<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended March 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the Transition Period from __________ to __________.
COMMISSION FILE NUMBER: 0-17893
--------------------------------
TELTRONICS, INC.
----------------
(Exact name of registrant as specified in its charter)
DELAWARE
--------
(State or other jurisdiction of incorporation or organization)
59-2937938
----------
(I.R.S. Employer Identification Number)
2150 WHITFIELD INDUSTRIAL WAY
SARASOTA, FLORIDA 34243
-----------------------------
(Address of principal executive offices, including zip code)
941-753-5000
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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 [ ]
As of May 5, 1998 there were 3,415,513 shares of the Registrant's
Common Stock outstanding.
<PAGE> 2
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . 3-14
Consolidated Balance Sheets at March 31, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . . . .3-4
Consolidated Statements of Operations for the Three
Months ended March 31, 1998 and 1997. . . . . . . . . . . .5
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 1998 and 1997. . . . . . . . . . .6-7
Notes to Interim Consolidated Financial Statements. . . 8-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . .12-14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . 15
ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . .15-16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . 16
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . 16
ITEM 6A. EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 6B. REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . 17
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1998 1997
---------- -----------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 776,928 $ 435,538
Accounts receivable, net of allowance for
doubtful accounts of $125,000 at
March 31, 1998 and $679,927 at
December 31, 1997 3,066,477 4,823,382
Inventories 3,731,998 6,149,307
Prepaid expenses and other current assets 464,725 615,743
----------- -----------
Total current assets 8,040,128 12,023,970
----------- -----------
Property and equipment, net 3,657,001 3,666,881
----------- -----------
Other assets 488,046 361,913
----------- -----------
Total assets $12,185,175 $16,052,764
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 4
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt $ 3,949,880 $ 4,763,835
Current portion of capital lease obligations 133,662 159,215
Accounts payable 2,577,327 5,610,101
Accrued expenses and other current liabilities 1,129,632 1,541,228
----------- -----------
Total current liabilities 7,790,501 12,074,379
----------- -----------
Long-term liabilities:
Long-term debt, net of current portion 1,470,959 4,607,576
Capital lease obligations, net of
current portion 51,772 82,655
----------- -----------
Total long-term liabilities 1,522,731 4,690,231
----------- -----------
Commitments and contingencies
Shareholders' equity (deficiency):
Common stock, $.001 par value, 40,000,000
shares authorized, 3,415,513 issued
and outstanding 3,416 3,867
Non-voting common stock, $.001 par value,
5,000,000 shares authorized, zero shares
issued and outstanding. 0 0
Preferred stock, $.001 par value, 5,000,000
shares authorized -
Preferred Series A stock, $.001 par value,
100,000 shares authorized, 100,000
shares issued and outstanding 100 100
Preferred Series B Convertible stock,
$.001 par value, 25,000 shares authorized,
25,000 shares issued and outstanding 25 0
Additional paid-in capital 16,313,298 14,434,772
Accumulated deficit (13,444,896) (13,959,085)
Unpaid shares issued pursuant to Employee
Stock Payment Plan 0 (1,191,500)
----------- -----------
Total shareholders' equity (deficiency) 2,871,943 (711,846)
----------- -----------
Total liabilities and shareholders'
equity (deficiency) $12,185,175 $16,052,764
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 5
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March, 31
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net sales $6,639,522 $8,098,372
Cost of goods sold 4,115,372 5,618,759
---------- ----------
Gross profit 2,524,150 2,479,613
---------- ----------
Operating expenses:
General and administrative 992,897 727,699
Sales and marketing 1,202,826 1,127,498
Research and development 652,379 466,927
---------- ----------
2,848,102 2,322,124
---------- ----------
Income (loss) from operations (323,952) 157,489
---------- ----------
Other income (expense):
Interest (236,627) (219,467)
Financing (64,218) (46,388)
Litigation costs (4,096) (76,724)
Gain on disposition of AT Supply 1,148,250 0
Other 19,833 (36,865)
---------- ----------
863,142 (379,444)
---------- ----------
Income (loss) from operations before
income taxes 539,190 (221,955)
Income tax expense 0 0
---------- ----------
Net income (loss) $ 539,190 $ (221,955)
========== ==========
Income (loss) per share:
Basic $ .15 $ (.07)
