<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A-1
AMENDMENT TO APPLICATION OR REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported) December 4, 1996
------------------------
(October 7, 1996)
TELTRONICS, INC.
- ------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
Delaware 0-17893 59-2937938
- ------------------------------------------------------------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification
Number)
2150 Whitfield Industrial Way, Sarasota, Florida 34243-9706
- ------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (941) 753-5000
---------------------
The above Registrant hereby amends the following items, financial
statements, exhibits or other portions of its current Report on Form 8-K
dated October 4, 1996 as set forth in the pages attached hereto:
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned hereunto duly authorized.
Teltronics, Inc.
(Registrant)
Dated: December 4, 1996 By: /s/ Ewen R. Cameron, President
------------------ ------------------------------------
<PAGE>
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
The financial statements of the business acquired are
attached to this Amendment No. 1.
(b) Pro Forma Financial Information
The following unaudited pro forma consolidated
statements of operations of Teltronics, Inc. ("Teltronics") for the year
ended December 31, 1995 and for the nine months ended September 30, 1996
gives effect to the September 1996 purchase of Shared Resource Exchange,
Inc. ("SRX"). The pro forma consolidated financial statements are based on
the historical financial statements of Teltronics and SRX after giving
effect to the transaction using the purchase method of accounting and the
assumptions and adjustments in the accompanying notes to the pro forma
consolidated financial statements.
<PAGE>
ITEM 7(a)
FINANCIAL STATEMENTS
SHARED RESOURCE EXCHANGE, INC.
YEARS ENDED DECEMBER 31, 1995 AND 1994
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
SHARED RESOURCE EXCHANGE, INC.
FINANCIAL STATEMENTS
Years ended December 31, 1995 and 1994
CONTENTS
Report of Independent Auditors........................................1
Audited Financial Statements
Balance Sheets........................................................2
Statements of Operations..............................................3
Statements of Changes in Shareholders' Equity.........................4
Statements of Cash Flows..............................................6
Notes to Financial Statements.........................................7
<PAGE>
ERNST & YOUNG LLP
2121 San Jacinto Street
Suite 500
Dallas, Texas 75201
Phone: 214-969-8000
Fax: 214-969-8587
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Shared Resource Exchange, Inc.
We have audited the accompanying balance sheets of Shared Resource
Exchange, Inc. (the Company), as of December 31, 1995 and 1994, and the
related statements of operations, changes in shareholders' equity, and cash
flows for the years then ended. 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 Shared Resource
Exchange, Inc., at December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 11, the Company has filed a petition for
reorganization under Chapter 11 of the United States Bankruptcy Code. The
uncertainties inherent in the bankruptcy process and the Company's
recurring losses from operations raise substantial doubt about the
Company's ability to continue as a going concern. Since the bankruptcy
filing, the Company has obtained Court approval for the sale of
substantially all of the Company's assets and the assumption of
substantially all of the Company's liabilities by the acquiring company.
The Company will file a Plan of Reorganization with the Court and believes
that its obligations under this Plan of Reorganization will be satisfied
upon the liquidation of the consideration received pursuant to the sale of
assets discussed above. The accompanying financial statements reflect
significant write downs of inventory and long-lived assets which management
believes reflect the ultimate value of these assets upon disposition.
However, the financial statements do not reflect additional material
adjustments to asset values and liabilities which could result from the
final disposition of assets or liquidation of liabilities in accordance
with the final Plan of Reorganization at amounts different from those
reflected in the accompanying financial statements.
October 25, 1996 /s/ ERNST & YOUNG LLP
-------------------------------
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<PAGE>
SHARED RESOURCE EXCHANGE, INC.
