of Class Ownership (1) Percentage of Class (1)
- ---------------------------------------------------------------------------------------------------------------------------
Directors and Officers
- ----------------------
Norman R. Dobiesz (2)(4) Common Stock 1,307,197 21.9% (3)
2150 Whitfield Industrial Way Preferred Series A Stock 100,000 100%
Sarasota, Florida 34243
Carl S. Levine (2) Common Stock 25,690 * (5)(6)
125 Jericho Turnpike
Jericho, New York 11753
Ewen R. Cameron (2)(4) Common Stock 161,786 2.7% (5)(7)
2150 Whitfield Industrial Way
Sarasota, Florida 34243
Patrick G. Min (4) Common Stock 15,455 * (5)
2150 Whitfield Industrial Way
Sarasota, Florida 34243
Gregory G. Barr (2) Common Stock 8,000 * (5)(8)
P. O. Box 413040
Naples, Florida 34101
Peter G. Tuckerman (4) Common Stock 29,567 * (5)(10)
2150 Whitfield Industrial Way
Sarasota, Florida 34243
Robert B. Ramey (4) Common Stock 42,080 * (5)(11)
2150 Whitfield Industrial Way
Sarasota, Florida 34243
Richard L. Stevens (2) Common Stock 0 *
5364 Ehrlich Road
Tampa, Florida 33602
All Directors and Officers as Common Stock 1,589,755 25.8%
a Group (8 persons)
Greater than 5% Ownership (9)
- -------------------------
Finova Mezzanine Capital Corp. Preferred Series B
500 Church Street, Suite 200 Convertible Stock 12,625 100%
Nashville, Tennessee 37219 Common Stock 1,904,829 25.3%
Harris Corporation Preferred Series C
1025 West NASA Boulevard Convertible Stock 40,000 100%
Melbourne, Florida 32919 Common Stock 1,454,545 19.7%
________________________________
* Less than one percent
52
(1) Does not include an aggregate of 951,000 shares of Common Stock which
may be issued upon exercise of incentive stock options granted or which
could be granted under the Company's 1995 Incentive Stock Option Plan.
(2) Director of the Company.
(3) Includes 56,000 shares owned by virtue of 100% ownership of H & N
Management Co., Inc. ("H&N"), 1,140,000 shares owned by virtue of 100%
ownership of W&D Consultants, Inc., 4,455 shares owned by virtue of 67%
ownership of Whitfield Capital of Sarasota, Inc., and 30,000 exercisable
stock options. Does not include 100,000 shares of Preferred Series A
Stock owned by Mr. Dobiesz, each such share entitling the holders to
cast 400 votes, in any matter submitted for vote of the holders of
common stock.
(4) Executive Officer of the Company named in Item 11 of this Report on Form
10-K.
(5) Beneficially owns less than 1% of the Company's outstanding Common
Stock.
(6) Includes: (i) 2,000 shares held by Mr. Levine's wife; (ii) 950 shares
held by Mr. Levine's wife, as custodian for Mr. Levine's children,
respecting which shares Mr. Levine disclaims beneficial ownership; (iii)
2,240 shares owned directly by Mr. Levine and 10,500 shares owned by the
Carl S. Levine IRA; and (iv) 10,000 exercisable stock options.
(7) Includes 130,000 shares of exerciseable stock options.
(8) Includes 2,000 shares owned jointly with Mr. Barr's wife. Includes 6,000
shares of exercisable stock options.
(9) The information concerning these 5% or greater stockholders is based
solely on information contained in Schedule 13D filings each of them
made with the SEC.
(10) Includes 22,000 shares of exercisable stock options.
(11) Includes 32,000 shares of exercisable stock options.
Change of Control
The holders of the Preferred Convertible Series B 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 Preferred
Convertible Series B Stock shall be in arrears.
Equity Compensation, Plan Information
The following table presents information as of December 31, 2002,
relating to our equity compensation plans:
Plan Category Number of Securities Weighted Average Number of
to be Issued upon Exercise Price of Securities Remaining
Exercise of Outstanding Options Available for
Outstanding Options Future Issuance
- ----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders:
1995 Incentive Stock
Option Plan 481,200 $1.75 1,301,000
53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective August 31, 2001 the Company entered into five year employment
agreements with Ewen R. Cameron, President and CEO, and Norman R. Dobiesz,
Senior Vice President Business Development. See Executive Compensation -
Employment Agreements.