Diluted $ .15 $ (.07)
Average number of common shares outstanding:
Basic 3,415,513 3,366,013
Diluted 3,487,870 3,366,013
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 6
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March, 31
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 539,190 $ (221,955)
Adjustments to reconcile net income (loss)
to net cash flows provided by (used in)
operating activities:
Bad debt expense (13,000) 26,497
Provision for obsolete inventory 58,928 0
Depreciation and amortization 208,832 197,447
Gain on disposition of AT Supply (1,148,520) 0
Changes in operating assets and liabilities,
net of dispositions:
Accounts receivable 690,364 287,818
Inventories 381,269 198,207
Prepaid expenses and other
current assets (165,657) (157,967)
Accounts payable 62,070 (2,943,618)
Accrued expenses and other liabilities (2,630) 27,061
---------- ----------
Net cash flows provided by (used in)
operating activities 610,846 (2,586,510)
---------- ----------
Cash Flows from Investing Activities:
Acquisition of property and equipment (233,695) (226,237)
Increase in other assets (126,133) (151,826)
Proceeds from disposition of AT Supply 50,000 0
---------- ----------
Net cash flows used in investing activities (309,828) (378,063)
---------- ----------
Cash Flows from Financing Activities:
Net change in cash overdraft 0 (25,180)
Net (payment) proceeds from line of credit (193,234) 117,384
Loan proceeds 1,281,115 4,250,000
Principal repayments of loans, notes
and leases (1,022,509) (292,545)
Proceeds from sale of preferred stock 0 24,125
Dividends on Series B Preferred Stock (25,000) 0
---------- ----------
Net cash flows from financing activities 40,372 4,073,784
---------- ----------
Net increase in cash and cash equivalents 341,390 1,109,211
Cash and cash equivalents - beginning of period 435,538 0
---------- ----------
Cash and cash equivalents - end of period $ 776,928 $1,109,211
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 7
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - Continued
<TABLE>
<CAPTION>
Three Months Ended March, 31
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Supplemental Non-cash Financing and
Investing Activities:
Issuance of preferred stock $2,500,000 $ 0
========== ==========
Issuance of warrants $ 569,600 $ 0
========== ==========
Note receivable from disposition of
AT Supply $ 200,000 $ 0
========== ==========
Cancellation of unpaid shares issued
pursuant to Employee Stock Payment Plan $1,191,500 $ 0
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 8
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS/BASIS OF PRESENTATION
Teltronics, Inc. (the "Company") was incorporated in Delaware in
February, 1989. The Company is engaged in product research,
design and manufacturing of electrical components, equipment and
software, primarily relating to the telecommunications industry.
The accompanying consolidated financial statements include the
accounts of the Company and is comprised of its wholly-owned
subsidiaries TTG Acquisition Corp. and Teltronics/SRX, Inc.
("SRX"), and its 80% owned subsidiary AT Supply, Inc. ("AT
Supply"), and its 85% owned subsidiary Interactive Solutions,
Inc. ("ISI"). AT Supply was sold on March 6, 1998.
The unaudited consolidated financial statements and related notes
have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission and on substantially
the same basis as the annual consolidated financial statements.
In the opinion of management, the consolidated financial
statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the
financial position, operating results, and cash flows for those
periods presented. Operating results for the three month period
ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31,
1998. These consolidated financial statements should be read in
conjunction with the consolidated financial statements, and notes
thereto, for the year ended December 31, 1997, as presented in
the Company's annual report on Form 10-KSB.
NOTE 2 - DISPOSITION
On March 6, 1998, the Company sold the assets and liabilities of
AT Supply, a majority owned subsidiary. The subsidiary was sold
to the minority owners of the subsidiary for $424,836 in cash and
a note receivable for $200,000. Interest on the note receivable
is payable at 12% and principal and interest are due monthly over
three years starting April 1, 1998. The note receivable is
secured by a second lien on assets and is personally guaranteed
by the principals of the buyer. The buyer paid $972,450 at
closing to terminate all liens and security interests with the
Company's principal lender. The buyer assumed responsibility for
payment of all liabilities. The Company recognized a gain of
$1,148,250 during the quarter ending March 31, 1998. Revenues
and net income for AT Supply were $1,278,000 and $6,000,
respectively for the quarter ended March 31, 1998. Revenues and
net loss were $2,308,000 and $(79,000), respectively for the
quarter ended March 31, 1997.
