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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A-1
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)
For the transition period from to
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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)
Issuer's telephone number, including area code: (813) 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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S B is not 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-KSB or any amendment to this Form 10-KSB, [ X ].
Issuer's revenues for its most recent fiscal year. $11,789,000
The aggregate market value (closing bid price) of the Registrant's common stock
held by non-affiliates at March 29, 1994, was approximately $2,000,000. For
purposes of computing such market value, the Registrant has assumed that
affiliates include only its executive officers, directors and 5% stockholders.
This determination of affiliate status has been made solely for the purpose of
this Report, and the Registrant reserves the right to disclaim that any such
individual is an affiliate of the Registrant for any other purposes.
Note: If determining whether a person is an market value of the common equity
held by non-affiliate will involve an unreasonable effort and affiliates on the
basis of reasonable assumptions, if expense, the issuer may calculate the
aggregate the assumptions are stated.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of March 29, 1994, 14,344,000 shares of the Registrant's common stock, par
value $.001, were issued and outstanding.
Exhibit index appears on pages 24. Total pages 60.
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PART 1
ITEM 1. BUSINESS
GENERAL
Teltronics, Inc. ("Company"), a Delaware corporation incorporated on
February 15, 1989, and successor to Comnet Systems, Inc. ("Comnet"), designs,
develops, manufactures and markets telecommunication equipment and software
products. All reference herein to Teltronics or the Company shall include the
operations of Comnet from its date of inception in June 1988 until its merger
with Teltronics in February 1989. In November 1988, Comnet acquired
substantially all the assets and certain liabilities of a division of BRIntec
Systems Corporation known and operated as the Teltronics Division ("Teltronics
Division").
On December 28, 1989, the Company entered into an Agreement of Sale
("Sale Agreement") with COM DEV, Inc., ("Com Dev"), a Florida corporation
located in Sarasota, Florida. Pursuant to the Sale Agreement the Company
agreed to purchase Com Dev. In the 1990 fiscal year, the Company acquired
substantially all of the assets of Com Dev subject to certain assumed
liabilities and caused TCT, Inc. ("TCT"), the Company's wholly-owned
subsidiary, to acquire certain assets and assume certain liabilities of Com
Dev's wholly-owned subsidiary, TC Telemanagement, Inc. Subsequent to TCT's
acquisition of assets of TC Telemanagement, Inc., the Company caused TCT to
change its name to TC Telemanagement, Inc. In January of 1993, TC
Telemanagement, Inc. moved to Sarasota and its operations were integrated with
Teltronics, Inc.
On August 24, 1991, the Company entered into a First Amendment to the
Agreement and Plan of Reorganization ("Reorganization Agreement") with
ComCentral Acquisition Corp. ("CCAC"), a newly formed wholly-owned subsidiary
of the Company incorporated in the State of Delaware, Catalyst Communications
Corporation, a Utah corporation now known as ComCentral Corp. ("ComCentral")
and certain shareholders of ComCentral. ComCentral, and its wholly-owned
subsidiary ComCentral, Inc. have been providing long distance telecommunication
services since 1989. Pursuant to the Reorganization Agreement, the Company
agreed with certain shareholders of ComCentral to exchange 3,650,000 shares of
the Company's $.001 par value common stock ("Company Stock") for 80% of the
total number of shares of all other classes of stock of ComCentral. The
transaction was closed subject to an escrow agreement ("Escrow") under which
the Company's stock was held by CCAC as escrow agent pending the successful
offering of securities of ComCentral. In addition, 1,191,940 shares of the
Company Stock remained in escrow for a period of one year commencing August 24,
1991 to secure the obligations of certain of the former ComCentral shareholders
under the Reorganization Agreement.
ComCentral (File No. 33-42635) is a separate reporting company filing
periodic reports pursuant to Section 12(9) under Securities Act of 1934 as
amended. The Company will from time to time cross-reference to information
more fully described in the ComCentral Form 10-K for the fiscal year ended
December 31, 1993. A number of transactions as they relate to ComCentral have
occurred which are more fully described in the notes to the financial
statements (see page F-10, Note 3). At December 31, 1993, the Company owns
502,000 shares of ComCentral common stock (representing approximately 3% of the
outstanding common stock) which are restricted for two years under Rule 144 of
the Securities and Exchange Commission and are recorded at the amount of
intercompany debt forgiven, which approximates the fair market value of the
stock on the date of issuance.
The Company employs 200 people as of February 28, 1994.
In December 1992 the Company entered into an exclusive licensing
agreement with Systems Reliability, Inc. (SRI) of Sarasota, Florida to sell and
distribute System Reliability's ORBi-TEL line of Call Accounting products in
North and South America.
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INDUSTRY SEGMENTS
Financial Information Relating to Industry Segment
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
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PRODUCT SOFTWARE CONSOLIDATED
SEGMENT SEGMENT TOTALS
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<S> <C> <C> <C>
Total revenues $10,341,189 $1,447,324 $11,788,513
Operating income (loss) (1,332,098) (370,825) (1,702,923)
Identifiable assets 8,356,067 2,391,634 10,747,701
Depreciation and
amortization 378,510 484,828 863,338
Capital expenditures 181,434 --- 181,434
</TABLE>
The Software Segment relates wholly to the business of the Company, no revenue
has been recorded in 1993 for the Service Segment (ComCentral).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
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PRODUCT SERVICE CONSOLIDATED
SEGMENT SEGMENT TOTALS
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<S> <C> <C> <C>
Total revenues $11,811,130 $8,205,215 $20,016,345
Operating income (loss) 400,689 143,070 543,759
Identifiable assets 7,508,711 286,939 $ 7,795,650
Depreciation and
amortization 331,772 288,637 620,409
Capital expenditures 499,132 256,336 755,468
</TABLE>
The Service Segment detailed above relates to 8 months ended August 31, 1992 of
ComCentral.
DESCRIPTION OF BUSINESS
PRODUCTS PRODUCED AND SERVICES PROVIDED
The Company designs, develops, manufactures, and markets electronic
hardware and application software for the telecommunications marketplace, as
well as engaging in contract manufacturing.
During the year ended December 31, 1993, sales to the Company's five
largest customers (Telematic Communications, GTE, C&L Communications, BellSouth
Communications, and Fujitsu Business Communications) accounted for
approximately 50% of the total sales revenue. Two of these customers
represented more than 10% of net sales however the Company does not believe it
is dependent on any one customer.
In 1993, Teltronics, Inc. reorganized, consolidating the businesses of
TC Telemanagement, Inc., Teltronics, Inc. and Systems Reliability, Inc. into
one company. This resulted in reducing overhead and better focusing the Company
on increasing sales through major distributors. The Company's product
development strategy continues to be the enhancement of existing product lines
and the completion of several new products.
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The Company's key markets within the telecommunications industry
include: Long Distance Management, Remote Maintenance, Call Accounting and
Telecommunications Management, and ACD Information Management. External to
telecommunications, but also considered a key market is Contract Manufacturing.
LONG DISTANCE MANAGEMENT ("LDM")
In today's largely deregulated telecommunications industry, there are
many carriers. Some of the better known are AT&T, Sprint, and MCI, plus over
300 smaller companies who sell or re-sell long distance and intralata telephone
service. These carriers compete to provide their customers with lower priced
telephone call routing, and until recently, they were known as Interexchange
Carriers (IXCs).
The advent of intralata competition changed the definition of these
carriers, and added a new dimension to the market for the Company's LDM
products. Additional regulatory changes are now being considered that will
allow these carriers to compete in the area of local call traffic; this will
further broaden the market for the Company's products.
The Company's LDM products assist their owners in creating revenue.
These products are divided in two categories: the Network Manager products and
the Automatic Call Processor products. Both categories have evolved in great
part as a result of deregulation of the telecommunications industry in the
United States.
The first category consists of the Network Manager products, which are
purchased primarily by long distance and intralata telephone carriers. The
Network Manager products analyze the digits dialed by a caller and determine
which calls are best handled by the carrier. They translate the caller's
dialed digits as required to access the carrier's facilities; this is done in
such a way that it is totally transparent to the caller.
Automatic Call Processors, the second category of LDM products, are
designed to address vertical market niches such as the lodging industry and
correctional institutions, where resale of telephone services is permitted.
These products provide a transaction based revenue stream for the owner of the
product by producing a margin between what may legally be charged for calls and
the price the owner pays to process the call through the telephone network.
Each time the regulations change, a niche opens for LDM products that
can, in general, translate the old way of doing things to the new. The Company
is now seeing continued regulatory changes in the United States, and an
accelerated rate of deregulation in other parts of the world. As deregulation
and competition increase, the Company is adapting its LDM products to take
advantage of these domestic and international opportunities.
Management of the Company believes that the Company has established a
strong competitive position in the Long Distance Management market. The
Company's products competing in the Long Distance Management market include the
Network Manager, Network Manager +, ACP PLUS, ACP+ONE, and the Confinement
Series. A brief description of these products follows.
NETWORK MANAGER AND NETWORK MANAGER +. These two products are
functionally identical but are available in different physical configurations to
address varying market requirements.
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The principle function of the Network Manager is to route calls from
their originating point to the desired carrier. This is accomplished by
analyzing the digits dialed by a caller and translating them to the necessary
digit patterns to be dialed on the public telephone network. The Network
Manager can route individual calls to the user's most cost-effective long
distance carrier based on the telephone number dialed.
The Network Manager also provides cost-effective long distance calling
and toll restriction for all tone and rotary dial telephones. The Network
Manager screens calls and can block, a) calls without a proper authorization
code, b) all or certain local calls based on the number dialed, and c) all or
certain long distance calls based on the number dialed (including special
access phone numbers such as those beginning with 950 and 976).
The design of the Network Manager is modular and allows the customer
to purchase the exact number of lines required. This is often a competitive
advantage in very small and very large applications. The Network Manager + is
a value engineered, four line product that addresses a specific high volume
application. It is designed for quick installation and simple programming
through automated tools provided by the Company.
The Network Manager and Network Manager + are used primarily in
businesses, schools, prisons and hospitals. The market for Network Managers is
mature and stable. Teltronics has approximately a 30% market share in the
United States.
AUTOMATED CALL PROCESSOR ("ACP") PRODUCTS. The ACP product family is
designed to automatically process calls that would normally require an operator
or would utilize the automated calling card functions provided by the telephone
company. Typical examples are calls charged to a telephone company calling card
or collect calls. In the industry, the calls are referred to as 0+ calls because
they all start by dialing 0 plus the destination number.
ACP products process 0+ calls. When, for example, a caller dials 0+ a
destination number to make a call charged to a telephone company calling card,
the ACP intercepts the destination number before it is dialed onto the public
telephone network. The ACP then presents the industry standard "bong" tone,
and prompts the caller to enter the calling card number. Once completed, the
ACP dials a 1+, direct-distance-dialed call to the destination and connects the
caller. This 1+ call is placed over very low cost long distance facilities
that have been contracted for by the owner of the ACP.
The destination number and the calling card number are stored in the
ACP along with the duration of the call, and this transaction data is collected
automatically, via teleprocessing, by host software marketed by the Company.
The calls are priced at the permitted operator-assisted rates, sent to a
clearing house to be processed and ultimately are placed on the caller's home
telephone bill. Thus, by charging the permitted premium rates for these 0+
calls, but paying a lower charge to route the call via a low cost carrier, the
owner of the ACP realizes a profit on each call.
ACP PLUS. The first member of the ACP product family is ACP PLUS. It
provides the 0+ re-selling functions described previously.
ACP PLUS also provides a means of adhering to an industry regulation
which does not permit a re-seller to knowingly bill for an unanswered call.
Since the public telephone network does not provide any formal indication to
the caller that a call has been answered, a significant technical
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challenge is presented to the ACP. The ACP PLUS uses sophisticated hardware
and software to "listen" for indications that a call has been answered.
ACP + ONE. For the reasons previously stated, a PABX in a hotel
cannot determine when a direct-distance-dialed call (i.e. 1+) from a guest
room is answered. This often leads to erroneous billing of unanswered calls, a
front desk argument, and an unhappy hotel guest. In addition, PABXs are often
configured to ignore calls of short duration, and such call records are
discarded as "probably not answered." This results in lost revenue for the
hotel which may be significant, even on local calls, since permitted per-call
surcharges are not collected.
ACP + ONE provides a solution to these billing problems. It has all
of the features of ACP PLUS, but also detects when 1+ calls have been answered.
The record of these calls is corrected to show the proper duration and then
sent to the hotel's billing system. In this way, all answered calls may be
billed regardless of duration, and calls that were not answered will not be
billed.