<TABLE>
Balance Sheets
<CAPTION>
DECEMBER 31
1995 1994
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,705,180 $ 8,042,495
Accounts receivable, less allowance of
$382,798 in 1995 and $275,291
in 1994 (Note 8) 2,290,486 2,433,677
Inventories (Notes 1 and 8) 1,776,207 1,974,220
Prepaid expenses and other current assets 88,594 413,478
------------ ------------
Total current assets 5,860,467 12,863,870
Equipment and furniture (Notes 2 and 3) 3,907,325 3,938,373
Accumulated depreciation and amortization 2,904,981 2,505,124
------------ ------------
1,002,344 1,433,249
Other assets 98,491 181,419
------------ ------------
Total assets $ 6,961,302 $ 14,478,538
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses (Note 1) $ 2,995,998 $ 3,456,012
Note payable (Note 6) 0 1,500,000
Current portion of capital lease
obligations (Note 3) 32,712 34,239
------------ ------------
Total current liabilities 3,028,710 4,990,251
Capital lease obligations, less current
portion (Note 3) 58,192 91,391
Commitments and contingencies Notes 3 and 10)
Shareholders' equity (Note 4):
Series A Preferred Stock, $.01 par value:
Authorized shares - 1,006,419
Issued and outstanding shares -
683,050 in 1995 and 600,300 in 1994 6,831 6,003
Series B Preferred Stock, $.01 par value:
Authorized shares - 1,608,017
Issued and outstanding shares -
1,533,937 in 1995 and 1994 15,339 15,339
Series C Preferred Stock, $.01 par value:
Authorized shares - 2,285,714
Issued and outstanding shares -
1,045,124 in 1995 and 1994 10,451 10,451
Series D Preferred Stock, $.01 par value:
Authorized shares - 1,428,57
Issued and outstanding shares -
395,338 in 1995 and 1994 3,953 3,953
Series E Preferred Stock, $.01 par value:
Authorized shares - 9,100,000
Issued and outstanding shares -
8,997,333 in 1995 and 1994 89,973 89,973
Common stock, $.001 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 285,589
in 1995 and 280,271 in 1994 286 280
Additional capital 38,194,818 38,111,042
Accumulated deficit (34,446,654) (28,839,550)
Cost of common stock in treasury -
7,281 and 6,032 shares in 1995
and 1994, respectively (597) (595)
----------- -----------
Total shareholders' equity 3,874,400 9,396,896
----------- -----------
Total liabilities and shareholders' equity $ 6,961,302 $14,478,538
=========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
SHARED RESOURCE EXCHANGE, INC.
<TABLE>
Statements of Operations
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
-----------------------------
<S> <C> <C>
Net sales (Note 8) $ 15,130,711 $ 12,910,004
Cost of sales 9,924,219 8,520,316
------------ ------------
5,206,492 4,389,688
Operating expenses:
Research and development 3,993,107 3,138,709
Marketing and sales 5,110,191 3,291,878
General and administrative 1,486,706 1,558,531
Loss on write down of inventory (Note 1) 1,009,874 0
Loss on impairment of equipment, furniture,
and other assets (Note 2) 920,336 0
------------ ------------
12,520,214 7,989,118
------------ ------------
Operating loss (7,313,722) (3,599,430)
Gain on patent licensing and
assignment (Note 9) 1,510,000 0
Interest expense (1,916) (127,222)
Other income (expense), net 4,552 (15,738)
Interest income 193,982 7,559
------------ ------------
Net loss $ (5,607,104) $ (3,734,831)
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
SHARED RESOURCE EXCHANGE, INC.
<TABLE>
Statements of Changes in Shareholders' Equity
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
COMMON PREFERRED PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK STOCK STOCK
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $280 $6,003 $15,339 $10,451 $ 0
Issuance of Series D
Preferred Stock,
$.01 par value 0 0 0 0 3,953
Issuance of Series E
Preferred Stock,
$.01 par value 0 0 0 0 0
Exercise of 756 common
stock options 0 0 0 0 0
Net loss 0 0 0 0 0
---- ------ ------- ------- ------
Balance at December 31, 1994 280 6,003 15,339 10,451 3,953
Exercise of Series A
Preferred Stock Warrants
to purchase 82,750 shares 0 828 0 0 0
Exercise of 5,318 common
stock options 6 0 0 0 0
Purchase of Treasury Stock 0 0 0 0 0
Net loss 0 0 0 0 0
---- ------ ------- ------- ------
Balance at December 31, 1995 $286 $6,831 $15,339 $10,451 $3,953
==== ====== ======= ======= ======
</TABLE>
See accompanying notes.