NOTE 3 - NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed by dividing net income
(loss), adjusted for preferred stock dividends, by the weighted
average number of issued and issuable common shares and dilutive
common equivalent shares outstanding during the applicable
period. Common equivalent shares consist of convertible
preferred stock, stock options (vested and unvested) and warrants
and are computed using the treasury stock method. Common
equivalent shares for 1997 were anti-dilutive and were not
included in the calculation of dilutive loss per share.
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"), EARNINGS PER SHARE. SFAS No. 128 replaced the calculation
of primary and fully diluted earnings per share with basic and
diluted earnings per share. All
<PAGE> 9
earnings per share amounts for all periods presented have been
restated to conform to the SFAS No. 128 requirements.
<TABLE>
<CAPTION>
The following table sets forth the computation of basic and
diluted earnings per share:
Three Months Ended March, 31
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
BASIC
Net income $ 539,190 $ (221,955)
Preferred dividends (25,000) 0
---------- ----------
Adjusted net income 514,190 (221,955)
Weighted average shares outstanding 3,415,513 3,366,013
---------- ----------
Net income (loss) per share $ .15 $ (.07)
========== ==========
DILUTED
Net income $ 539,190 $ (221,955)
Preferred dividends 0 0
---------- ----------
Adjusted net income 539,190 (221,955)
---------- ----------
Weighted average shares outstanding 3,415,513 3,366,013
Net effective of dilutive stock
options using the treasury stock method 72,357 0
---------- ----------
Total shares outstanding 3,487,870 3,366,013
---------- ----------
Net income (loss) per share $ .15 $ (.07)
========== ==========
</TABLE>
NOTE 4 - INVENTORIES
<TABLE>
<CAPTION>
The major classes of inventories are as follows:
March 31, December 31,
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
Raw materials $2,126,764 $2,368,547
Work-in-process 920,259 789,227
Finished goods 684,975 2,991,533
---------- ----------
$3,731,998 $6,149,307
========== ==========
</TABLE>
NOTE 5 - LONG TERM DEBT
On February 25, 1998, the Company issued $1,750,000 of Secured
Subordinated Debentures. The proceeds of the Debentures were
used for the partial repayment of the $4,250,000 Convertible
<PAGE> 10
Debentures issued on February 13, 1997. Interest is paid at 12%
per annum, payable quarterly starting May 1, 1998. The note is
due February 13, 2002 and fees paid in connection with the loan
totaled $8,750. The Debenture does not have a prepayment penalty
and is collateralized by a first lien on fixed assets and a
second lien on all other assets. The Holder of the Debenture
received 525,000 warrants to purchase the Company's Common Stock
at an exercise price of $2.75 per share. These warrants are
exercisable in whole, or in part, at any time during a five-year
period beginning on the date of issuance. The Debenture contains
certain financial covenants, including restrictions which could
affect future funding of ISI by the Company.
On February 25, 1998, the Company entered into senior Secured
Loans ("loans") for $1,000,000 and $280,000. The proceeds of the
loans were used for working capital ($1,000,000) and to repay the
$290,300 term loan agreement. Interest is paid at 12% per annum.
The $1,000,000 loan is due February 25, 1999 and interest is
payable quarterly starting May 15, 1998. The monthly principal
and interest payment on the $280,000 loan is $10,272 starting May
15, 1998 and the note is due October 1, 2000. Fees paid in
connection with these loans totaled $32,000. The loans do not
have a prepayment penalty and are collateralized by a first lien
on property and equipment and a second lien on all other assets.
The holder of the loans received 365,000 warrants to purchase the
Company's Common Stock at an exercise price of $2.75 per share.
These warrants are exercisable in whole or in part, at any time
during a five-year period beginning on the date of issuance. The
loan contains certain financial covenants, including restrictions
which could affect future funding of ISI by the Company.