THE CONFINEMENT SERIES. The Confinement Series, introduced in 1990,
is a special adaptation of the ACP product line that addresses the unique
requirements of correctional institutions.
Correctional institutions are permitted to re-sell calls placed by
inmates; most frequently the inmates are allowed to place only collect calls.
The Confinement Series provides a revenue stream by again allowing calls to be
charged at a permitted premium rate and processed at a much lower cost. This
product is also used to prevent fraudulent calling that is common in these
institutions.
REMOTE MAINTENANCE
Emphasis on service as a product (the maintenance and repair of
systems), caused a market for automated fault/alarms management systems to
emerge in the 1980's. The market is based on the need to monitor a population
of remotely located, computer based systems from a Technical Assistance Center
(TAC.) This capability is extremely important in the telecommunications
industry as well as in other service environments. To effectively address this
market, service providers need state of the art technology to manage and
maintain their equipment, and to project a proactive service image to their
customers.
Management of the Company believes that it has established a strong
competitive position in the Remote Maintenance market through sales of the
following products: Dispatcher, Site Event Buffer-II, and IRIS.
DISPATCHER. The Dispatcher is a microprocessor based monitoring
system that is co-located with the remote system to be monitored for faults.
These remote systems are often referred to as Network Elements.
Most Network Elements, such as PABXs or voice mail systems, generate
maintenance information as events occur; they may also be queried for this
information. The Dispatcher constantly evaluates the maintenance data stream
from the Network Element. Once a problem has been identified, the Dispatcher
automatically calls the Technical Assistance Center (TAC) responsible for
servicing the Network Elements and reports the specific location and the
associated problem. The Dispatcher also provides secure access to the Network
Element enabling the TAC to remotely perform scheduled or emergency maintenance
while hackers and other unauthorized users are blocked from access.
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GTE, PacTel Meridian Systems, NYNEX Meridian Systems, Southwestern
Bell, and the Puerto Rican Telephone Company (PRTC) use the Dispatcher as part
of an integrated system to provide enhanced maintenance services to their
customer bases.
SITE EVEN BUFFER-II ("SEB-II"). Like the Dispatcher, the SEB-II
monitors remotely located Network Elements, but is a much more sophisticated
system.
The SEB-II may simultaneously monitor up to four Network Elements. In
addition to fault/alarm reporting and security functionality that exceeds that
of the Dispatcher, the SEB-II also has data storage and retrieval capabilities.
Its multi-port configuration allows the SEB-II to concurrently collect and
store various forms of data, such as Station Message Detail Records (SMDR),
Automatic Call Distribution (ACD) data, and PABX traffic information. By using
one of the Company's Management Information Systems (MIS), this data may be
retrieved and processed into useful reports.
The SEB-II is a multi-application product whose architecture permits
its operational characteristics to be completely changed by remotely
downloading new software. Introduced in mid-1991, the SEB-II replaces the
original Site Event Buffer-I (SEB-I) with a product that offers increased
functionality, twice the data storage capacity, and support for additional
Network Elements.
In late 1993, development efforts were initiated which provided for
scripts, written in a high-level language, that may be used to create a
dialogue between the SEB-II and the Network Element. This dialogue will allow
the SEB-II to clear fault conditions present in the Network Element and to
perform more complex analysis of maintenance data. Included in these
development activities is the design of high speed internal modems required for
more demanding applications and for international markets. These developments
are scheduled to be completed in 1994.
BellSouth, GTE, PacTel Meridian Systems, NYNEX Meridian Systems, Bell
Atlantic Meridian Systems, British Columbia Telephone, Mitel, NEC, ROLM, and
Critical Services Management use SEBs and SEB-IIs as part of an integrated
system to provide enhanced maintenance services to their customer bases.
IRIS. The IRIS system is a UNIX-based software package that is used
by service providers in Technical Assistance Centers to monitor alarms and to
process data collected from the Network Elements.
In operation, Dispatchers and SEBs associated with remote Network
Elements report events to IRIS. These events may represent alarm conditions in
the Network Elements, or may simply be status information to indicate that
everything is working properly. Using IRIS, the service provider often
resolves problems before the customer is aware of them. IRIS 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.
The status of Network Element alarms is maintained in IRIS, and the
service provider may obtain reports on alarm status at any time. Comprehensive
reports that provide statistical analysis of received alarms are also
available. Service personnel use them to isolate faulty components, identify
trends, and track the historical performance of Network Elements.
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IRIS is currently available on a personal computer platform for the
medium sized service provider, and on the IBM RS/6000 family of RISC-based
super-minicomputers for those customers with a large population of Network
Elements and associated Dispatchers or SEBs.
IRIS is used by BellSouth, GTE, PacTel Meridian Systems, NYNEX
Meridian Systems, Bell Atlantic Meridian Systems, British Columbia Telephone,
Mitel, NEC, ROLM, and Critical Services Management as the Management
Information System that is the heart of their service offerings.
IRIS TRAFFIC. This optional IRIS software module is a traffic
analysis system that allows service providers to perform traffic studies on
Northern Telecom SL-1 and Meridian-1 PABX systems. The information created by
this application assists the service provider in "fine tuning" their customer's
PABX to operate at peak efficiency. The IRIS Traffic system has proven to be a
very effective revenue generator for service providers by allowing them to
identify PABX upgrades to sell to their customers and provide enhanced
performance or new features.
TELECOMMUNICATION MANAGEMENT
Telemanagement and Call Accounting are very competitive markets in
North America with over 150 companies battling for market share. Management
believes that four factors ensure that the Company will compete favorably in
these markets.
These competitive advantages are a) the securing of the exclusive
North and South American distribution license for the ORBi-TEL/UNIX product
line, b) introduction of major improvements in the ORBi-TEL/UNIX product
offering, c) the negotiation of a favorable distribution agreement with the
software developer (MDR Telemanagement Limited) for an OEM version of their
DOS/Windows product.
The products with which the Company competes in the Telemanagement and
Call Accounting markets are CallQuest-IV, ORBi-TEL/DOS, ORBi-TEL/Windows,
ORBi-TEL/UNIX, and ORBi-TEL/CO. A brief description of these products follows.
CALLQUEST IV. CallQuest IV is a Call Accounting software package that
runs under DOS on a personal computer. It is a highly effective Call
Accounting system that meets the needs of both the hospitality industry and the
general business environment.
CallQuest IV is simple to use and has great flexibility in call
pricing and support of various long distance tariffs. The system is targeted at
single site telephone systems with 75 to 1000 stations, and is marketed
primarily through distributors who sell and service PABXs and key systems.
ORBI-TEL/DOS AND ORBI-TEL/WINDOWS. ORBi-TEL/DOS and ORBi-TEL/Windows
are Telemanagement software packages that run on a personal computer under DOS
and Windows respectively. While functionally very similar, ORBi-TEL DOS and
ORBi-TEL Windows coexist because Windows, while popular, is not always the
customer's first choice for an operating system.
The ORBi-TEL family of products provides comprehensive Call Accounting
as well as several other Telemanagement modules: Inventory, Work Order, and
Directory Look-up. Both DOS and Windows versions support multiple PABX sites
by polling data from collection devices associated with remote PABXs.
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ORBi-TEL/DOS and ORBi-TEL/Windows are targeted at users with PABXs
ranging in size from 100 stations to 10,000 stations and multiple sites are
supported. These products are marketed directly to end-users and through
distributors who sell and service PABXs and key systems.
ORBI-TEL/UNIX. ORBi-TEL/UNIX is a high end Telemanagement software
package. It has modular architecture and is designed to accommodate moderate
sized to extremely large single site users, as well as large multi-site
networks. It is comprised of ten integrated modules which are added to the core
system as required to address the specific application.
ORBi-TEL/UNIX is built around the UNIX operating system and the
INFORMIX relational database management system. These building blocks provide
for simultaneous access by multiple users and for efficient access to, and
correlation of, data in the various modules. The integrated modules available
are; a) Call Accounting, b) Traffic Analysis, c) Inventory, d) Work Order, e)
Trouble Ticket, f) Directory Services, g) Fault/Alarms Management, h) Billing,
i) Cable & Wire Management, and j) PABX Management. An ad hoc report writer is
also available to provide users with flexibility in generating meaningful
reports from the various modules.
The product has been enhanced by the Company to support the Site Event
Buffer-II (SEB-II) described previously as the data collection device in all
multi-site applications. The SEB-II is also used to monitor and report alarm
conditions to ORBi-TEL's Fault/Alarms Management module.
ORBi-TEL/UNIX is marketed directly to end users throughout North and
South America, and is available through selected premium distributors that
demonstrate an ability to sell and support sophisticated software systems.
ORBI-TEL/CO. A longstanding rivalry for the business telephone
market has existed between the operating telephone companies (Telcos) and
interconnect companies. In recent years, the Telcos have enhanced their central
office based offering (Centrex) to be very competitive in price and feature
content with PABX systems. Because the most requested value-added feature in
the business telephone market today is Call Accounting, the Telcos must be able
to offer PABX-like Call Accounting features to their Centrex customers.
ORBi-TEL/CO provides Telcos with a central office based platform for Call
Accounting services.
ORBi-TEL/CO was derived from the standard ORBi-TEL/UNIX system, and
provides two different feature sets which may be selected on a per customer
basis. First, the system may be configured to deliver call detail records, or
SMDR, to the Centrex customer's location so that a Call Accounting system such
as ORBi-TEL/Windows may be used to further process the data. Alternatively,
the ORBi-TEL system may be configured to provide complete Call Accounting
processing and reporting to the Centrex customer. These reports are available
through teleprocessing or may be provided by the Telco on a service bureau
basis.
ACD INFORMATION MANAGEMENT
The market for software packages that provide information management
tools for telecommunication users is expanding. This is a result of the
evolution of intelligent switching systems that have the capability to generate
various types of statistical information.
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One of the enhanced telecommunication features is Automatic Call
Distribution (ACD). The ACD feature in the switching system provides the
orderly distribution of incoming call traffic to agents manning a call center's
phones, along with messages and music to the calling customer. ACD features
are offered by many switch manufacturers and have created a market for software
applications that help the call center manager to make quick decisions and gain
a historical perspective of call center activity.
Information desired by ACD managers includes a) the number of calls
and duration of calls that were holding for an agent to answer, b) the number
of calls per agent per hour, c) the number of calls received over a particular
set of telephone lines, and d) other productivity information. The Company
markets ACD Management Information Systems (ACD/MIS) that provide this data for
several telephone systems.
SL-1 ACD MANAGEMENT SYSTEM. This ACD/MIS product enhances the
Northern Telecom SL-1 and Meridian-1 family of customer location telephone
systems that offer an embedded ACD function.
This ACD/MIS takes the raw ACD information records generated by the
PABX, and produces reports to manage ACD call activity and ensure optimum
performance of the ACD group's resources. This product is marketed as a
software package and runs on a PC under DOS. The SEB-II is used as the data
collection device for this product.
ACD-100. Northern Telecom's central office system is the DMS100. It
is used by most of the Regional Bell Operating Companies (RBOCs), and other
Telcos to offer regulated telephone services to both residential and business
users. The DMS100 offers ACD functions for the business user as an alternative
to purchasing an ACD system.
The Company's ACD/MIS software for the DMS100 is called ACD-100, and
was developed under contract with BellSouth; it is jointly owned by both
companies. This product uses a real-time, graphical representation to show ACD
agent activity and performance parameters of the ACD system. Comprehensive
reports are available which may be used to identify proper agent staffing for
the desired levels of customer response. The ACD-100 system also offers a Load
Management feature set which allows the call center manager to dynamically
alter DMS100 parameters in response to changing calling loads or traffic
patterns.
ACD-100 is marketed as a software package and is designed to run on a
high-end PC under UNIX. BellSouth sells the product to their central office ACD
customers, and uses the product internally. Other than in the BellSouth
seven-state territory, the Company has complete rights to market the product to
other RBOCs and independent telephone companies.
Management of the Company believes that the demand for this product
will increase as the rivalry between Telcos and the interconnect companies for
central office ACD solutions versus customer owned ACD equipment continues to
intensify in the marketplace.
CONTRACT MANUFACTURING
The size of the Contract Manufacturing industry is currently in excess
of $3 billion annually worldwide, and is growing at 20% per year. Management
recognized that the Company's
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manufacturing costs (particularly labor) were significantly lower than those of
most competitors in the United States and decided to make a trial entry into
the market in 1992.
The Company's initial efforts to gain a foothold in contract
manufacturing were modest in scale and limited to a few select customers.
Encouraged by the success indicators of acceptable profits and high quality
results on smaller projects, and in the belief that a relevant share of the
market could be captured, the Company entered the Contract Manufacturing market
full scale in mid-1993. Results thus far are promising.