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<PAGE>
SHARED RESOURCE EXCHANGE, INC.
<TABLE>
Statements of Changes in Shareholders' Equity
<CAPTION>
SERIES E TREASURY
PREFERRED ADDITIONAL ACCUMULATED COMMON
STOCK CAPITAL DEFICIT STOCK TOTAL
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 0 $27,823,823 $(25,104,719) $(595) $2,750,582
Issuance of Series D
Preferred Stock,
$.01 par value 0 1,379,730 0 0 1,383,683
Issuance of Series E
Preferred Stock,
$.01 par value 89,973 8,907,360 0 0 8,997,333
Exercise of 756 common
stock options 0 129 0 0 129
Net loss 0 0 (3,734,831) 0 (3,734,831)
------- ----------- ------------ ----- ----------
Balance at December 31, 1994 89,973 38,111,042 (28,839,550) (595) 9,396,896
Exercise of Series A
Preferred Stock Warrants
to purchase 82,750 shares 0 81,922 0 0 82,750
Exercise of 5,318 common
stock options 0 1,854 0 0 1,860
Purchase of Treasury Stock 0 0 0 (2) (2)
Net loss 0 0 (5,607,104) 0 (5,607,104)
------- ----------- ------------ ----- -----------
Balance at December 31, 1995 $89,973 $38,194,818 $(34,446,654) $(597) $3,874,400
</TABLE>
See accompanying notes.
-5-
<PAGE>
SHARED RESOURCE EXCHANGE, INC.
<TABLE>
Statements of Cash Flows
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(5,607,104) $(3,734,831)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 747,636 625,462
Interest converted to equity 0 7,120
Loss on disposal of equipment 4,777 7,764
Loss on impairment of equipment, furniture,
and other assets 920,336 0
Loss on write down of inventories 1,009,874 0
Loss on write down of capitalized software 546,250 0
Changes in operating assets and liabilities:
Accounts receivable 143,191 532,459
Inventories (811,861) (1,006,294)
Prepaid expenses and other 324,884 (41,496)
Other assets 1,434 (46,142)
Accounts payable and accrued expenses (460,014) 174,215
----------- -----------
Net cash used in operating activities (3,180,597) (3,481,743)
INVESTING ACTIVITIES
Purchases of equipment and furniture (1,161,424) (554,685)
Capitalized software costs (546,250) 0
Proceeds from sale of equipment and furniture 1,075 3,200
----------- -----------
Net cash used in investing activities (1,706,599) (551,485)
FINANCING ACTIVITIES
Principal payments on capital lease obligations (34,727) (13,487)
Payments on factoring receivables, net 0 (83,003)
(Payments on) proceeds from notes payable (1,500,000) 1,500,000
Purchase of treasury stock (2) 0
Proceeds from issuance of preferred stock 82,750 10,373,896
Proceeds from issuance of common stock 1,860 129
----------- -----------
Net cash (used in) provided by financing
activities (1,450,119) 11,777,535
----------- -----------
Net (decrease) increase in cash and
cash equivalents (6,337,315) 7,744,307
Cash and cash equivalents at beginning of year 8,042,495 298,188
----------- -----------
Cash and cash equivalents at end of year $ 1,705,180 $ 8,042,495
=========== ===========
SUPPLEMENTAL INFORMATION
Cash paid for interest $ 1,917 $ 134,342
=========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
SHARES RESOURCE EXCHANGE, INC.