NOTE 6 - SHAREHOLDERS' EQUITY (DEFICIENCY)
(A) Common Stock - On February 5, 1998, 450,500 shares of the
Company's Common Stock issued on May 15, 1997 and registered on
Form S-8 under the Employee Stock Payment Plan were cancelled.
On February 16, 1998, the Company cancelled reservations of the
following shares of the Company's Common Stock:
Teltronics Employee Stock Payment Plan..........661,600 shares
Teltronics Consultant Stock Payment Plan........105,000 shares
(B) Preferred Stock - On February 16, 1998, the Company reduced
the number of authorized shares designated as Series A Preferred
Stock from 250,000 to 100,000 such shares.
On February 16, 1998, the Company authorized 25,000 shares of
Series B Convertible Preferred Stock at a par value of $.001 per
share.
On February 25, 1998, the Company issued $2,500,000 of Series B
Convertible Preferred Stock. The Company issued 25,000 shares at
a par value of $.001 per share. The proceeds were used for the
partial repayment of the $4,250,000 Convertible Debentures issued
on February 13, 1997. The Series B Convertible Preferred Stock
provides for a $12 per share dividend, payable quarterly starting
May 15, 1998. The dividend increases to $20 after four years.
Fees paid in connection with this Preferred Stock totaled
$12,500. The holder of the Series B Convertible Preferred Stock
has the right at its option to convert to the Company's Common
Stock at $2.75 per share. The Series B Convertible Preferred
Stock cannot be called for two years and after two years, only if
the twenty-day average bid price exceeds $5.50 per share. After
four years, the Company has the right to redeem the Series B
Convertible Preferred Stock in full at 100% of the face value
plus accrued and unpaid dividends. The Series B Convertible
Preferred Stock contains certain financial covenants.
<PAGE> 11
(C) Warrants - As discussed, on February 25, 1998, the Company issued
890,000 warrants to purchase the Company's common stock at an exercise
price of $2.75 per share. These warrants are exercisable in
whole, or in part, at any time during a five year period
beginning on the date of issuance. The warrants are valued at
$569,600 or $.64 per share and are being amortized over five
years.
NOTE 7 - SUBSEQUENT EVENTS
On April 23, 1998, the Company sold the customer list and
maintenance and support agreements for the ORBi-TEL and non-Unix
call accounting product lines to MDR Telemanagement Limited.
These product lines were sold for $125,000 in cash, a contingent
consideration payable in one year of $125,000 and a 30%
commission based on sales, payable monthly. The gain on the sale
is $125,000 and the contingent gain of $125,000 and 30%
commission will be recorded when realized. Revenues for these
product lines were $60,499 for the quarter ended March 31, 1998.
Although the Company has been selling telemanagement products for
many years, it has not been able to become a major player, due to
the fragmented market and many competitors. The Company was not
the manufacturer of the ORBi-TEL product and therefore could not
control the costs or direction of that product. The Company,
therefore, took the decision to sell this product line to MDR
Telemanagement Limited.
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
A number of statements contained in this Report are forward-
looking statements within the meaning of the Private Securities
Litigation reform Act of 1995 that involve risks and
uncertainties that could cause actual results to differ
materially from those expressed or implied in the applicable
statements. These risks and uncertainties include, but are not
limited to the costs and the uncertainties associated with the
development and introduction of new products; risks related to
technological factors; potential manufacturing difficulties;
competitive market factors; and liability risks.
RESULTS OF OPERATIONS
The following tables set forth certain data, expressed as a
percentage of revenue, from the company's consolidated Statements
of Operations for the three month period ended March 31, 1998 and
1997.
<TABLE>
<CAPTION>
Three Months Ended March, 31
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 62.0% 69.4%
------ ------
Gross profit 38.0% 30.6%
------ ------
Operating expenses:
General and administrative 15.0% 9.0%
Sales and marketing 18.1% 13.9%
Research and development 9.8% 5.8%
------ ------
42.9% 28.7%
------ ------
Income (loss) from operations -4.9% 1.9%
------ ------
Other income (expense):
Interest -3.6% -2.7%
Financing -1.0% -0.6%
Litigation costs -0.1% -0.9%
Gain on disposition of AT Supply 17.3% 0.0%
Other 0.3% -0.5%
------ ------
12.9% -4.7%
------ ------
Income (loss) before income taxes 8.0% -2.8%
Income taxes 0.0% 0.0%
------ ------
Net income (loss) 8.0% -2.8%
====== ======
</TABLE>
Total sales for the three months ended March 31, 1998 decreased
by $1,459,000 over the same period of 1997. The sale of AT
Supply resulted in a sales decrease of $1,030,000 over the same
period of 1997. Electronic Manufacturing sales decreased
$493,000 over the same period of 1997
<PAGE> 13
due to the timing of shipments to such customers. ISI sales
increased $321,000 primarily due to billings to the Operation
Smart Force Consortium ("Consortium"). This Consortium consists
of Raytheon, Army National Guard, General Motors-Service
Technology Group and New Jersey Institute of Technology.