The current manufacturing capacity allows for considerable growth of
existing product lines, and will also accommodate a doubling of Contract
Manufacturing activities. Contract Manufacturing enables the Company to profit
from economies of scale through increased purchasing power and utilization of
excess plant capacity, thus reducing direct material costs and overhead on the
Company's baseline products. This will make those products more profitable and
competitive in their respective markets.
PATENTS, COPYRIGHTS AND TRADEMARKS
The Company has no patent or copyright registrations protecting its
existing products. While the Company may in the future apply for patent or
copyright protection for new products, the Company is unlikely to do so because
telecommunications technology changes so rapidly. The Company seeks to protect
its confidential and proprietary information through the enforcement of
confidentiality/non-compete agreements presently being executed by key
employees.
WARRANTY AND SERVICE
The Company provides a limited warranty on its products, for a period
of from 3 to 36 months (depending on the product), under which the Company
agrees to repair or replace, in the Company's sole discretion, units defective
in material or workmanship, provided the equipment has not been subjected to
alteration or abuse. The Company's technical service and engineering staff
provide support services over the telephone to customers with installation or
operational questions. Warranty and other repair services are provided by the
Company at its facility in Sarasota, Florida. To date, warranty expenses have
been insignificant in proportion to the Company's gross revenues.
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 component manufacturers. Purchase orders for
components are placed from one (1) month to six (6) months in advance,
depending on the supply sensitivity of a particular component. All of the
necessary components are available from one of several sources, based upon
current price quotations. The Company believes that several suppliers for its
product components are available. If these suppliers should stop carrying our
manufacturing components for the Company, the Company's operations could,
however, 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, the Company has
not experienced and does not anticipate experiencing any significant difficulty
in obtaining components other than the "COD Requirements". Effective in the
second quarter of 1993, many of the Company's suppliers began requiring the
Company to pay cash on delivery of component shipments to the Company ("COD
Requirements"). Some of those suppliers still require the Company to purchase
on a COD basis.
BACKLOG
The Company's backlog at December 31, 1993 and 1992 was $3,319,000 and
$480,000 respectively. At February 28, 1994 and 1993 the Company's backlog was
$2,297,100 and $720,000 respectively.
11
<PAGE> 12
The Company entered into a software development agreement whereby the
Company will develop certain software for $1,275,000. The Company has billed
$450,000 under this Contract at December 31, 1993. The contract can be
terminated by either party with 60 days notice.
COMPETITION
The Company has one significant competitor in its Long Distance
Management product group (Mitel). There are no significant competitors in the
Alarm Management marketplace. The Call Accounting and ACD Information
Management Markets are saturated with numerous competitors and no one company
dominates the market. Management of the Company believes that 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,
including new technology and/or products for its Call Accounting product group,
as well as development of application software for its products in the Remote
Maintenance and ACD Information Management Markets.
RESEARCH AND PRODUCT DEVELOPMENT
The Company maintains a continuing research and development program
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, 1993, 1992 and 1991 were $1,371,000 (after
capitalization of software development costs), $828,000 (after capitalization
of software development costs), and $1,583,000 respectively.
REGULATION
Part 68 of the Federal Communications Commission ("FCC") Rules ("Part
68") contains the majority of the technical requirements with which telephone
systems must comply to qualify for FCC registration for interconnection to the
public telephone network. Part 68 registration represents a determination by
the FCC that telecommunication equipment interfacing with the public telephone
network complies with certain interference parameters and other technical
specifications. FCC registration for the Company's products has been granted
and the Company intends to apply for FCC registration for all of its new
products.
Certain of the Company's products are also subject to and comply with
regulation under Part 15 of the FCC Rules ("Part 15") which requires equipment
classified as containing a Class A computing device to meet certain radio and
television signal interference requirement. 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.
12
<PAGE> 13
ITEM 2. PROPERTIES
TELTRONICS, INC. - HEADQUARTERS AND PLANT
The Company's main facility consists of approximately 72,000 square
feet, located in a two story concrete and steel building leased from ARE
Sarasota Limited Partnership ("ARE"), a limited partnership ("ARE Lease").
Approximately 36,000 square feet are used for laboratories and offices. The
plant is located at 2150 Whitfield Industrial Way, Sarasota, Florida.
The monthly ARE Lease payment is $42,000. The ARE Lease expires in
August 2005, and may be extended by the Company for two additional five year
periods.
The Company also leases from ARE approximately 7,500 square feet of
warehouse space at 2240 Whitfield Industrial Way, Sarasota, Florida. The
monthly lease payment and terms are included as a part of the ARE Lease.
TC TELEMANAGEMENT, INC. - OFFICES
TCT's office facility consists of 8,500 square feet and is located at
13830 58th Street N., Suite 404, Clearwater, Florida 34620. The space is
leased from Rubin Icot Center Limited ("ICOT lease"). TCT moved into the
Teltronics facility in February 1993.
The monthly ICOT lease payment was $5,200 and increased to $8,100 on
May 1, 1993. The ICOT lease expires on April 30, 1996. These premises have
been sublet to a non-affiliated company.
ITEM 3. LEGAL PROCEEDINGS
The Company is a codefendant in a lawsuit by a former customer of
ComCentral alleging damages in excess of $140,000. The Company disputes the
allegations, however, outside counsel for the Company has advised that no
discovery has been conducted and they cannot offer an opinion as to the
potential liability to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the year ended December 31, 1993.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
On April 3, 1989 the Company filed with the Atlanta Regional Office of
the Securities and Exchange Commission, Registration Statement No. 33-27957-A
on Form S-18 ("S-18 Registration Statement") relating to a public offering of
Units ("Units"), each Unit consisting of four shares of the Company's common
stock, $.001 value per share ("Common Stock"), and two Warrants ("Warrants"),
each Warrant entitling the holder thereof to purchase one share of Common Stock
for $1.75. The S-18 Registration Statement was declared effective on July 21,
1989. The Company closed the offering on August 4, 1989, and sold 600,000
Units, receiving therefrom $3,240,000 prior to deduction of various expenses of
the offering. The Common Stock and Warrants were immediately detachable and
tradable upon the closing. The Company extended the period within which to
exercise the Warrants from January 17, 1990 to April 22, 1991, and reduced the
exercise price to $1.00. On April 22, 1991 the Warrants expired.
The Company's common stock is traded in the over-the-counter market.
As of August 1, 1989, the Company listed its Common Stock for trading on the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ"). The following table sets forth for the fiscal periods indicated
the high and low closing bid quotations in the over-the-counter market for the
Company's common stock as reported on NASDAQ. These quotations represent
inter-dealer prices, without adjustment for retail markups, markdowns or
commissions, and may not represent actual transactions.
COMMON STOCK
<TABLE>
<CAPTION>
1993 1992 1991 1990
Closing Bid Closing Bid Closing Bid Closing Bid
High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD
1st Quarter .63 .44 1.44 .94 1.00 .31 1.47 .88
2nd Quarter 1.06 .63 .94 .53 1.19 .88 1.47 .88
3rd Quarter 1.44 1.22 .69 .31 1.16 .82 .78 .25
4th Quarter 1.28 .88 1.22 .25 1.28 .75 .63 .31
</TABLE>
On March 29, 1994, the closing bid quotation for the Company's common
stock as reported on NASDAQ was $.53. As of March 29, 1994, there were in
excess of 600 shareholders of the Company's common stock. The Company has not
paid cash dividends to holders of its common stock and does not plan
to pay such dividends in the foreseeable future.
14
<PAGE> 15
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
At December 1992 the Company consisted of TC Telemanagement, Inc., Teltronics
and the business of Systems Reliability, all operating as separate entities
from different locations. In order to achieve better communications and
direction, the Company reorganized into one business unit at Teltronics, under
new management. This enabled the restructuring of the Sales and Marketing
departments under a new Vice President. This strategy has resulted in an
increase of sales as demonstrated by the Company's current backlog. At the
same time, Senior Management changes were made in Finance, Engineering,
Manufacturing and Technical Services. This reorganization took place over the
first three quarters of 1993.
In 1993 the Company reported sales of $11.8 million, which were comparable to
the product segment sales of $11.8 million for 1992. The 1992 income statement
includes eight (8) months of fully consolidated ComCentral results. (See Page
F-10, Note 3).
The gross margin for the current year was 49.7% compared to 34% in 1992. This
improvement was a direct result of ComCentral not being a part of the 1993
financial statements.
RESULTS OF OPERATIONS
Net sales for 1993 were $11.8 million compared to $20 million for 1992.
However, the 1992 income statement included eight (8) months of fully
consolidated ComCentral results, which included $8.2 million in sales.
Effective September 1, 1992 the Company changed the method of accounting for
ComCentral from a consolidated presentation to an equity method presentation.
The decline in sales between 1992 and 1993 is a direct result of the change in
the method of accounting for ComCentral.
Operating Income (Loss) fell to $(1,703,000) in 1993 from $544,000 in 1992.
This decrease was primarily the result of reorganizational activities during
the 1st three quarters along with increased spending in the selling and
research and development areas in preparation for increased sales, product
development and market penetration. Positive results from these efforts were
seen in the 4th quarter. The pretax loss for 1993 was $(198,000). In 1992
pretax (loss) was $(3,307,000) primarily as a result of losses incurred by
ComCentral.
The increase in earnings was primarily the result of a gain realized on the
sale of ComCentral stock. In 1993 the Company reported a net income of
$11,000, compared to a net loss of $(2,018,000) in 1992.
General and administrative expenses decreased to $2,520,000 from $2,880,000 in
1992. This was primarily a direct result of the reorganizational activity and
administrative cost cutting measures implemented during the first 3 quarters.
Selling expenses increased to $3,673,000 from $2,585,000 in 1992. This
increase was primarily the direct result of the reorganization of the sales and
marketing areas so as to improve and expand the channels of distribution.
Positive results of this effort are evidenced by the $5 million backlog as of
March 25, 1994.
Research and development expense increased to $1,371,000 from $828,000 in
1992. This increase was the result of a continued effort to develop new and
enhanced products which will contribute substantially to the growth of the
Company's business. The Company capitalizes costs of internally developed
software to be sold after the product is determined to be technologically and
economically feasible. (See Page F-9, Note 2).
15
<PAGE> 16
Other income (expense) of $1,505,000 in 1993 was comprised of gain on sale of
ComCentral stock, miscellaneous income and the recovery of advances from
ComCentral which were offset by interest expense, sales commission to H&N
Management Co., and equity in loss of unconsolidated subsidiary. In the
opinion of management these items do not reflect recurring future operating
results. Other expenses, net of $3,851,000 in 1992 was comprised of bad debts,
a valuation allowance, management fees of ComCentral, miscellaneous income,
royalties, fees, sublease revenues and other non-recurring items.
Effective January 1, 1993 the Company changed its method of accounting for
income taxes from the deferred method to the liability method. (See Page F-8,
Note 2).
Other Assets - Other assets reflects an increase of approximately $2.5 million
over 1992 primarily as a result of capitalized software licensing rights of
$1,281,000 (see Page F-15, Note 8), an increase in the investment in ComCentral
of $365,000 (See Page F-10, Note 3) and an advance to H&N of $716,000 (See Page
F-18, Note 10)
Debt - Debt increased approximately $2 million over 1992 primarily a result of
a royalty obligation under the acquisition of software licensing rights of
approximately $1.2 million and convertible notes payable to various individuals
for approximately $705,000 (See Page F-13, Note 6).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1992, the FASB adopted FAS No. 109, Accounting for Income Taxes.
FAS No. 109 requires the use of the liability method of accounting and
reporting for income taxes for fiscal years beginning on or after December 15,
1992. The Company adopted, effective January 1, 1993, the Statement of
Financial Accounting Standard (SFAS) No. 109, issued in February 1992. This
change did not have a significant impact on income before the cumulative effect
of the change in accounting for income taxes for the year ended December 31,
1993.
The Company will be required to adopt Statement of Financial Accounting
Standards ("FAS") No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" during 1994. The Company does not anticipate that the
adoption will have any affect on net income.
CAPITAL RESOURCES AND LIQUIDITY
Cash requirements are met by borrowings from the Barnett Bank of Manatee
County, N.A. under its credit facility. ("Barnett Line of Credit"). The credit
line with Barnett Bank is due on demand. (See page F-13, Note 6) The Company
was in violation of certain financial ratio and other covenants at December 31,
1993, under the terms of the agreement, the bank may call the loan if the
Company is in violation of any restrictive covenant. As of March 24, 1994, the
Company has not received a waiver of the violation of this covenant from the
bank, however, the bank has not instituted collection procedures. During the
year, capital expenditures grew mainly through lease financing to conserve
operating capital.