Notes to Financial Statements
December 31, 1995 and 1994
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Shared Resource Exchange, Inc. (the Company) was formed in 1983 to design,
market, sell, manufacture and support digital voice and data transmission
systems. The Company's revenues are derived primarily from sales to
customers throughout the United States.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (weighted-average method) or
market. Inventories consist of the following at December 31:
1995 1994
-----------------------
Finished goods $ 471,309 $ 932,965
Work in process 322,159 453,845
Raw materials 982,739 587,410
---------- ----------
$1,776,207 $1,974,220
========== ==========
As of December 31, 1995, the Company determined inventories with a carrying
amount of $1,009,874 were no longer marketable and, accordingly, recorded a
charge to operating expense to reduce the carrying amount to zero.
EQUIPMENT AND FURNITURE
Equipment and furniture are stated at cost. Major renewals and betterments
are capitalized. Maintenance and repairs are charged to operations as
incurred. Provisions for depreciation and amortization of equipment and
furniture are computed using the straight-line method over estimated useful
lives of 3 to 5 years.
-7-
<PAGE>
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
ACCRUED EXPENSES
Accrued expenses include $277,680 and $607,718 at December 31, 1995 and
1994, respectively, for repairs on returned merchandise and estimated
warranty expense.
REVENUE RECOGNITION
Sales revenue is generally recognized at the time of shipment provided that
no significant vendor and post-contract support obligations are outstanding
and that collections of the resulting receivables are probable. If such
obligations are present in the contract, revenue is not recognized until
such time as the contractual obligations are met.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the year in
which such costs are incurred. During 1995, the Company initially
capitalized software development costs of approximately $546,000. However,
at December 31, 1995, these costs were charged to research and development
expense to reflect their net realizable value.
CREDIT RISK
Credit is extended to customers based upon evaluation of the customer's
financial condition and, generally, collateral is not required. The Company
maintains an allowance for doubtful accounts based upon expected
collectibility. Any losses from bad debts have historically been within
management's expectations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from these estimates.
RECLASSIFICATIONS
Certain amounts from prior years have been reclassified to conform to
current year presentation.
-8-
<PAGE>
2. EQUIPMENT AND FURNITURE
Equipment and furniture consist of the following at December 31:
1995 1994
-----------------------
Equipment $3,765,453 $3,832,968
Furniture 141,872 105,405
---------- ----------
$3,907,325 $3,938,373
========== ==========
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-
LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to be
recognized for long-lived assets used in operations when indicators of
impairment are present and estimated future undiscounted cash flows are not
sufficient to recover the assets' carrying amount. The impairment loss is
measured by comparing the fair value of the asset to its carrying amount.
The Company elected early adoption of Statement No. 121 as of December 31,
1995.
As of December 31, 1995, the Company determined assets with a carrying
value of $2,066,054 were impaired and wrote them down by $920,336 to their
fair value. Fair value was based on the estimated future cash flows from
liquidation of the assets as described in Note 11.
3. LEASE AGREEMENTS
CAPITAL LEASES
The Company leases equipment under long-term leases and has the option to
purchase the equipment for a nominal cost at the termination of the lease.
Equipment and furniture includes the following amounts for leases that have
been capitalized:
1995 1994
-----------------------
Equipment $ 136,887 $ 136,887
Less accumulated depreciation 38,121 11,080
--------- ---------
Total $ 98,766 $ 125,807
========= =========
-9-
<PAGE>
3. LEASE AGREEMENTS (continued)
Future minimum payments for capitalized leases were as follows at December
31, 1995:
1996 $ 49,329
1997 43,170
1998 13,919
----------
Total minimum lease payments 106,418
Less amounts representing interest 15,514
----------
Present value of net minimum lease payments $ 90,904
==========
OPERATING LEASES
The Company leases buildings under noncancelable operating leases that
expire in 2005. Future minimum payments, by year and in the aggregate under
noncancelable operating leases with maturities of one year or more, consist
of the following at December 31, 1995:
OPERATING LEASES
----------------
1996 $ 448,698
1997 487,709
1998 505,485
1999 523,261
2000 537,139
Thereafter 2,660,190
----------
Total minimum lease payments $5,162,482
==========
Total rent expense incurred by the Company under noncancelable operating
lease agreements was approximately $393,000 and $249,000 in 1995 and 1994,
respectively.