Gross profit for the three months ended March 31, 1998 increased
$44,000. The increase in gross profit was the result of improved
margins. The gross profit percentage of sales increased to 38.0%
from 30.6% for the same quarter of 1997. This increase was due
to product mix, with increased ISI sales and decreased low margin
sales for AT Supply and Electronic Manufacturing. Also,
personnel reductions were implemented in the first quarter of
1998.
Total operating expenses for the three months ended March 31,
1998 increased $526,000. General and administrative expenses
increased $265,000 for the quarter. This increase related to
increased payroll, travel and benefit plan expenses. Sales and
marketing expenses increased $76,000 for the quarter. This
increase related to increased marketing expenses for Teltronics
and SRX and increased payroll and travel expenses for ISI.
Research and development expenses increased $185,000 for the
quarter. This increase is the result of the Company's continued
funding of ISI and SRX.
Net loss from operations was $(324,000) for the quarter as
compared to a $157,000 profit for the same period of 1997. This
loss relates to increased operating expenses and the Company's
continued funding of ISI. Interest expense for the quarter was
$237,000 as compared to $219,000 for the same period of 1997.
This increase resulted from the Debentures and Loans issued to
Sirrom Capital Corporation.
Income tax expense for the quarter was offset by the realization
of net operating loss carry forwards.
Net income was $539,000 for the quarter as compared to a loss of
$(222,000) for the same period of 1997. AT Supply was sold for a
gain of $1,148,000 during the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash requirements were met with cash provided primarily by
operations, by borrowings from The CIT Group/Credit Finance
("CIT"), the Debentures and Senior Secured Loans discussed below
and the disposition of AT Supply.
The Company's working capital ratio at March 31, 1998 was 1.03:1
as compared to 1.0:1 at December 31, 1997. Net working capital
was $250,000 at March 31, 1998 as compared to $(50,000) at
December 31, 1997.
Net cash increased $341,000 during the quarter ended March 31,
1998. Net cash flows generated by operating activities was
$611,000 for the quarter ended March 31, 1998. Accounts
receivable decreased by $690,000 and inventory decreased by
$381,000 for the quarter ended March 31, 1998. Net cash flow
used in investing activities for the quarter ended March 31, 1998
was $(310,000). Acquisition of property and equipment totaled
$234,000 for the quarter ended March 31, 1998.
The Company entered into an agreement on February 25, 1998 with
Sirrom Capital. Pursuant to this agreement, the Company issued
$2,500,000 of Series B Convertible Preferred Stock and $1,750,000
of 12% Subordinated Secured Debentures due February 13, 2002.
The proceeds of this financing were used to repurchase $4,250,000
of 11% Subordinated Convertible Debentures
<PAGE> 14
due on February 13, 2002. In connection with the Subordinated
Convertible Debentures, the Company issued 525,000 warrants to
purchase the Company's common Stock at an exercise price of $2.75
per share. These warrants are exercisable in whole, or in part,
at any time during a five year period beginning on the date of
issuance.
The Company borrowed $1,280,000 from Sirrom Capital under a Loan
and Security Agreement between the Registrant and Sirrom Capital
dated February 25, 1998 ("Loan Agreement") and delivered its: (i)
Secured Senior Subordinated Promissory Note in the principal
amount of $1,000,000 with interest at 12% per annum maturing in
February, 1999, the proceeds of which are to be used for working
capital of the Company and (ii) Secured Senior Subordinated
Promissory Note in the principal amount of $280,000 with interest
at 12% per annum maturing in October, 2000, the proceeds of which
were used to pay an equipment loan made to the Company by CIT.