Net cash used in operations was $(1,900,000) in 1993 compared to $7,500
provided in 1992. Investing activities, which included fixed asset
acquisitions generated $645,000 in cash compared to utilizing $2.6 million in
1992. Cash provided by financing activities including the Barnett Credit line,
proceeds from notes payable and proceeds from stock offering was a net of
$1,187,000 compared to $550,000 for 1992. The Company entered into agreements
with clients of Joseph Roberts and Co., Bernstein and Future Financial to
provide short term funding as more fully described in the Financial Statements
(Page F-13, Note 7).
The Company's working capital ratio at December 31, 1993 was 1.07:1. Net
working capital was $357,000 at the end of the year.
Short term cash requirements are expected to be met through cash flows from
operations augmented by credit line facilities. The Company is currently
working to secure alternative financing for the Barnett Line of Credit and
believes that such financing will be secured during 1994. Long term capital
needs will be financed through traditional methods of capital markets,
operations and bank borrowings. Management believes that cash available from
operations, and borrowings from banks, will be sufficient to meet current cash
requirements for normal operations. The Company has no material commitments
for capital expenditures as of December 31, 1993.
16
<PAGE> 17
CURRENT OUTLOOK
The Company has now completed most of the management changes and focused its
sales team. This has resulted in strong sales growth of its core product. New
sales made in the last quarter of 1993 of its IRIS software will ensure more
sales of the SEB II product in 1994. Deregulation of the Australian
telecommunications market has created a new market for the Long Distance
Management products of the Company. The Australian telecommunications market
was very similar to that of the US market in the mid 1980's. The
telecommunications market was serviced by one carrier in a monopolistic
situation, Australian Telecom. The Australian government decided to introduce
competition into this marketplace and allow a number of carriers to come into
the market, similar to the USA. As a result, there was an immediate need for a
dialer to allow access to these competitive carriers. During 1993 the Company
secured one of the alternate carriers to Telecom Australia, AAP, through the
Company's distributor, Telematic of Melbourne, Australia. However, as this
market is still volatile, there can be no guarantees of significant numbers
being provided this year. Teltronics, however, enjoys the position through
Telematic of being the major source of dialers for this marketplace. Management
believes that the relationship with its major distributors has improved and is
showing better acceptance of its core products.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditor's Reports F-1
Balance Sheets - December 31, 1993 F-2/3
Statements of Income for
Years Ended December 31, 1993 and 1992 F-4
Statements of Stockholders' Equity for the
Years Ended December 31, 1993 and 1992 F-5
Statements of Cash Flows for the
Years Ended December 31, 1993 and 1992 F-6/7
Notes to Financial Statements F-8/23
</TABLE>
Financial statement schedules not included in this Annual Report on
Form 10-K have been omitted, because they are not applicable or the required
information is shown in the financial statements or notes thereto.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND FINANCIAL
DISCLOSURE
No change or disagreements with accountants in any accounting and
financial disclosures during the year ended December 31, 1993. There was a
change in accountants for ComCentral as more fully described in the Form 8-K
amended filed February 19, 1992, and there was a change in accountants for
Teltronics as more fully described in the amended form 8-K filed May 17, 1992.
17
<PAGE> 18
PART III
ITEM 9. 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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Ewen R. Cameron 41 President and
Chief Executive Officer
Gregory L. Deringer 40 Senior Vice President,
Sales and Marketing
Peter G. Tuckerman 47 Vice President,
Business Development
Pierre P. Forestier 48 Vice President,
Technical Services
Paul D. Shrader 46 Controller and Principal Financial Officer
Matthew A. Veal 36 Secretary
Norman R. Dobiesz 46 Director
Carl S. Levine 47 Director
James F. Williams 36 Director
James H. Williams 62 Director
</TABLE>
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 as a consultant to the Company and acting President since
January, 1993. Prior to that, Mr. Cameron served as Managing Director of SRH
plc, a European telecommunications 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 21 years in the computer and
telecommunications industry.
GREGORY L. DERINGER joined Teltronics in March 1993, as Vice
President - Sales. Prior to this, Mr. Deringer was with Boole & Babbage
Network Systems, a software development and sales company, from May 1991 to
March 1993 as Vice President - Sales; he was Vice President of Sales and
Marketing with Westinghouse Communications Software, Inc. a communication
software development and sales company, from March 1990 to April 1991; served
in the positions of Director/Systems Integration and Regional Sales Manager
from January 1988 to February 1990; and had various Area
18
<PAGE> 19
to National Sales functions with Teltone Corporation from June 1981 to December
1987. Mr. Deringer earned his BS in 1978 from the University of Wisconsin.
PETER G. TUCKERMAN became Vice President of Business Development for
the Company in January of 1994 after serving as Vice President of Product
Management from March of 1993. Mr. Tuckerman has also served Vice President of
Engineering from March of 1991 to March of 1992 and as Vice President of
Product Management for TCT from August of 1990 to March of 1991. Prior to
this, Mr. Tuckerman has held various management positions at Com Dev including
Vice President of Product Development (1986-1990), Director of Product
Management (1982-1986) and Product Manager (1978-1985).
PIERRE P. FORESTIER joined Teltronics in July of 1993 as Vice
President, Technical Services. Prior to this Mr. Forestier owned and ran his
own independent consulting group for two years. Mr. Forestier served as Vice
President, Services for JWP/Businessland Information Systems, a business PC and
network distributor, from 1990 to 1992. From 1974 to 1989 while employed by
Perkin-Elmer Data Systems, Mr. Forestier held diverse positions including,
Regional Sales Manager, Director of European Service Operations, Subsidiary
General Manager, Director, North American Service Operations. Mr Forestier has
been in the computer and data communications industry for 26 years.
PAUL D. SHRADER joined Teltronics in June 1993 as Accounting Manager.
Prior to this, Mr. Shrader was with Mote Marine Laboratory, Inc., a marine
research laboratory, from 1989 as Business Manager and Director of
Administration. He was Controller for TrailMate, Inc. from 1984 to 1989.
Prior to this Mr. Shrader held Controller positions with other local firms
including the Ophthalmic Group of Milton Roy Company for seven years. Mr.
Shrader earned his B.S. degree with a major in Accounting in 1970 from Concord
College, Athens, WV.
MATTHEW A. VEAL was appointed as Secretary to board in January 1993
after having served as Controller of the Company since 1991. Mr. Veal has been
a certified public accountant since 1983 and is also the Vice President of
Finance for ComCentral Corp. From 1982 through 1990, Mr. Veal was an
accountant with James Moore & Co., beginning as a staff accountant and
subsequently being promoted to a manger in 1987. From 1980 to 1982, Mr. Veal
was an accountant with the State of Florida. Mr. Veal is a member of the
American Institute of Certified Public Accountants and the Florida Institute of
Certified Public Accountants and has been a member of numerous professional and
civic organizations. Mr. Veal received his B.S. in Business Administration
from the University of Florida in 1980.
JAMES H. WILLIAMS served as Chairman of the Company until June 1990
and continues to serve as a Director of the Company. Mr. Williams developed
substantial financial, production and general management experience as a
principal stockholder and executive officer of the Williams Group of companies
which he founded in 1965. This group of heavy construction, waste disposal and
recycling, and transportation companies grew from 0 to $90,000,000 in annual
sales prior to its sale in 1983. Mr. Williams is presently Chairman of the
Board of Integrated Waste Services, Inc., a publicly held non-hazardous waste
management company. Mr. Williams is also a private investor with interests in
real estate development and various retail, wholesale, manufacturing and
service businesses. James H. Williams is the uncle of James F. Williams, who,
while no longer serving as President, remains a Director of the Company. Mr.
Williams is also a principal of Welch Energy Fuel Supply, Inc., Mid-Eastern
States Leasing Corp., and Opti-Net, Inc. Mr. Williams is Chairman, Director
and a principal of H&N Management Co., Inc. which entered into a management
consulting agreement with the Company in March 1989 and an acquisition
consulting agreement in October 1990.
JAMES F. WILLIAMS was active in the planning and negotiations leading
to the Company's acquisition of the Teltronics Division and was appointed
President shortly after completion of the acquisition in November 1988. Mr.
Williams served as President of the Company until September 1989 and continues
to serve the Company as a Director. Mr. Williams is currently Vice President,
and
19
<PAGE> 20
Director of Integrated Waste Services, Inc., a publicly held non-hazardous
waste management company and Chief Financial Officer for a group of
diversified, closely held real estate development, retail, wholesale,
manufacturing, and service businesses. He holds a B.S. in Accounting from St.
John Fisher College and an M.B.A. from the Rochester Institute of Technology.
James F. Williams is the nephew of James H. Williams, a former Chairman of the
Company's Board of Directors who still serves as Director.
CARL S. LEVINE has served as a Director of the Company since July 27,
1988. Mr. Levine is an attorney who has been engaged in private practice in
New York, New York from 1977 to 1981, and in Garden City, New York from 1981 to
June 1985. Mr. Levine is presently the senior partner in the law firm of
Levine, Robinson & Algios, P.C., Mitchel Field, 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.
NORMAN R. DOBIESZ has served as a Director of the Company since
October 25, 1991. He currently is President of H&N Management Co., Inc. which
entered into a management consulting agreement with the Company in March 1989
and an acquisition consulting agreement in October 1990. 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 major shareholder of Welch Energy
Fuel Supply, Inc., Sado Gas Sales, Inc., H&N Management Co., Inc. and several
other companies. Mr. Dobiesz has passive investments in both real estate as
well as other operating companies.
JOHN W. PRIEST resigned his position as CEO and Chairman of the Board
in July 1993.
20
<PAGE> 21
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information relating to the
compensation received and to be received by certain persons who are presently,
or were executive officers of the Company during the fiscal year ended December
31, 1993.
<TABLE>
<CAPTION>
Cash Compensation
-----------------
CASH RECEIVED IN
CAPACITIES IN WHICH FISCAL YEAR
NAME OF INDIVIDUAL SERVED ENDING 12/31/93
- ------------------ ------ ------------------
<S> <C> <C>
Ewen R. Cameron President & C.E.O. $168,940
Gregory L. Deringer V.P. Sales & Service *
Peter G. Tuckerman V.P. Business Development *
Pierre P. Forestier V.P. Technical Services *
Paul D. Shrader Controller & Principal Financial Officer *
Matthew A. Veal Secretary **
All Executive Officers as a group $403,782
- -----------------------------
</TABLE>
These amounts consist of salaries. They exclude certain personal
benefits that aggregate less than the lesser of $25,000 or ten percent (10%) of
the total cash compensation of any of the executive officers or which cannot be
readily ascertained. They do not include $96,101 paid to Mr. John W. Priest
who served as Chairman and CEO from January 1 to June 30, 1993.
* These salaries are less than $100,000 per annum.
** Mr. Veal serves as Secretary for the Company without salary.
21
<PAGE> 22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the
beneficial ownership of all of the Company's outstanding Common Stock by each
person owning five percent (5%) or more of such shares, by each director, and
by all directors and officers as a group as of March 31, 1993. 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.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER AMOUNT AND NATURE OF PERCENTAGE
AND ADDRESS BENEFICIAL OWNERSHIP OF CLASS (1)
- ----------- -------------------- ------------
<S> <C> <C>
Norman R. Dobiesz (2) (4) 3,069,159 21.40%
995 Monte Cristo Blvd.
Tierra Verde, Florida 33715
James H. Williams (2) (3) 2,867,100 19.99%
1640 Twelve Oaks Way
N. Palm Beach, Florida 33408
All Directors and Officers (6) (5) 6,770,459 47.20%
as a Group (12 persons)
- --------------------------------
</TABLE>
(1) Includes the possible exercise of 240,000 warrants, entitling the
holders thereof to purchase an aggregate of up to 240,000 shares of Common
Stock.
(2) Director of the Company.
(3) Includes 700,000 shares owned by virtue of 50% ownership of H&N,
112,000 shares held by a trust over which James H. Williams, a director of the
Company, exercises sole voting and investment power, and 120,000 shares that
could be acquired upon exercise of warrants.
(4) Includes 700,000 shares owned by virtue of 50% ownership of H&N, and
83,109 shares owned by virtue of 33% ownership of Whitfield Capital of
Sarasota, and 120,000 shares that could be acquired upon exercise of warrants.
(5) Does not include options granted John W. Priest to purchase up to
100,000 shares of the Company's common stock. Fifty thousand shares are
available at an exercise price of $0.344 per share. These options expire
November 5, 2000.
(6) Under a five year employment contract, Ewen Cameron is granted a
President stock option to purchase 125,000 shares of common stock at $0.40 per
share for each year of employment for a total of 625,000 shares.