Effective September 9, 2002 the Company entered into three year
employment agreements with Robert B. Ramey, Vice President Manufacturing and
Patrick G. Min, Vice President Finance and CFO. See Executive Compensation -
Employment Agreements.
The Company had an outstanding note payable to its President and CEO,
which was paid in full plus interest at September 18, 2002 for $73,380. The
balance at December 31, 2001 and 2000 was $69,350 and $64,035, respectively.
The Senior Vice President Business Development 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,
2002 and 2001 was $347,958 and $320,508, respectively.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Chief Executive Officer, Ewen R. Cameron, and the Chief Financial
Officer, Patrick G. Min, evaluated the effectiveness of Teltronics' disclosure
controls and procedures as of a date within 90 days of the filing of this report
(the "Evaluation Date"), and concluded that, as of the Evaluation Date,
Teltronics' disclosure controls and procedures were effective to ensure that
information Teltronics is required to disclose in its filings with the
Securities and Exchange Commission under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms, and to ensure that information required to
be disclosed by Teltronics in the reports that it files under the Exchange Act
is accumulated and communicated to Teltronics' management, including its
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
Change to Internal Controls and Procedures for Financial Reporting
There were no significant changes to Teltronics' internal controls or
in other factors that could significantly affect these controls subsequent to
the Evaluation Date.
54
PART IV
ITEM 15. 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 22.
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts is on page 56.
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.
(3) See Item 15(c) below.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the fourth quarter of
fiscal year ended December 31, 2002.
(c) Exhibits: The exhibits listed on the Exhibit Index are filed as part
of, or incorporated by reference into, this Report.
(d) Financial Statement Schedules: See Item 15(a) above.
55
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions Additions
Balance at Charged to Charged Balance at
Beginning Costs and to Other end of
Description of Period Expenses Accounts Writeoffs Period
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended December 31, 2002 $469,860 $226,462 -- $ (296,712) $399,610
Year ended December 31, 2001 278,500 191,360 -- -- 469,860
Year ended December 31, 2000 210,000 89,199 -- (20,699) 278,500
Reserve for slow-moving inventories:
Year ended December 31, 2002 $1,235,000 $2,290,080 -- $(1,374,080) $2,151,000
Year ended December 31, 2001 1,171,586 63,414 -- -- 1,235,000
Year ended December 31, 2000 709,340 462,246 -- -- 1,171,586
Valuation allowance for deferred tax assets:
Year ended December 31, 2002 $6,160,591 -- $1,640,119 -- $7,800,710
Year ended December 31, 2001 3,779,509 -- 2,381,082 -- 6,160,591
Year ended December 31, 2000 3,267,493 -- 512,016 -- 3,779,509
56
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 31, 2003 By: /s/ Patrick G. Min
-------------------
Patrick G. Min
Vice President Finance and
Chief Financial 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 31, 2003
- -------------------------------- Chief Executive Officer
Ewen R. Cameron
/s/ Patrick G. Min Vice President Finance, Chief Financial March 31, 2003
- -------------------------------- Officer, Secretary and Treasurer
Patrick G. Min
/s/ Norman R. Dobiesz Director March 31, 2003
- --------------------------------
Norman R. Dobiesz
/s/ Carl S. Levine Director March 31, 2003
- --------------------------------
Carl S. Levine
/s/ Gregory G. Barr Director March 31, 2003
- --------------------------------
Gregory G. Barr
/s/ Richard L. Stevens Director March 31, 2003
- --------------------------------
Richard L. Stevens
57
CERTIFICATION
-------------
I, Ewen R. Cameron, certify that:
1. I have reviewed this annual report on Form 10-K of Teltronics, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Teltronics, Inc. as of, and for, the periods presented in this annual report;
4. Teltronics, Inc.'s other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for Teltronics, Inc. and we have;
(a) designed such disclosure controls and procedures to ensure that
material information relating to Teltronics, Inc., including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of Teltronics, Inc.'s disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
of the Evaluation Date;
5. Teltronics, Inc.'s other certifying officer and I have disclosed,
based on our most recent evaluation, to Teltronics, Inc.'s auditors and the
audit committee of Teltronics, Inc.'s board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect Teltronics, Inc.'s ability to record,
process, summarize and report financial data and have identified for Teltronics,
Inc.'s auditors any material weaknesses in internal controls; and
(b) any fraud, whether not material, that involves management or other
employees who have a significant role in Teltronics, Inc.'s internal controls;
and
6. Teltronics, Inc.'s other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Ewen R. Cameron
- -------------------------------------
Ewen R. Cameron
Director, President and Chief
Executive Officer
58
CERTIFICATION
-------------
I, Patrick G. Min, certify that:
1. I have reviewed this annual report on Form 10-K of Teltronics, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Teltronics, Inc. as of, and for, the periods presented in this annual report;
4. Teltronics, Inc.'s other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for Teltronics, Inc. and we have;
(a) designed such disclosure controls and procedures to ensure that
material information relating to Teltronics, Inc., including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of Teltronics, Inc.'s disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
of the Evaluation Date;
5. Teltronics, Inc.'s other certifying officer and I have disclosed,
based on our most recent evaluation, to Teltronics, Inc.'s auditors and the
audit committee of Teltronics, Inc.'s board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect Teltronics, Inc.'s ability to record,
process, summarize and report financial data and have identified for Teltronics,
Inc.'s auditors any material weaknesses in internal controls; and
(b) any fraud, whether not material, that involves management or other
employees who have a significant role in Teltronics, Inc.'s internal controls;
and
6. Teltronics, Inc.'s other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Patrick G. Min
- --------------------------------------------
Patrick G. Min
Vice President/Finance and
Chief Financial Officer
59
EXHIBIT INDEX
(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 filed April 2, 1997.