The Company issued 365,000 warrants to purchase the Company's
Common Stock at an exercise price of $2.75 per share. These
warrants are exercisable in whole, or in part, at any time during
a five year period beginning on the date of issuance.
In addition, the Company is exploring other equity financing.
CURRENT OUTLOOK
Generally, the start of the year is slow in the
telecommunications business. Traditionally, our customers, the
major PBX manufacturers, also have a slow start which reflects in
sales of our Remote Maintenance products.
The major Regional Bell Operating Company that signed a contract
late last year has been undergoing training during this first
quarter and the Company is now beginning to see requests for
proposals increasing from that organization. Sales should be
forthcoming during the second and third quarters of 1998 for the
Vision PBX product line.
The Consortium received a science and technology award from the
government to produce a proof of concept for the Smart Truck.
ISI received part of that funding to produce the interface
hardware. General Motors has now created some ten thousand
screens on the Northstar engine and is currently in test with
MENTIS (tm) computer in a number of dealerships. The Company is
manufacturing the first units of production quality FCC approved
MENTIS(tm) units.
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about September 12, 1995, Commstar, Ltd., a Canadian
corporation, commenced an action in the Circuit court of the
Thirteenth Judicial District, Hillsborough County, Florida,
against the Company, a director of the Company, and a former
majority owned subsidiary of the Company, seeking damages in
connection with a 1993 sale of shares of the former subsidiary.
The complaint, which seeks rescission, damages in excess of
$15,000, as well as costs and attorneys fees, was dismissed on
February 9, 1996 without prejudice. The complaint was
subsequently refiled and discovery in the action has commenced.
Although the complaint does not set forth precisely the damages
sought by Commstar, the complaint alleges that Commstar agreed to
pay $600,000 for the shares of the former subsidiary and that
Commstar owed the Company approximately $98,700.
On or about November 12, 1997, an action was commenced against
the Company by a former employee ("Plaintiff") seeking damages
exceeding $50,000 and injunctive relief, arising out of alleged
violations of the Americans With Disabilities Act, The Family
Medical Leave Act, and The Florida Human Rights Act. An answer
was served by the Company in December, 1997 denying liability and
asserting various affirmative defenses. A Reply to Affirmative
Defenses was served by the Plaintiff in December, 1997.
Discovery has commenced.
On January 28, 1998, an action was commenced against the Company
by Kelley Drye & Warren, LLP seeking approximately $172,000 for
legal fees incurred by Shared Resource Exchange, Inc. in
connection with the sale of substantially all of its assets to
the Company in September, 1996. The Plaintiff claims that the
Company agreed to pay all of its fees under the Agreement of Sale
entered into between Shared Resource Exchange, Inc. and the
Company on September 20, 1996. An answer was served by the
Company in April, 1998, denying liability and asserting various
affirmative defenses. Discovery has not yet commenced.
On February 16, 1998, the Company settled a lawsuit with C&L
Communications for $10,000 in cash and a $65,000 promissory note
from AT Supply. The Company was released from all liabilities as
part of the settlement. The total amount of the settlement was
accrued at December 31, 1997.
ITEM 2. CHANGES IN SECURITIES
On February 26, 1998, the Company issued to Sirrom Capital
Corporation, d/b/a Tandem Capital ("Sirrom Capital") 25,000
shares of Series B Convertible Preferred stock ("Series B
Preferred") for $2,500,000 under a Preferred Stock Purchase
Agreement between the Company and Sirrom Capital dated February
25, 1998.
The Series B Preferred Stock have rights and preferences as set
forth in a Certificate Of Designations Establishing Series of
Shares filed with the Secretary of State of Delaware including
voting rights; dividends payable in cash at the rate of $12.00
per share per annum payable quarterly; and payments of $100 per
share in the event of liquidation, dissolution or winding up of
the Company prior to any distributions to the holders of any
other class or series of capital stock of the Company, including
holders of Common Stock. The shares of series B Preferred Stock
are convertible at the option of the holder, in whole or in part,
at any time at an initial conversion price of $2.75 per share
subject to adjustment under certain circumstances. The Company
has the option commencing February 26, 2000 to redeem all (but
not less than all) of the Series B Preferred at a price per share
equal to $100 plus all accrued but unpaid dividends and interest,
if any, and any dividends in arrears provided the average bid
price of the Company's Common Stock
<PAGE> 16
exceeds $5.50 per share with respect to each of the twenty
trading days immediately preceding the Company's notice of
redemption to the holder(s).