4. SHAREHOLDERS' EQUITY
PREFERRED STOCK
In December 1994, the Company filed a Restated Certificate of Incorporation
with the Delaware Secretary of State, increasing the number of the
Company's authorized shares to 36,000,000, consisting of 20,000,000 shares
of common stock and 16,000,000 shares of preferred stock.
-10-
<PAGE>
4. SHAREHOLDERS' EQUITY (continued)
Under the terms of the Company's preferred stock shareholder agreements,
the Series A, B, C, and E Preferred Stock will be automatically converted
to common stock at the conversion rate of 1 for 1 and the Series D
Preferred Stock will be automatically converted to common stock at the
conversion rate of 1 share of preferred stock for 3.5 shares of common
stock upon a sale of common stock in a public offering at an offering price
of $5.00 or more per share, which sale results in gross proceeds of not
less than $5,000,000. Also, upon approval by at least 51% of the holders,
the preferred stock may be converted to common stock at the above
conversion rate. Conversion of preferred stock to common stock would result
in the issuance of an additional 13,643,127 shares of common stock,
assuming the warrants to purchase 74,080 shares of Series B Preferred
Stock, 1,045,124 shares of Series C Preferred Stock and 45,000 shares of
Series E Preferred Stock are not exercised. Preferred shareholders have the
right to one vote for each share of common stock into which the preferred
stock could be converted. Voting rights are equal to those of common
shareholders. As of December 31, 1995, exercise prices on outstanding
warrants were $3.15, $3.50, and $1.00 for Series B, C, and E Preferred
Stock, respectively.
Upon receiving written notice from at least 67% of the holders, the Company
shall redeem all shares of preferred stock in accordance with redemption
preferences and prices designated in the Restated Certificate of
Incorporation. The per-share redemption price is designated as (1) the
greater of issue price or fair market value as of a date within 45 days
after receipt by the Company of the holder's written notice of redemption,
plus (2) accrued or declared and unpaid dividends.
During 1995, warrants to purchase Series A Preferred Stock were exercised
at $1.00 per share resulting in the issuance of 82,750 shares of Series A
Preferred Stock.
In May 1994, the Board of Directors authorized the issuance of 1,428,572
shares of Series D Preferred Stock at a purchase price of $3.50 per share.
The Company issued 395,338 shares of Series D Preferred Stock, receiving
$1,384,000 in cash.
In December 1994, the Board of Directors authorized the issuance of
9,100,000 shares of Series E Preferred Stock at a purchase price of $1.00
per share. The Company issued 8,997,333 shares of Series E Preferred Stock
and received $7,767,000 in cash and $1,230,000 from the conversion of
principal and interest of a loan from investors made in November 1994.
Warrants to purchase 45,000 shares of Series E Preferred Stock at $1.00 per
share were issued to Silicon Valley Bank.
-11-
<PAGE>
4. SHAREHOLDERS' EQUITY (continued)
The terms of the Series A, B, and C Preferred Stock were amended in 1994 to
eliminate anti-dilution protection and to subordinate each such share to
the Series D and E Preferred Stock as to liquidation preference, dividends,
and redemption. The terms of the Series D Preferred Stock were also
adjusted to take into account the dilutive effect of the Series E Preferred
Stock financing which is reflected in the 1 to 3.5 conversion ratio to
common stock.
Dividends, when and if declared by the Board of Directors, are at the
annual rate of $0.10 in the case of Series A and E Preferred Stock, $0.315
in the case of Series B Preferred Stock, and $0.35 in the case of Series C
and D Preferred Stock. Dividends and distributions may be paid, or declared
and set aside for payment on shares of Series A, B, and C Preferred Stock
only if dividends have been paid, or declared and set aside for payment on
all shares of Series D and E preferred stock. Dividends shall be cumulative
for all designated preferred stock beginning July 1, 1997.