22
<PAGE> 23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1993, H&N Management Co., Inc. ("H&N"), a management and
consulting company as more fully described in the notes to the financial
statements (Page F-17, Note 10), owned and operated by James H. Williams and
Norman R. Dobiesz, Directors and principal stockholders of the Company, waived
all fees but not expenses required to be paid by the Company to H&N under a
management consulting agreement for the quarters ended March 31, June 30,
September 30, and December 31, 1993.
The Company entered into the management consulting agreement with H&N
in March 1989. H&N is jointly owned by two major shareholders of the Company.
The initial term of the management agreement is ten years and is renewable
automatically for successive terms of five years each. The agreement requires
H&N to provide the Company advice with respect to executive, managerial,
financial, business and sales matters. For the performance of these services,
H&N is entitled to a fee, payable quarterly and determined as a percent of the
Company's gross annual sales. The stated percentage is 3% of the first $10
million of sales; 2% of the next $10 million in sales; and 1% of any sales in
excess of $20. H&N waived the fee for 1993 and 1992 as no such services were
performed under this agreement. H&N is also entitled to be reimbursed for
expenses incurred in the performance of its duties under the agreement. The
Company may terminate the management agreement for cause by giving 30 days
prior written notice if H&N defaults in the performance of its obligations
under the agreement. In addition, the two stockholders of H&N, who are also
major shareholders and directors of the Company have agreed with the Company to
abstain with respect to any vote at any meeting or action of the stockholders
and/or directors of the Company with respect to the interpretation,
enforcement, amendment, modification and/or waiver of the provisions of the
management agreement.
23
<PAGE> 24
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
<TABLE>
<CAPTION>
Page
<S> <C> <C>
(1) Financial Statements:
Independent Auditor's Reports F-1
Balance Sheets - December 31, 1993 F-2/3
Statements of Income for
Years Ended December 31, 1993 and 1992 F-4
Statements of Stockholders' Equity for the
Years Ended December 31, 1993 and 1992 F-5
Statements of Cash Flows for the
Years Ended December 31, 1993 and 1992 F-6/7
Notes to Financial Statements F-8/23
(b) Reports on Form 8-K
(c) Exhibits:
10.112 Letter of waiver of Management Consulting Fees by H&N Management Co.,
for quarter ended March 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a)*
10.113 Letter of waiver of Management Consulting Fees by H&N Management
Co. Inc. for quarter ended June 30, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . (b)
10.114 July 1993 Employee/Consultant Benefit Plan . . . . . . . . . . . . . . . . . . . . . . . . (b)
10.115 Consulting Agreement dated July, 1993 between the Company and John W. Priest . . . . . . . (b)
10.116 Employment Agreement between the Company and
Ewen Cameron dated June 30, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (b)
10.117 Inter-Company Agreement between the Company and
ComCentral Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a)*
10.118 Divestiture Management Agreement between the Company
and H&N Management Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a)*
10.119 Equipment Leases with Eastman Kodak dated May 28, 1993 . . . . . . . . . . . . . . . . . . (a)*
10.120 Private Placement Memorandum, $360,000 Principal Amount,
due March 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a)*
10.121 Private Placement Memorandum, $500,000 Principal Amount,
due October 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a)*
- ---------------------------
</TABLE>
(a) Filed as an Exhibit to this Report on Form 10-K.
(b) Filed as an Exhibit to Form S-8 and incorporated hereon by
reference.
* Filed as an Exhibit to Report on Form 10-KSB filed March 31, 1994
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly cause this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TELTRONICS, INC.
By: /s/Ewen Cameron
---------------------------------------
Ewen Cameron
President and Chief Executive Officer
and Director
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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/Ewen Cameron President, Chief Executive June 30, 1995
- ------------------------------------- Officer and Director
Ewen Cameron
/s/Paul D. Shrader Vice President Finance, June 30, 1995
- --------------------------------------- Secretary and Treasurer
Paul D. Shrader
/s/Norman R. Dobiesz Vice President Mergers and June 30, 1995
- ------------------------------------ Acquisitions and Director
Norman R. Dobiesz
/s/Carl S. Levine Director June 30, 1995
- ----------------------------------------
Carl S. Levine
</TABLE>
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Teltronics, Inc.:
We have audited the accompanying balance sheet of Teltronics, Inc. as
of December 31, 1993, and the related statements of operations, shareholder's
equity and cash flows for the years ended December 31, 1993 and 1992. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Teltronics, Inc. as
of December 31, 1993, and the results of its operations and its cash flows for
the years ended December 31, 1993 and 1992, in conformity with generally
accepted accounting principles.
As discussed in Note 16, the 1993 financial statements have been
restated to reduce the amount capitalized as software licensing rights. As
discussed in Note 2 to the financial statements, in 1993 the Company changed
its method of accounting for income taxes to conform with Statement of
Financial Accounting Standards No. 109.
Gainesville, Florida
March 24, 1994
F-1
<PAGE> 27
TELTRONICS, INC.
BALANCE SHEET
DECEMBER 31, 1993
ASSETS
<TABLE>
<CAPTION>
1993
------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,332
Accounts receivable, net of allowance for
doubtful accounts of $120,000 2,038,447
Inventories 2,430,284
Due from Whitfield Capital of Sarasota, Inc. 212,000
Due from Receivable Dynamics, Inc. 44,879
Income taxes receivable 378,780
Deferred income taxes 150,900
Other current assets 141,939
-----------
Total current assets 5,407,561
-----------
PROPERTY AND EQUIPMENT, net 1,225,110
-----------
OTHER ASSETS:
Prepaid loan guarantee, net 326,676
Advances to H&N Management Co., Inc. 716,176
Marketable equity securities 652,000
Software development costs, net 999,130
Software licensing rights, net 1,280,504
Other 140,544
-----------
Total other assets 4,115,030
-----------
TOTAL ASSETS $10,747,701
===========
</TABLE>
See accompanying notes.
F-2
<PAGE> 28
TELTRONICS, INC.
BALANCE SHEET
DECEMBER 31, 1993
(CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1993
------------
<S> <C>
CURRENT LIABILITIES:
Note payable on line of credit $ 1,610,989
Current portion of long-term debt 1,361,065
Bank overdraft 87,800
Accounts payable 1,176,435
Accrued liablilities 731,646
Deferred income 82,766
-----------
Total current liabilities 5,050,701
-----------
LONG-TERM LIABILITIES:
Long-term debt, less current portion 946,210
Deferred income taxes 421,450
-----------
Total long-term liabilities 1,367,660
-----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)
SHAREHOLDERS' EQUITY:
Common stock, $.001 par, 50,000,000 shares
authorized, 14,344,000 issued and outstanding 14,344
Additional paid-in capital 7,886,349
Shares issued for future services (1,605,873)
Accumulated deficit (1,965,480)
-----------
Total shareholders' equity 4,329,340
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,747,701
===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 29
TELETRONICS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
NET SALES $11,788,513 $20,016,345
----------- -----------
COSTS AND EXPENSES
Cost of goods sold 5,926,892 13,178,605
General and administrative 2,520,055 2,880,416
Selling 3,673,265 2,585,426
Research and development 1,371,224 828,139
----------- -----------
13,491,436 19,472,586
----------- -----------
Operating income (loss) (1,702,923) 543,759
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (280,692) (193,576)
Miscellaneous 89,223 234,110
Gain on sale of ComCentral stock 1,252,000 -
Sales commission to H&N
Management Co., Inc. (300,000) -
Recovery of advances from ComCentral 852,000 -
Sale of customer accounts and equipment
to Tampa Bay Financial, Inc. - (87,069)
Valuation adjustment of cross-license
agreement - (710,292)
Bad debts - related parties - (2,498,125)
Management fees to International
Petroleum - (600,000)
Management fees from American
Telecommunications Corp. - 125,000
Equity in loss of unconsolidated
subsidiary (107,737) (120,919)
----------- -----------
1,504,794 (3,850,871)
----------- -----------
Loss before income taxes (198,129) (3,307,112)
Provision (benefit) for income taxes (124,000) 255,400
----------- -----------
Loss before minority interest (74,129) 3,562,512
Minority interest in net loss of
consolidated subsidiary - 1,544,707
----------- -----------
Net loss before cumulative
effect of accounting change (74,129) (2,017,805)
Cumulative effect of change in accounting
for income taxes 85,081 -
----------- -----------
NET INCOME (LOSS) $ 10,952 $(2,017,805)
=========== ===========
NET INCOME (LOSS) PER SHARE $ - $ (.18)
=========== ===========
Average number of common shares outstanding 12,251,534 11,377,630
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 30
TELTRONICS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL SHARES ISSUED
------------------------ PAID-IN FOR FUTURE
SHARES AMOUNT CAPITAL SERVICES
------ ------ ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1991 11,269,000 $ 11,594 $ 5,493,460 $ -
Gain on issuance of stock by subsidiary - - 210,062 -
Effect of Deconsolidation of subsidiary 325,000 - (104,000) -
Net loss as restated - - - -
---------- -------- ----------- ------------
BALANCE, DECEMBER 31, 1992 11,594,000 11,594 5,599,522 -
Issuance of shares to employees
and consultants for future
services 2,750,000 2,750 2,286,827 (2,289,577)
Compensation earned - - - 683,704
Net income as restated - - - -
---------- -------- ----------- ------------
BALANCE, DECEMBER 31, 1993 14,344,000 $ 14,344 $ 7,886,349 $ (1,605,873)
========== ======== =========== ============
<CAPTION>
RETAINED
EARNINGS TREASURY
(ACCUMULATED STOCK AT
DEFICIT) COST TOTAL
------------- ---------- -----------
<S> <C> <C> <C>
BALANCE, December 31, 1991 $ 41,373 $ (264,063) $ 5,282,364
Gain on issuance of stock by subsidiary - - 210,062
Effect of Deconsolidation of subsidiary - 264,063 160,063
Net loss as restated (2,017,805) - (2,017,805)
------------ ---------- -----------
BALANCE, DECEMBER 31, 1992 (1,976,432) - 3,634,684
Issuance of shares to employees
and consultants for future
services - - 683,704
Compensation earned - - -
Net income as restated 10,952 - 10,952
------------ ---------- -----------
BALANCE, DECEMBER 31, 1993 $ (1,965,480) $ - $ 4,329,340
============ ========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 31
TELTRONICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 10,952 $(2,017,805)
Adjustments to reconcile net income (loss) to net cash
flows from (used in) operating activities:
Depreciation and amortization 863,338 620,409
Deferred income taxes 68,263 353,187
Gain on sale of ComCentral stock (1,252,000) -
Recovery of advances to ComCentral (852,000) -
Minority interest in loss of consolidated
subsidiary - (1,544,707)
Loss on sale to related parties - 87,069
Equity in loss of unconsolidated subsidiary 107,737 120,919
Bad debts - related parties - 1,217,760
Valuation adjustment to cross-license agreement - 210,292
Changes in assets and liabilities:
Accounts receivable and other assets 193,202 (114,976)
Inventories (498,842) 106,903
Due to affiliates - 79,097
Deferred income taxes (38,794) (17,583)
Income tax receivable (327,576) (51,204)
Other assets (45,037) -
Accounts payable and accrued liabilities (126,128) 1,183,683
Income taxes payable - (183,665)
Increase in deferred revenue 40,880 (41,886)
----------- -----------
Net cash flows from (used in) operating activities (1,856,005) 7,493
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (67,934) (638,832)
Proceeds from sale of ComCentral stock 951,567 -
Advances to ComCentral - (1,140,702)
Payments from ComCentral 565,061 646,723
Advances to H & N Management (335,444) (405,795)
Advances to Receivable Dynamics, Inc. (19,816) -
Deferred acquisition and other costs - (94,932)
Investment in customer accounts - (300,000)
Effect of deconsolidation of ComCentral - (159,954)
Profit on intercompany sale to ComCentral
eliminated in consolidation - 280,000
Capitalized software development costs (448,810) (822,958)
----------- -----------
Net cash flows from (used in) investing activities 644,624 (2,636,450)
----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE> 32
TELTRONICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
(CONTINUED)
<TABLE>
<CAPTION>
1993 1992
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit $ 11,951,756 $ 15,743,475
Repayments on line of credit (11,732,174) (15,050,459)
Proceeds from notes payable 817,851 180,000
Repayment of notes payable and
other long-term debt (348,939) (786,172)
Cash paid for future offering costs (25,000) -
Cash paid for bridge loan costs (110,385) -
Repayment of due to affiliates and
related party debt - (1,006,366)
Proceeds from stock offering 546,278 1,602,350
Cash paid for offering costs - (132,911)
Net change in bank overdraft 87,800 -
------------ ------------
Net cash flows from financing
activities 1,187,187 549,917
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (24,194) (2,079,040)
CASH AND CASH EQUIVALENTS, beginning of year 34,526 2,113,566
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 10,332 $ 34,526
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchase of equipment under capital lease $ 113,500 $ 495,790
Acquisition of software licensing rights 1,384,500 -
Equipment acquired under capital lease for
assumption of liability of $550,000 - 550,000
Purchase of customer accounts in exchange for
50,000 shares of common stock - 153,500
Note receivable from related party for 100,000
shares of common stock - 307,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 274,000 $ 216,000
Income taxes - 190,000
</TABLE>
See accompanying notes.