4.1 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 5 to Teltronics' Form 8-K filed
October 7, 1996.
4.2 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 3.1 to Teltronics' Form
8-K filed March 9, 1998.
4.3 Amended Designation of Teltronics, Inc. filed with the Delaware
Secretary of State on February 25, 1998. Filed as Exhibit 3.2 to
Teltronics' Form 8-K filed March 9, 1998.
4.4 Certificate of Designations Establishing Series of Shares and Articles
of Amendment of Teltronics, Inc. filed with the Delaware Secretary of
State on March 27, 2002. Filed as Exhibit 3.6 to Teltronics' Form
10-K filed April 1, 2002.
4.5 Amended Designations Establishing Series of Shares and Articles of
Amendment of Teltroncis, Inc. filed with the Delaware Secretary of
State on April 29, 2002. Filed as Exhibit 3 to Teltronics' Form 10-Q
filed August 14, 2002.
10.1 Loan and Security Agreement between Sirrom Capital Corporation and
Teltronics, Inc. and its Subsidiaries dated February 25, 1998. Filed
as Exhibit 10.4 to Teltronics' Form 8-K filed March 9, 1998.
10.2 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 10.5 to Teltronics' Form
8-K filed March 9, 1998.
10.3 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 10.6 to Teltronics' Form 8-K filed
March 9, 1998.
10.4 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 10.7 to Teltronics' Form 8-K
filed March 9, 1998.
10.5 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 10.8 to Teltronics' Form 8-K
filed March 9, 1998.
10.6 Registration Rights Agreement dated February 25, 1998 between
Teltronics, Inc. and Sirrom Capital Corporation. Filed as Exhibit
10.9 to Teltronics' Form 8-K filed March 9, 1998.
10.7 Agreement of Sale dated March 5, 1998 between AT Supply, Inc. and AT2
Communications, Incorporated. Filed as Exhibit 10.7 to Teltronics'
Form 8-K filed March 19, 1998.
10.8 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.
Filed as Exhibit 10.1 to Teltronics' Annual Report on Form 10-K filed
March 31, 1999.
10.9 Global Amendment dated March 29, 1999 between Sirrom Capital
Corporation and Teltronics, Inc. and its Subsidiaries. Filed as
Exhibit 10.1 to Teltronics' Form 10-Q filed May 14, 1999.
10.10 Amended and Restated Senior Secured Promissory Note in the amount of
$1,000,000.00 dated and delivered March 29, 1999 by Teltronics, Inc.
to Sirrom Capital Corporation. Filed as Exhibit 10.2 to Teltronics'
Form 10-Q filed May 14, 1999.
10.11 Amended and Restated 12% Subordinated Secured Debenture Due
February 13, 2002 dated and delivered March 29, 1999 by Teltronics,
Inc. to Sirrom Capital Corporation. Filed as Exhibit 10.3 to
Teltronics' Form 10-Q filed May 14, 1999.
60
10.12 Lease Rider No. 990325 dated March 25, 1999, between Teltronics, Inc.
and SunShore Leasing Corporation. Filed as Exhibit 10.4 to
Teltronics' Form 10-Q filed May 14, 1999.