Upon liquidation, the holders of shares of Series D and E Preferred Stock
are entitled to receive, prior and in preference to the holders of Series
A, B, and C Preferred Stock or common stock, an amount per share equal to
$3.50 and $1.00, respectively, and all accrued but unpaid dividends before
any payment or any assets are distributed to the holders of the Series A,
B, and C Preferred Stock or common stock. After payment to the holders of
the Series D and E Preferred Stock, the holders of Series A, B, and C
Preferred Stock will be paid $1.00, $3.15, and $3.50, respectively, and all
accrued but unpaid dividends before any payment is made or any assets are
distributed to holders of common stock. Remaining proceeds will be split on
a pro rata basis with all stockholders on an as-converted basis.
COMMON STOCK
At December 31, 1995, the Company has reserved approximately 15,131,000
shares of common stock for the conversion of preferred stock. The Company
also has reserved approximately 3,575,000 shares of common stock for
issuance to employees or consultants.
INCENTIVE STOCK OPTION PLAN
The Company established an Incentive Stock Option Plan in 1983 and adopted
a new plan in 1994. Under the terms of the plan, options became exercisable
in increments over four years.
-12-
<PAGE>
4. SHAREHOLDERS' EQUITY (continued)
In July 1994, the Company canceled 1,454,803 outstanding options and
reissued an equal number of options at an exercise price of $.35 per share.
Options reissued retained the vested status of all canceled options.
At December 31, 1995 and 1994, approximately 966,000 and 785,000 shares of
common stock, respectively, under the Incentive Stock Option Plan were
exercisable at $.35 per share.
During 1995, options to purchase 5,318 shares of common stock were
exercised at $.35 per share. During 1994, options to purchase 756 shares of
common stock were exercised at prices ranging from $.10 to $.31 per share.
At December 31, 1995 and 1994, options to purchase 3,490,295 and 1,485,277
shares, respectively, were outstanding. There were options to purchase
2,156,964 and 805,103 shares of common stock granted during 1995 and 1994,
respectively.
5. INCOME TAXES
The Company accounts for income taxes using the liability method required
by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred income taxes include
depreciation, book reserves, bad debts, inventory valuation methods, and
net operating loss and tax credit carryforwards.
At December 31, 1995 and 1994, the components of deferred taxes were as
follows:
1995 1994
--------------------------
Total deferred tax assets $13,286,700 $11,277,810
Total deferred tax liabilities (15,574) (23,732)
Total valuation allowance (13,271,126) (11,254,078)
----------- -----------
Net deferred tax assets $ 0 $ 0
=========== ===========
-13-
<PAGE>
5. INCOME TAXES (continued)
The income tax benefit of current and prior year losses has been fully
reserved by a tax valuation allowance. During 1995, the allowance was
increased by approximately $2,017,000.
At December 31, 1995, the Company has net operating loss and tax credit
carryforwards of approximately $30,830,000 and $700,000, respectively,
which begin to expire in 1998. Future utilization of a significant portion
of the carryforwards is restricted as a result of prior year changes in
ownership, as defined by federal income tax law. In addition, as more fully
discussed in Note 11, the proposed Reorganization and liquidation of the
Company will restrict the ability to utilize the carryforwards.
6. NOTE PAYABLE
In August 1994, the Company signed a note to borrow $1,500,000 from Silicon
Valley Bank with interest at a rate equal to three percentage points above
the Prime Rate (11.5% at December 31, 1994). Substantially all of the
assets of the Company were pledged as collateral against this note. In
January 1995, the Company paid in full the principal balance and accrued
interest on the Silicon Valley Bank note.
7. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) defined contribution plan for all employees who
meet certain eligibility requirements. The Company contributes amounts
approved by the Board of Directors. Company contributions of $56,220 and
$57,689 were made in 1995 and 1994, respectively.
8. SIGNIFICANT VENDOR AND CUSTOMERS
A majority of the Company's inventories are purchased from Texas
Instruments, Incorporated, under a manufacturing agreement that can be
terminated by either party with 30 days' notice.
In 1995, sales to and receivables from Motorola, Inc., totaled
approximately $3,843,000 and $1,141,221, or 26% and 43%, of the Company's
sales and accounts receivable, respectively. No other customer accounted
for more than 10% of the Company's revenues or receivables in 1995.