F-7
<PAGE> 33
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION:
Teltronics, Inc., (the Company) was incorporated in Delaware in
February 1989 and is the successor, by merger, to Comnet Systems, Inc., which
was organized on June 16, 1988. The Company is engaged in product research,
design and manufacturing of electrical components, equipment and software,
primarily relating to the telecommunications industry and long distance and
telephone operator services.
In August 1991, in a transaction discussed in Note 3, the Company
temporarily acquired a controlling interest in the issued and outstanding
common stock of ComCentral Corp., and entity engaged in the business of
marketing and providing long distance telecommunication and operator services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION--The financial statements include the
accounts of Teltronics, Inc. The financial statements also include the
accounts of ComCentral Corp. and subsidiaries ("ComCentral") until August
31, 1992, at which time the Company's investment in ComCentral is
presented using the equity method of accounting (See Note 3). All
significant intercompany balances and transactions have been eliminated,
as applicable.
INVENTORIES--Inventories are stated at the lower of cost or market.
Cost is determined principally on the weighted average method.
PROPERTY AND EQUIPMENT--Property and equipment are carried at cost.
Depreciation is provided over the estimated useful lives of the respective
assets using the straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. Maintenance, repairs and
minor renewals are charged to expense as incurred while expenditures that
materially increase values, change capacities, or extend useful lives are
capitalized. Upon sale or retirement of property and equipment, the cost
and the related accumulated depreciation are eliminated from the
respective accounts and the resulting gain or loss is included in
operations.
INCOME TAXES--The Company adopted, effective January 1, 1993, the
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for Income Taxes", issued in February 1992. Under the liability method
specified by SFAS 109, the deferred tax liability is determined based on
the difference between the financial statements and tax bases of assets
and liabilities as measured by the enacted tax rates which will be in
effect when these differences reverse. Deferred tax expense is the result
of changes in the liability for deferred taxes. The principal types of
differences between assets and liabilities for financial statement and tax
return purposes are accumulated depreciation resulting from use of
accelerated methods for tax purposes, the timing of recognition of accrued
compensated absences and capitalization of software development costs and
certain inventory costs.
The deferred method, used in years prior to January 1, 1993, required
the Company to provide for deferred tax expense based on certain items of
income and expense which were reported in different years in the financial
statements and the tax returns as measured by the tax rate in effect for
the year the difference occurred. Net operating loss carry forwards are
recognized to the extent of the net deferred income tax credits in the
balance sheet reversing during the carryforward period.
F-8
<PAGE> 34
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Net income for the year ended December 31, 1993, was increased by
approximately $85,000 by the cumulative effect of the change in accounting
for income taxes related to years prior to January 1, 1993, which were not
restated. This change did not have a significant impact on income before
the cumulative effect of the change in accounting for income taxes for the
year ended December 31, 1993.
CASH AND CASH EQUIVALENTS--For the purposes of the Statement of Cash
Flows, the Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
INCOME (LOSS) PER SHARE--Net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during each period presented. Common stock equivalents
outstanding during each period presented were either anti-dilutive or not
sufficiently dilutive to be included in the computation of income (loss)
per share. Included in the Company's calculation of weighted average
shares outstanding in 1992 are the effects of 325,000 shares of treasury
stock owned by ComCentral during the period in which ComCentral was
consolidated with the Company.
REVENUE RECOGNITION--Revenues from product sales are recognized when
the product is shipped. Revenue from software development contracts is
recognized using the percentage of completion method. Software license
fees are recognized upon customer acceptance and delivery of the software
product. Revenue from software maintenance contracts is recognized ratably
over the contract period and other service revenue is recognized upon
performance. Revenues for operator services provided by ComCentral during
the period in 1992 in which ComCentral was consolidated with the Company,
were recognized in the period when the customer placed the related call,
net of unverifiable calls and rejects based on historical estimates.
ISSUANCE OF STOCK BY SUBSIDIARIES--Issuance of stock by the
Company's subsidiaries which cause a change in the Company's ownership
percentage in a subsidiary are accounted for in results of operations
unless subsequent capital transactions are contemplated at the time of
issuance or other factors are present which may affect realization (see
Note 3).
SOFTWARE DEVELOPMENT COSTS--The Company capitalizes production
costs of internally developed software to be sold after the product is
determined to be both technologically and economically feasible. The
costs are amortized on a product-by-product basis once the product is
available for general release to customers, using the greater of the
amount computed using (a) the ration that current gross revenues for a
product bear to the total current and anticipated future gross revenues
for that product or (b) the straight-line method over the remaining
estimated economic life of the product which range from 18 months to 7
years. Accumulated amortization at December 31, 1993 was $407,485.
Amortization charged to expense was $342,550 and $65,000 for the years
ended December 31, 1993 and 1992, respectively. Research and development
costs which do not meet the capitalization requirements are expensed when
incurred.
SOFTWARE LICENSING RIGHTS--The Company entered into a software
license agreement to develop and market certain software in North and South
America. The Company is required to pay royalties equal to 30% of the
gross sales of the software up to $1.6 million in royalties. Upon payment
of the $1.6 million in royalties, the software will become the property of
the Company. The Company capitalized $1,422,782 under this agreement and
is amortizing the costs over a ten year period, which is the estimated
economic life of the rights. Amortization
F-9
<PAGE> 35
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
expense and accumulated amortization as of and for the year ended
December 31, 1993, was $142,278 (see (Note 16).
WARRANTY EXPENSE--The Company provides currently for the
estimated cost which may be incurred under product warranties.
MARKETABLE EQUITY SECURITIES--Marketable equity
securities are comprised of 502,000 shares of ComCentral stock
which are stated at their lower of aggregate cost or market.
(3) INVESTMENT IN COMCENTRAL CORP.:
In August 1991, the Company acquired 80% of the issued and
outstanding shares of common stock of ComCentral Corp., a Tampa, Florida based
provider of long distance telecommunication and operator services. The
acquisition was consummated through the issuance of 3,650,000 shares of the
Company's common stock to certain ComCentral common shareholders in exchange
for the ComCentral common shares acquired.
The cost of the acquisition and the fair value assigned to the
shares issued and issuable was $1,779,375. The amount was determined based on
the quoted market price of the Company's common shares as adjusted to give
effect to price fluctuations, quantities traded, and lack of marketability of
restricted or non-publicly traded shares.
Effective September 1, 1992, the Company changed its method of
accounting for ComCentral from a consolidation presentation to an equity method
presentation. This change was made because the Company's ownership interest
in ComCentral voting common stock was expected to be diluted upon the closing
of a pending business combination and reorganization of ComCentral. This
business combination and reorganization was agreed to in principle on August
31, 1992, by the parties involved in this transaction and it was determined to
be highly probable that the expected dilution in the Company's ownership
interest in ComCentral voting common stock would occur reasonably soon. Based
on this determination, the Company's controlling interest in the voting common
stock of ComCentral was considered to be temporary as of August 31, 1992.
Accordingly, ComCentral is no longer consolidated in the Company's financial
statements as of that date.
Summarized income statement information for ComCentral for the
unconsolidated period September 1, 1992 through December 31, 1992, as restated
(see Note 16) is as follows:
<TABLE>
<S> <C>
Sales $1,791,898
Gross profit 108,539
Net loss (178,106)
</TABLE>
The Company recognized a loss of $120,919 during the period
September 1, 1992 to December 31, 1992, reflecting its equity in the loss of
ComCentral after deducting preferred stock dividends in arrears of $29,393. In
1992, the effect of recording the Company's share of losses of ComCentral of
$2,119,000 reduced unamortized goodwill (the difference between the carrying
value of its investment in ComCentral common stock and its interest in the
underlying net equity) to zero at December 31, 1992.
F-10
<PAGE> 36
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(3) INVESTMENT IN COMCENTRAL CORP.: (Continued)
During the eight months ended August 31, 1992, ComCentral
acquired certain customer accounts and equipment under the cross license and
lease agreement from American Telecommunications Corp. ("American") for
$622,925 including the assumption of a $550,000 liability owed to Teltronics by
American for equipment purchased from Teltronics in 1992. ComCentral
subsequently paid Teltronics $550,000 in satisfaction of this liability. The
profit on this sale of $280,000 was eliminated in consolidation.
Upon the issuance by ComCentral of 150,000 shares of its
common stock in 1992, discussed above, the Company's proportionate interest in
ComCentral's common equity increased by $210,062. This increase was accounted
for as an equity transaction in consolidation and is reflected as additional
paid-in capital in the accompanying financial statements.
During 1991, ComCentral issued 250,000 shares of Series A,
non-voting, non-participating preferred stock to the Company to repay amounts
previously advanced by the Company to ComCentral. The preferred stock is
entitled to a preference in the amount of $1.00 per share in the event of
liquidation or dissolution or the sale of substantially all of the assets of
ComCentral Corp. and bears cumulative dividends at an annual rate of 10%.
Dividends in arrears on the Series A 10% cumulative preferred stock totaled
approximately $64,600 and $39,600 at December 31, 1993 and 1992, respectively.
No dividends on Series A preferred stock have been paid. The preferred stock
is convertible at the option of the holder into common stock at a conversion
price equal to the fair market value of the common stock based on an average
bid price for the ten day period prior to conversion.
On February 26, 1993, the Company sold 1,300,000 shares of its
ComCentral stock for $130,000 cash and $1,820,000 in notes receivable due
December 31, 1993. The Company's ownership percentage of ComCentral was
reduced to approximately 20% as a result of this sale. The Company deferred
the gain on this sale due to uncertainties as to collectibility of the notes
receivable. The Company recorded a $130,000 gain for the cash received in
exchange for 86,667 shares. The Company received no payments on the notes
receivable. It was the opinion of management, if the Company increased its
position in ComCentral at that time by reacquiring the remaining 1,213,333
shares, the Company's ownership position would have a negative effect on
ComCentral's ability to sell additional shares through its investment banker.
Therefore, effective December 31, 1993, the Company assigned its rights to
collect on the defaulted notes receivable or to reclaim the ComCentral shares,
to ComCentral with an escrow agreement in exchange for a $1,000,000 contingent
receivable from ComCentral to be paid from the proceeds of a proposed offering
by ComCentral of previously unissued ComCentral shares. The Company recorded
any amounts due under this escrow agreement at zero due to uncertainties
regarding collectibility. The Company has no recourse to reclaim 1,213,333
shares of ComCentral stock underlying the $1,820,000 notes receivable in the
event of nonpayment of the $1,000,000 by ComCentral.
Effective April 1, 1993, the Company suspended the equity
method of accounting for its investment in ComCentral when the Company's share
of losses equaled the carrying amount of its investment including advances.
The Company recorded $107,737 as its equity in loss of ComCentral for 1993.
The Company's unrecorded share of ComCentral's losses through June 30, 1993,
was $49,383.
F-11
<PAGE> 37
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(3) INVESTMENT IN COMCENTRAL CORP.: (Continued)
During May through July 1993, the Company sold its remaining
700,000 shares of ComCentral stock for cash and realized a gain of $1,110,000.
The Company recorded an expense of $300,000 to H&N Management as a commission
on the sale. The Company changed its method of accounting for ComCentral from
the equity to the cost method effective July 1, 1993, because its ownership
percentage declined significantly below 20%.
During the six months ended June 30, 1993, the Company sold
$404,000 in equipment to ComCentral. The Company eliminated $144,000 profit
net of deferred taxes on this sale under the equity method.
In November and December 1993, the Company received 602,000
shares of ComCentral common stock from ComCentral in satisfaction of
approximately $852,000 of intercompany debt between the companies. The Company
recorded a gain of $852,000 in 1993 as recovery of intercompany advances
previously reduced to zero under the equity method in recording losses of
ComCentral. The Company sold 100,000 shares in December 1993 and recorded a
gain of $12,000.