10.13 Amended and Restated Employment Agreement between Teltronics, Inc. and
Ewen R. Cameron dated May 3, 1999. Filed as Exhibit 10.1 to
Teltronics' Form 10-Q filed August 2, 1999.
10.14 Amended and Restated Employment Agreement between Teltronics, Inc. and
Norman R. Dobiesz dated May 3, 1999. Filed as Exhibit 10.2 to
Teltronics' Form 10-Q filed August 2, 1999.
10.15 Agreement of Sale dated December 31, 1999 between Teltronics, Inc. and
Telident, Inc. Filed as Exhibit 10.1 to Teltronics' Form 8-K filed
January 14, 2000.
10.16 Amendment to Agreement of Sale dated February 16, 2000 between
Teltronics, Inc., and Telident, Inc. Filed as Exhibit 10.1 to
Teltronics' Form 8-K/A filed February 24, 2000.
10.17 Asset Sale Agreement dated June 30, 2000 by and between Teltronics,
Inc. and Harris Corporation. Filed as Exhibit 10.1 to Teltronics'
Form 8-K filed July 12, 2000.
10.18 Amended Agreement dated October 30, 2000 between Harris Corporation
and Teltronics, Inc. Filed as Exhibit 10 to Teltronics' Form 10-Q
filed November 13, 2000.
10.19 Amended and Restated Employment Agreement between the Company and
Ewen R. Cameron dated August 31, 2002 Filed as Exhibit 10.1 to
Teltronics' Form 10-Q filed November 13, 2001.
10.20 Amended and Restated Employment Agreement between the Company and
Norman R. Dobiesz dated August 31, 2001 Filed as Exhibit 10.2 to
Teltronics' Form 10-Q filed November 13, 2001.
10.21 Amended, Restated and Consolidated Secured Promissory Note restated as
of March 28, 2002 delivered to Harris Corporation. Filed as Exhibit
10.21 to Teltronics' Form 10-K filed April 1, 2002.
10.22 Third Amended and Restated Senior Secured Promissory Note in the
amount of $1,000,000 dated and delivered May 2, 2002 by Teltronics,
Inc. to Finova Mezzanine Capital, Inc. f/k/a/ Sirrom Capital
Corporation. Filed as Exhibit 10.1 to Teltronics' Form 10-Q filed
August 14, 2002.
10.23 Amended and Restated Stock Purchase Warrant covering 525,000 shares
Common Stock of Teltronics, Inc. issued May 2, 2002 to Finova
Mezzanine Capital, Inc. f/k/a Sirrom Capital Corporation. Filed as
Exhibit 10.2 to Teltronics' Form 10-Q filed August 14, 2002.
10.24 Amended and Restated Stock Purchase Warrant covering 365,000 shares
Common Stock of Teltronics, Inc. issued May 2, 2002 to Finova
Mezzanine Capital, Inc. f/k/a Sirrom Capital Corporation. Filed as
Exhibit 10.3 to Teltronics' Form 10-Q filed August 14, 2002.
10.25 Employment Agreement between the Company and Patrick G. Min dated
September 9, 2002. Filed as Exhibit 10.1 to Teltronics' Form 10-Q
filed November 14, 2002.
10.26 Employment Agreement between the Company and Robert B. Ramey dated
September 9, 2002. Filed as Exhibit 10.2 to Teltronics' Form 10-Q
filed November 14, 2002.
10.27 Thirteenth Amendment to Loan and Security Agreement dated October 16,
2002 between The CIT Group/Business Credit, Inc. and Teltronics. Filed
as Exhibit 10.3 to Teltronics' Form 10-Q filed November 14, 2002.
10.28 First Amendment to Loan and Security Agreement, Fourth Amended and
Restated Senior Secured Promissory Note and Pledge and Security
Agreement dated September 30, 2002 between Finova Mezzanine Capital
Inc. and Teltronics, Inc. Filed as Exhibit 10.4 to Teltronics' Form
10-Q filed November 14, 2002.
10.29 Agreement of Purchase and Sale of Vortex Technology dated October 31,
2002 between Tri-Link Technologies Inc. and Teltronics, Inc. Filed as
Exhibit 10.5 to Teltronics' Form 10-Q filed November 14, 2002.
21* List of Subsidiaries.
23* Consent of Independent Certified Public Accountants, Ernst & Young
LLP.
99.1* Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350.
99.2* Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350.
- ----
(*) Filed as an Exhibit to this Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.
61