-14-
<PAGE>
8. SIGNIFICANT VENDOR AND CUSTOMERS (continued)
In 1994, sales to and receivables from Motorola, Inc., totaled
approximately $4,103,000 and $441,000, or 32% and 16%, of the Company's
sales and accounts receivable, respectively. No other customer accounted
for more than 10% of the Company's revenues or receivables in 1994.
9. PATENT LICENSING AND ASSIGNMENT
In July 1995, the Company entered into a Patent License Agreement with
Advanced Fibre Communications, Inc. (AFC). Pursuant to the AFC License
Agreement, the Company granted AFC the worldwide right and license to
exploit U.S. Patent Nos. 4,799,216 and 4,685,104 (the DSC Patents) in
exchange for (i) $1,000,000 as compensation for AFC's use of the DSC
Patents prior to July 21, 1995 and (ii) royalty payments of $1,500,000 to
be paid in three equal payments of $500,000 in July of 1996, 1997 and 1998,
respectively. The $1,000,000 received by the Company from AFC described in
(i) above is included in the accompanying Statement of Operations as gain
on patent licensing and assignment.
In August 1995, the Company entered into a Patent Assignment Agreement with
DSC Communications Corporation (DSC) in which DSC acquired the DSC Patents
and related royalty payments described in (ii) above, subject to the
retention by the Company of certain rights pertaining to the patents. The
Company received an assignment fee of $510,000 from DSC associated with
this assignment which is included in the accompanying Statement of
Operations as gain on patent licensing and assignment.
In May 1996, DSC paid the Company $1,000,000 in exchange for the assignment
by the Company to DSC of substantially all of its remaining right, title
and interest in the AFC License Agreement and in the DSC Patents.
10. LITIGATION AND CLAIMS
The Company is involved in legal actions and claims that relate to various
contracts and other matters. The Company is defending itself vigorously,
and in the opinion of management, the final disposition of these matters
will not have a material adverse effect on the Company's financial position
or results of operations.
-15-
<PAGE>
11. CHAPTER 11 REORGANIZATION AND BASIS OF PRESENTATION
On August 15, 1996, the Company was forced into bankruptcy proceedings by
the filing of an Involuntary Petition under Chapter 7 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Eastern
District of Texas, Sherman Division (Court). On August 20, 1996, the
Company exercised its right to convert the proceeding to a proceeding under
Chapter 11 of the United States Bankruptcy Code. The Court entered the
Order converting the case to a Chapter 11 proceeding on August 22, 1996.
The Company is operating its business as a Debtor-in-Possession and no
trustee or examiner has been requested or appointed by the Court.
Since the bankruptcy filing, the Company negotiated an Agreement of Sale
with SRX of Florida, Inc., a wholly owned subsidiary of Teltronics, Inc. On
September 19, 1996, the Company obtained Court approval for the Agreement
of Sale whereby substantially all of the assets and liabilities of the
Company were transferred to SRX of Florida, Inc.
The Company will file a Plan of Reorganization with the Court and believes
that its obligations under this Plan of Reorganization will be satisfied
upon the liquidation of the consideration received pursuant to the sale of
assets discussed above. The accompanying financial statements reflect
significant write downs of inventory and long-lived assets which management
believes reflect the ultimate value of these assets upon disposition.
However, the financial statements do not reflect additional material
adjustments to asset values and liabilities which could result from the
final disposition of assets or liquidation of liabilities in accordance
with the final Plan of Reorganization at amounts different from those
reflected in the accompanying financial statements.
Subject to Court approval and certain other limitations, the Company has
the right to assume or reject real estate leases, personal property leases,
service contracts and other unexpired executory contracts. Parties to
contracts which are rejected are entitled to file claims for losses or
damages sustained as a result of the rejection. These potential allowable
claims have not been reflected in the accompanying financial statements.