At December 31, 1993, the Company owns 502,000 shares of
ComCentral common stock (representing approximately 3% of the outstanding
common stock) which are restricted for two years under Rule 144 of the
Securities and Exchange Commission and are recorded at the amount of
intercompany debt forgiven, which approximates the fair market value of the
stock on the date of issuance.
(4) PROPERTY AND EQUIPMENT:
The major classifications and estimated useful lives of
property and equipment at December 31, 1993, are as follows:
<TABLE>
<CAPTION>
DESCRIPTION ESTIMATED USEFUL LIVES COST
----------- ---------------------- ----
<S> <C> <C>
Machinery and equipment 3 - 10 years $ 947,021
Furniture and fixtures 3 - 10 years 713,855
Equipment under capital lease 5 - 10 years 485,983
Leasehold improvements 3 - 5 years 139,991
-----------
2,286,850
Accumulated depreciation (1,061,740)
-----------
$ 1,225,110
===========
</TABLE>
Depreciation expense was approximately $360,000 and $220,000
in 1993 and 1992, respectively.
Accumulated depreciation on equipment under capital lease at
December 31, 1993 was approximately $130,000.
F-12
<PAGE> 38
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(5) INVENTORIES:
The major classes of inventories at December 31, 1993, are as
follows:
<TABLE>
<S> <C>
Raw materials $1,091,625
Work-in-progress 567,546
Finished goods 771,113
----------
$2,430,284
==========
</TABLE>
The Company allocates a portion of general and administrative
costs to inventory. The Company allocated approximately $600,000 and $540,000
for 1993 and 1992, respectively, of general and administrative costs of which
approximately $250,000 remained in inventory at December 31, 1993.
(6) NOTE PAYABLE ON LINE OF CREDIT:
At December 31, 1993, the Company has a $2,000,000 line of
credit which is due in full sixty days after demand by the bank. Interest is
payable monthly at a rate equal to the prime rate plus 2.0% (prime rate was 6%
at December 31, 1993). Accounts receivable, inventory and fixed assets are
pledged as collateral on the line of credit. In addition, the line of credit
is guaranteed by two principal shareholders.
The line of credit agreement subjects the Company to several
restrictive covenants related to, among others, certain financial ratios and
net worth requirements and requires the Company adhere to certain operational
restrictions relating primarily to equipment purchases, additional debt and
business acquisitions. Under the most restrictive covenant, the Company's
tangible net worth may not be less than $3 million. The Company was in
violation of certain financial ratio and other covenants at December 31, 1993.
Under the terms of the agreement, the bank may call the loan if the Company is
in violation of any restrictive covenant. As of March 24, 1994, the Company
has not received a waiver of the violation of this covenant from the bank,
however, the bank has not instituted collection procedures.
Bank deposits of approximately $5,000 are held in a collateral
account at December 31, 1993. These amounts are restricted for repayment of
amounts borrowed and have been applied against the outstanding loan balances in
the accompanying financial statements.
(7) LONG-TERM DEBT:
Long-term debt at December 31, 1993, consists of the following:
<TABLE>
<S> <C>
Capital lease payable, interest imputed at 10.15%,
payments of $1,325 including interest due monthly $ 8,566
Capital lease payable, interest imputed at 9.28%,
payments of $2,189 including interest due monthly $ 79,829
</TABLE>
F-13
<PAGE> 39
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(7) LONG-TERM DEBT: (Continued)
<TABLE>
<S> <C>
Capital lease payable, interest imputed at 11.23%
payments of $6,371 including interest due monthly 141,425
Capital lease payable, interest imputed at 10.51%
payments of $2,107 including interest due monthly 92,949
Capital lease payable, interest imputed at 8.96%
payments of $711 including interest due monthly 15,568
Convertible notes payable to various individuals,
principal and interest at 8% due on February 1,
1994 (these notes have not been repaid, converted
or extended as of March 24, 1994) 350,000
Convertible notes payable to various individuals,
principal and interest at 8% due on October 31,
1994 354,623
Obligation under acquisition of software licensing
rights, interest imputed at 8%, royalty payments
based on sales projected over the next three years 1,151,087
Unsecured advance by the President of Company,
due on demand 113,228
----------
Total long-term debt 2,307,275
Less current portion 1,361,065
----------
Long-term debt, less current portion $ 946,210
==========
</TABLE>
Maturities on long-term debt for the fiscal years subsequent
to 1993 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1994 $1,361,065
1995 737,678
1996 155,154
1997 37,167
1998 16,211
==========
</TABLE>
Future minimum lease payments under capital leases (included
in long-term debt) as of December 31, 1993, are as follows:
F-14
<PAGE> 40
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(7) LONG-TERM DEBT: (Continued)
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1994 $145,798
1995 136,524
1996 57,922
1997 40,624
1998 16,856
Thereafter -
--------
397,724
Less amount representing interest (59,387)
--------
$338,337
========
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT CONTRACTS--The Company has an employment contract
with its president with a remaining term of five years. This
agreement may be terminated by the president. If the Company
terminates the president without cause, the president shall receive a
separation payment equal to his annual salary which is $175,000. All
other rights and benefits shall immediately cease upon termination.
The agreement also includes a covenant not to compete with the Company
extending for a period of two years after termination for any reason.
The contract grants the president stock options to purchase 125,000
shares of common stock at $.40 per share for each year of employment
for a total of 625,000 shares.
SOFTWARE LICENSE AGREEMENT--The Company entered into a
software license agreement effective January 1, 1993, that allows
Teltronics to market and sell certain software in North and South
America. The Company is required to pay royalties equal to 30% of the
gross sales of the software. After the Company pays $1.6 million in
royalties, the software will become property of the Company for the
markets specified.
The Company has capitalized the costs at the present
value of the royalty payments plus additional costs related to the
agreement and has recorded an obligation for the payment of the
royalties at the present value of the projected royalty payments (see
Note 7). During the year ended December 31, 1993, the Company
capitalized $1,422,782 of costs related to the agreement which is
being amortized over the expected economic life of the agreement (10
years). Accumulated amortization of these costs at December 31, 1993,
and amortization expense for the year was $142,278 (see Note 16).
SOFTWARE DEVELOPMENT AGREEMENT--The Company entered into a
software development agreement whereby the Company will develop
certain software for $1,275,000. Revenue is recognized using the
percentage of completion method. The Company is entitled to receive
payment upon completion and acceptance of specified phases contained
in the agreement. The Company has billed $450,000 under this contract
at December 31, 1993. The contract is for a three-year period
beginning July 23, 1993, and can be terminated by either party with 60
days notice.
OPERATING LEASES--The Company leases its manufacturing
facilities including land and building under the terms of a 15 year
operating lease expiring August 31, 2005.
F-15
<PAGE> 41
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(8) COMMITMENTS AND CONTINGENCIES: (Continued)
The terms of the operating lease for manufacturing facilities
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 also has the option at the end of the lease
term to renew the lease for up to two additional five-year periods.
In addition, the Company is responsible for paying all taxes,
insurance and maintenance cost relating to the leased property. The
lease also provides for an adjustment in the annual rent beginning in
1993 based on changes in the Consumer Price Index. However, the lease
provides that, in no event shall the annual rents payable during the
adjustment period be less than the previous year's rent or increase
annually by more than 6%.
The Company also leases various equipment under operating
leases expiring in one to two years.
Future minimum lease payments for all noncancelable operating
leases at December 31, 1993, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1994 $ 696,613
1995 638,333
1996 511,496
1997 476,513
1998 476,513
Thereafter 3,176,754
----------
$5,976,222
==========
</TABLE>
Rental expense for operating leases totaled approximately $829,000 and
$608,000 in 1993 and 1992, respectively.
LITIGATION--The Company is a codefendant in a lawsuit by a
former customer of ComCentral alleging damages in excess of $140,000.
The Company disputes the allegations, however, outside counsel for the
Company has advised that no discovery has been conducted and they
cannot offer an opinion as to the potential liability to the Company.
(9) COMMON STOCK:
In connection with a public offering completed in 1989 the
Company issued warrants to the underwriter to purchase up to 240,000 shares of
common stock for the aggregate price of $100. The underwriter's warrants are
exercisable at $1.80 per share for a period of five years beginning July 1989.
The warrants contain an anti-dilutive clause whereby the number of shares under
the option has been increased to approximately 350,000 based upon subsequent
issuances of the Company's common stock. In October 1990, H & N Management
Co., Inc. (H&N), a management consulting company owned by two major
shareholders of the Company, acquired the rights to the underwriter's warrants,
and the Company's Board of Directors voted to reduce the warrant exercise price
to $0.30.
The Company has reserved 280,000 shares of common stock for
future issuance to key personnel and 280,000 shares of common stock for
issuance upon exercise of options if an employee stock option plan is approved.
In November 1990, the Company granted an option to purchase 50,000 shares of
common stock with an option price of 34.4 cents per share, exercisable for a
period of ten
F-16
<PAGE> 42
TELETRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(9) COMMON STOCK: (Continued)
years beginning November 5, 1990, to the Company's former Chairman and CEO
under the terms of a long-term employment contract. As of December 31, 1993,
50,000 shares of common stock are under option under their terms of this
contract.
The Company has also reserved 860,000 shares of common stock
for issuance to the holders of the bridge loans issued during the year ended
December 31, 1993, for the conversion of the loans.
During 1993, the Company issued 1,500,000 of its common stock
to its employees and certain officers for future services. The Company holds
the shares under an escrow agreement. As the shares are sold, the proceeds are
placed in an escrow account and used to fund the Company's normal payroll. The
Company has recorded $626,326 is deferred compensation at December 31, 1993,
for the amount attributable to future periods. The Company recorded in
$683,704 expense for the year ended December 31, 1993, under this arrangement.
During 1993, the Company issued 1,250,000 shares of the its
commons stock under various agreements to the following consultants: Norman
Dobiesz 250,000 shares; Harry Williams 250,000 shares; Michael Zambouros
250,000 shares; Future Financial, Inc. 300,000 shares; FGP Consultants, Inc.
200,000 shares. Norman Dobiesz and Harry Williams are directors of the
Company. The Company has recorded $979,547 in deferred compensation under
these agreements at December 31, 1993. These amounts will be expenses based on
the performance of the services required under the agreements.
(10) RELATED PARTY TRANSACTIONS:
ComCentral and its subsidiaries are related by common control
and significant financial relationships to various individuals, stockholders,
and companies. The following is a summary of transactions with these parties:
MANAGEMENT AGREEMENTS--The Company entered into a
management consulting agreement with H & N Management Co.,
Inc. (H&N) in March 1989. H&N is jointly owned by two major
shareholders of the Company. The initial term of the
management agreement is ten years and is renewable
automatically for successive terms of five years each. The
agreement requires H&N to provide the Company advice with
respect to executive, managerial, financial business and sales
matters. For the performance of these services, H&N is
entitled to a fee, payable quarterly and determined as a
percent of the Company's gross annual sales. The stated
percentage is 3% of the first $10 million of sales; 2% of the
next $10 million in sales; and 1% of any sales in excess of
$20 million. H&N waived the fee for 1993 and 1992 as no such
services were performed under this agreement. H&N is also
entitled to be reimbursed for expenses incurred in the
performance of its duties under the agreement. The Company
may terminate the management agreement for cause by giving 30
days prior written notice if H&N defaults in the performance
of its obligations under the agreement. In addition, the two
stockholders of H&N, who are also major shareholders and
directors of the Company have agreed with the Company to
abstain with respect to any vote at any meeting or action of
the stockholders and/or directors of the Company with respect
to the interpretation, enforcement, amendment, modification
and/or waiver of the provisions of the management agreement.
F-17
<PAGE> 43
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(10) RELATED PARTY TRANSACTIONS: (Continued)
ComCentral paid $600,000 to International Petroleum ("IP")
under an acquisition services agreement which is classified as a
management fee expense in 1992. IP is principally owned by a major
shareholder of the Company. IP has agreed to repay the $600,000 and
has given a note receivable to ComCentral. No value was assigned to
the note by ComCentral (see Note 16).
ACQUISITION CONSULTING AGREEMENT--In October 1990, the Company
entered into an Acquisition Consulting Agreement with H&N effective
September 1, 1989, and remaining in effect for five (5) years. This
agreement engages H&N to perform evaluation, negotiation, and advisory
functions with respect to any and all prospective acquisitions the
Company may seek. Compensation for such services is to be determined
as follows. a five percent (5%) fee will be paid on the purchase
price of any acquisition up to $5,000,000, four percent (4%) on the
next $5,000,000, three percent (3%) on the next $5,000,000, two percent
(2%) on the next $5,000,000, and one percent (1%) on the amount in
excess thereof. The Company shall also reimburse H&N for any out-of-
pocket expenses incurred in performance of their obligations under
the agreement. The Agreement may be terminated by the Company with a
ninety-day written notice to H&N if H&N fails to perform its
obligations, and fails to cure such failure prior to the effective
date of the termination. If terminated, H&N shall be entitled to
receive compensation for a period of two years relative to any
acquisition on which it rendered services.