-16-
<PAGE>
ITEM 7(b)
<TABLE>
TELTRONICS, INC. AND SRX, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ending December 31, 1995
<CAPTION>
Pro Forma
Teltronics SRX Combined
------------------------------------------
<S> <C> <C> <C>
SALES $21,603,491 $15,130,711 $36,734,202
COST OF GOODS SOLD 13,224,984 9,924,219 23,149,203
----------- ----------- -----------
GROSS PROFIT 8,378,507 5,206,492 13,584,999
OPERATING EXPENSES
General and administrative 2,901,816 1,486,706 4,388,522
Research and development 1,448,664 3,993,107 5,441,771
Selling and marketing expenses 3,261,037 5,110,191 8,371,228
----------- ----------- -----------
7,611,517 10,590,004 18,201,521
OPERATING INCOME 766,990 (5,383,512) (4,616,522)
OTHER INCOME (EXPENSES)
Interest (381,645) 192,066 (189,579)
Miscellaneous (2,466) 4,552 2,086
Loss on write down of inventory 0 (1,009,874) (1,009,874)
Loss on impairment of
equipment/furniture/assets 0 (920,336) (920,336)
Gain on patent licensing and
assignment 0 1,510,000 1,510,000
Gain on sale of software rights 165,000 0 165,000
Financing expense (287,275) 0 (287,275)
----------- ----------- -----------
(506,386) (223,592) (729,978)
INCOME (LOSS) BEFORE INCOME TAXES 260,604 (5,607,104) (5,346,500)
PROVISION FOR INCOME TAXES (37,725) 0 (37,725)
NET PROFIT (LOSS) $ 222,879 $(5,607,104) $(5,384,225)
=========== =========== ===========
</TABLE>
7(b)-1
<PAGE>
TELTRONICS, INC. AND SRX, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 1996
(Unaudited)
[CAPTION]
Pro Forma
Teltronics SRX Combined
------------------------------------------
[S] [C] [C] [C]
SALES $20,372,810 $ 5,622,026 $25,994,836
COST OF GOODS SOLD 13,686,934 3,835,317 17,522,251
----------- ----------- -----------
GROSS PROFIT 6,685,876 1,786,709 8,472,585
OPERATING EXPENSES
General and administrative 1,681,862 1,288,235 2,970,097
Research and development 1,014,145 1,737,239 2,751,384
Selling and marketing expenses 3,945,159 1,775,228 5,720,387
----------- ----------- -----------
6,641,166 4,800,702 11,441,868
OPERATING INCOME 44,710 (3,013,993) (2,969,283)
OTHER INCOME (EXPENSES)
Interest (397,874) 6,907 (390,967)
Miscellaneous 0 (10,000) (10,000)
Gain on sale of patent
licensing 0 1,000,000 1,000,000
Loss on impairment of
fixed assets/inventory 0 424,115 424,115
Financing expense 11,979 0 11,979
----------- ----------- -----------
(385,895) 1,421,022 1,035,127
INCOME (LOSS) BEFORE INCOME TAXES (341,185) (1,592,971) (1,934,156)
PROVISION FOR INCOME TAXES 0 0 0
NET PROFIT (LOSS) $ (341,185) $(1,592,971) $(1,934,156)
=========== =========== ===========
7(b)-2
<PAGE>
TELTRONICS, INC. AND SRX, INC.
NOTES TO THE
PRO FORMA COMBINED STATEMENT OF OPERATIONS
The pro forma consolidated statements of operations set forth the
effects of Teltronics' purchase of substantially all of the assets of SRX
as if the transaction had been consummated on January 1, 1995.
These pro forma consolidated financial statements may not be
indicative of the results that actually would have occurred if the purchase
had been in effect on the dates indicated or which may be obtained in the
future. The pro forma consolidated financial statements should be read in
conjunction with the audited financial statements and accompanying notes of
SRX for the years ended December 31, 1995 and 1994 (filed with this report
under item 7(a)) and the audited consolidated financial statements and
accompanying notes of Teltronics included in its annual report on form 10-
KSB for he period ended December 31, 1995.
7(b)-3