DIVESTITURE MANAGEMENT AGREEMENT--During 1993, the Company
entered into a Divestiture Management Agreement with H&N to assist in
the divestiture of its common stock investment in ComCentral. H&N was
paid a fee of $300,000 as specified in the agreement and it was
charged to expense in 1993.
ADVANCES TO H&N--The agreements referred to above grant H&N the
right to receive advances from the Company from time to time, in
amounts to be determined by the Board of Directors of the Company
based upon the Company's financial needs and financial condition at
the time. The Company advanced H&N $335,444 and $380,732 during the
years ended December 31, 1993 and 1992, for pending acquisition
projects. The balance outstanding at December 31, 1993, of $716,176
is non interest bearing, unsecured, and may be offset against future
management fees.
PREPAID LOAN GUARANTEE--In connection with the lease of its
manufacturing facilities discussed in Note 8, the Company's two
principal shareholders personally guaranteed the Company's obligations
to the lessor over the term of the lease. The Company agreed to pay
each of the two shareholders 3% of the total future value of the lease
payments, excluding executory costs, as consideration for the personal
guarantee. This amount was paid during 1991. The cost of the guarantee
to the Company, 6% of $7 million, or $420,000 has been deferred as a
financing cost (prepaid loan 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,
1993, was approximately $84,000.
COMCENTRAL SALE OF CUSTOMER ACCOUNTS AND EQUIPMENT--In 1992,
ComCentral sold certain customer accounts and tangible personal
property to Tampa Bay Financial ("TBF") in exchange for a promissory
note in the principal amount of $980,000. The note received was
recorded by ComCentral at zero value and the basis of the assets sold
($130,865) was recorded as a bad debt of $1,358,268 for the year ended
December 31, 1992, which also included other amounts due from TBF due
to uncertainties as to collectibility (see Note 16). The goodwill
expensed by Teletronics attributable to the assets sold, is reflected
as a loss on the sale of contracts
F-18
<PAGE> 44
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(10) RELATED PARTY TRANSACTIONS: (Continued)
and equipment in the amount of $87,069 in the accompanying
consolidated income statement. The Company has also agreed to sell
TBF additional equipment at predetermined prices in exchange for TBF's
agreement to pay ComCentral 30% of the net revenues from any related
business. ComCentral has also agreed to grant TBF the right to book
traffic under certain agreements with long distance carriers in
exchange for TBF's agreement to pay ComCentral 30% of the net revenues
from any related business.
DUE FROM WHITFIELD CAPITAL OF SARASOTA, INC.--Whitfield is
owned by a major shareholder of the Company and serves as an escrow
agent for the Company. The amount due from Whitfield Capital of
Sarasota, Inc. ("Whitfield") at December 31, 1993, represents
proceeds from the sale of approximately 200,000 shares of ComCentral
common stock which took place in December 1993.
DUE FROM RECEIVABLE DYNAMICS INC.--The Company has subleased
building space to Receivable Dynamics, Inc. (RDI) which is owned by a
major shareholder. The Company has continued to pay the rent and
record an amount due from RDI of $44,879 at December 31, 1993.
(11) INDUSTRY SEGMENT INFORMATION:
The Company operated principally in two industry segments
during 1993, telecommunications products and telecommunications software
development. During 1992, the Company operated principally in the
telecommunications products segment and telecommunications and operator
services. Teltronics operates in the telecommunications products segment
("product segment") which includes design, manufacture and sale of
telecommunications related hardware and software products including long
distance management, remote maintenance, ACD information management and call
accounting products and the development of telecommunications software
("software segment"). ComCentral operates in the telecommunications and
operator services segment ("service segment") which includes marketing and
providing long distance telecommunication and operator services to the
hospitality industry, hospitals, universities and pay telephone owners. The
1992 information provided below includes ComCentral (service segment) for the
eight months ended August 31, 1992 (see Note 3). Business segment information
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
--------------------------------------------------------
PRODUCT SOFTWARE
SEGMENT SEGMENT TOTALS
------- ------- ------
<S> <C> <C> <C>
Total revenues $10,341,189 $1,447,324 $11,788,513
Operating loss (1,332,098) (370,825) (1,702,923)
Identifiable assets 8,356,067 2,391,634 10,747,701
Depreciation and amortization 378,510 484,828 863,338
Capital expenditures 181,434 - 181,434
</TABLE>
F-19
<PAGE> 45
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(11) INDUSTRY SEGMENT INFORMATION: (Continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
--------------------------------------------------------
PRODUCT SERVICE
SEGMENT SEGMENT TOTALS
------- ------- ------
<S> <C> <C> <C>
Total revenues $11,811,130 $8,205,215 $20,016,345
Operating income 400,689 143,070 543,759
Identifiable assets 7,508,711 286,939 7,795,650
Depreciation and amortization 331,772 288,637 620,409
Capital expenditures 499,132 256,336 755,468
</TABLE>
The Company eliminated $144,000 and $280,000 of profit on
sales of $404,000 and $550,000 in the product segment in 1993 and 1992,
respectively.
Sales to certain customers representing more than 10% of net
sales were as follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Customer #1 $1,868,000 $1,927,000
Customer #2 1,300,000 -
</TABLE>
All of these sales were to customers within the product
segment.
(12) INCOME TAXES:
Effective January 1, 1993, the Company changed its method of
accounting for income taxes from the deferred method to the liability method
(see Note 2). The 1992 income tax provision has not been restated to reflect
the liability method.
The provision (benefit) for income taxes consists of the
following:
<TABLE>
<CAPTION>
1993
-----------------------------------------------
STATE FEDERAL TOTAL
------- --------- ---------
<S> <C> <C> <C>
Current $ - $(336,000) $(336,000)
Deferred - 212,000 212,000
------- --------- ---------
Total $ - $(124,000) $(124,000)
======= ========= =========
<CAPTION>
1992
-----------------------------------------------
STATE FEDERAL TOTAL
------- --------- ---------
<S> <C> <C> <C>
Current $ - $ (51,000) $ (51,000)
Deferred 37,400 269,000 306,000
------- --------- ---------
Total $37,400 $ 218,000 $ 255,400
======= ========= =========
</TABLE>
F-20
<PAGE> 46
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(12) INCOME TAXES: (Continued)
Deferred income tax components at December 31, 1993, are as follows:
<TABLE>
<S> <C>
Inventory $ 123,700
Accelerated depreciation (168,300)
Bad debt allowance 48,600
Accrued vacation 105,000
Software costs (404,000)
Deferred revenue 24,450
---------
$(270,550)
=========
</TABLE>
A reconciliation of the provision for income taxes to the
amount calculated using the statutory federal rate (34%) in 1993 and 1992 is as
follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Income tax benefit at federal statutory
rate $ (66,600) $1,124,400)
Equity accounting adjustments (120,100) -
State income taxes, net of federal benefit - 24,700
Purchase accounting adjustments - 70,800
Loss of consolidated subsidiary not
consolidated for tax purposes - 1,187,800
Elimination of related party sale 50,400 95,200
Other, net 12,300 1,300
--------- ----------
Income tax provision (benefit) $(124,000) $ 255,400
========= ==========
</TABLE>
The tax effect of timing differences giving rise to deferred
income tax provisions (benefits) at December 31, 1992, are summarized as
follows:
<TABLE>
<CAPTION>
1992
----
<S> <C>
Depreciation $ 31,000
Provision for doubtful accounts 10,000
Inventory (4,000)
Accrued vacation (7,000)
Software development costs 272,900
Other accrued expenses 3,500
--------
$306,400
========
</TABLE>
(13) ACCRUED LIABILITIES:
The balance of accrued liabilities includes accrued
compensated absences totaling $260,000 at December 31, 1993.
F-21
<PAGE> 47
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(14) CONCENTRATIONS OF CREDIT RISK:
The Company extends credit to its customers resulting in a
significant concentration of credit risk from groups of counter-parties engaged
in similar activities or having similar economic characteristics. The
Company's principal customers include regional Bell operating companies,
independent telephone companies and alternate operator service providers
located throughout the U.S. The Company has no policy requiring collateral or
other security to support accounts receivable from these customers which are
subject to credit risk.
(15) COMPUTATION OF INCOME (LOSS) PER SHARE:
Dividends in arrears of approximately $25,000 at December 31,
1993, on the Company's investment in ComCentral preferred shares discussed in
Note 3 are included in the Company's earnings (loss) per share and are deducted
from the earnings available to common shareholders of ComCentral to the extent
applicable to the period included in consolidation.
The Company's proportionate interest in ComCentral's earnings
attributable to common stock included in consolidated earnings per share in
1992 is based on ComCentral's reported net loss of $3,750,410 (net loss per
common share of $1.11) and a weighted average number of common shares
outstanding of 4,822,000 for the period included in consolidation.
(16) RESTATEMENT OF 1992 AND 1993 FINANCIAL STATEMENTS:
The financial statements as of and for the year ended
December 31, 1992 and 1993, have been restated from those originally presented
to reflect certain adjustments as described below:
DECEMBER 31, 1992
WRITE-OFF OF RELATED PARTY RECEIVABLES--The Company has
revised the financial statements for the year ended December 31, 1992,
to reflect the write-off of receivables owed to ComCentral together
with related accrued interest from certain related parties due to
doubtful collectibility. ComCentral is related to these entities by
common ownership and/or common control. These amounts were written
off by ComCentral in various periods in 1992, both before and after
deconsolidation (see Note 3). The amounts are summarized as follows:
<TABLE>
<CAPTION>
RECEIVABLE FROM
<S> <C>
Southnet Corporation $ 273,705
Tampa Bay Financial 630,865
KL Communications 1,240,000
American 500,000
----------
Total bad debt $2,644,570
==========
</TABLE>
VALUATION ADJUSTMENTS RELATED TO CROSS-LICENSE AGREEMENT--The
value of the assets (goodwill and equipment) acquired under the
cross-license agreement with American (see Note 3) was reduced to zero
during the year ended December 31, 1992, due to doubt as to the future
benefit to ComCentral. The adjustment reduces ComCentral's originally
reported assets by the following amounts:
F-22
<PAGE> 48
TELTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(16) RESTATEMENT OF 1992 AND 1993 FINANCIAL STATEMENTS: (Continued)
<TABLE>
<S> <C>
Valuation adjustment to goodwill $(210,292)
Valuation adjustment to equipment (500,000)
---------
Total restatement effect $(710,292)
=========
</TABLE>
ELIMINATION OF GAIN ON SALE TO RELATED PARTY--The Company has
revised the financial statements for the year ended December 31, 1992,
to eliminate the $675,529 gain previously reported on the sale of
certain contracts to Tampa Bay Financial (see Note 10).
MANAGEMENT FEE TO INTERNATIONAL PETROLEUM--The financial
statements for the year ended December 31, 1992, have been revised to
expense a $600,000 management fee to International Petroleum by
ComCentral rather than record a note receivable based on International
Petroleum's agreement to repay the management fee to ComCentral as was
previously reported (see Note 10). ComCentral has not assigned any
value to the note receivable due to uncertainties concerning its
collectibility.
The effect of these changes on the Company's 1992 statement of
operations was to reduce the net income previously reported by
$2,363,682 with a related deduction in net income per share of $.20
for the year ended December 31, 1992. The income tax provision for
1992 decreased $394,000 and the related extraordinary item decreased
$69,600 for the changes related to ComCentral as previously described.
DECEMBER 31, 1993
ADJUSTMENT TO SOFTWARE LICENSING RIGHTS--The value of the
software licensing rights was reduced by $368,407 during the year
ended December 31, 1993, to restate the costs originally capitalized
for amounts not deemed to have future value.
The effect of this change on the Company's 1993 statement of
operations was to reduce the net income previously reported by
$219,566 with a related reduction in net income per share of $.02 for
the year ended December 31, 1993. The income tax benefit for 1993
increased $112,000 for the change described above.
(17) SIGNIFICANT FOURTH QUARTER ADJUSTMENTS:
The Company recorded an acquisition of software licensing
rights effective January 1, 1993, and an obligation to pay royalties under the
agreement. This resulted in an increase in software licensing rights of
$1,422,782 and an increase in long-term debt of $1,384,518. At December 31,
1993, the unamortized portion of the related software licensing rights was
$1,280,504 and the balance of the long-term obligation was $1,151,087 (see
Notes 2 and 7).
F-23