The Company also issued Warrants to Sirrom Capital for an
aggregate of 890,000 shares of the Company's Common Stock
exercisable at any time or from time to time prior to February
26, 2003 at an initial price of $2.75 per share, subject to
adjustment under certain conditions.
Simultaneously with the issuance of the Series B Preferred Stock,
the Company and Sirrom Capital entered into a Registration Rights
Agreement granting to Sirrom Capital the right to demand
registration under the Securities Act of 1933, as amended, of
shares of Common Stock of the Company issuable upon any
conversion of the Series B Preferred Stock and/or exercise of the
Warrants. Under the agreements, Sirrom Capital has the right to
appoint one member to the Board of Directors of the Company,
which cannot exceed five total members without the approval of
Sirrom Capital.
The Series B Preferred Stock were issued in reliance upon the
exemption from registration available under Rule 506 of
Regulation D under the Securities Act of 1933, as amended. The
Warrants were issued in reliance upon the exemption from
registration available under Section 4(2) of the Securities Act
of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6A. EXHIBITS
10.1 Preferred Stock Purchase Agreement between Sirrom
Capital Corporation (d/b/a Tandem Capital) and
Teltronics, Inc. dated February 25, 1998. . . . . . . . . .(a)
10.2 Debenture Purchase Agreement between Sirrom Capital
Corporation, d/b/a Tandem Capital and Teltronics, Inc.
dated February 25, 1998 . . . . . . . . . . . . . . . . . .(a)
10.3 12% Subordinated Secured Debenture Due February 13,
2002 issued by Teltronics, Inc. to Sirrom Capital
Corporation . . . . . . . . . . . . . . . . . . . . . . . .(a)
10.4 Loan and Security Agreement between Sirrom
Capital Corporation and Teltronics, Inc. and its
Subsidiaries dated February 25, 1998. . . . . . . . . . . .(a)
10.5 Secured Senior Subordinated Promissory Note of
Teltronics, Inc. in the principal amount of
$1,000,000 dated February 28, 1998 delivered to
Sirrom Capital Corporation. . . . . . . . . . . . . . . . .(a)
10.6 Secured Senior Promissory Note of Teltronics, Inc.
in the principal amount of $280,000 dated February
26, 1998 delivered to Sirrom Capital Corporation. . . . . .(a)
10.7 Common Stock Purchase Warrant covering 525,000
shares of Common Stock of Teltronics, Inc. issued
to Sirrom Capital Corporation dated February 26, 1998 . . .(a)
10.8 Common Stock Purchase Warrant covering 365,000
shares of Common Stock of Teltronics, Inc. issued to
Sirrom Capital Corporation dated February 26, 1998. . . . .(a)
10.9 Registration Rights Agreement dated February 25, 1998
between Teltronics, Inc. and Sirrom Capital Corporation. . (a)
10.10 Agreement of Sale dated March 5, 1998 between
AT Supply, Inc. and AT2 Communications, Incorporated. . . .(b)
27 Financial Data Schedule . . . . . . . . . . . . . . . . . .(c)
<PAGE> 17
ITEM 6B. REPORTS ON FORM 8-K
During the quarter ended March 31, 1998 the Registrant
filed the following Current Reports on Form 8-K:
1. Current Report on Form 8-K filed March 9, 1998
concerning the issuance to Sirrom Capital Corporation.
2. Current Report on Form 8-K filed March 19, 1998
concerning the sale of AT Supply, Inc.
__________________________
(a) Filed as an Exhibit to Teltronics' Current Report on Form 8-K
filed March 9, 1998.
(b) Filed as an Exhibit to Teltronics' Current Report on Form 8-K
filed March 19, 1998.
(c) Filed as an Exhibit to this Quarterly Report on Form 10-Q for the
three month period ended March 31, 1998.
<PAGE> 18
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TELTRONICS, INC.
May 5, 1998 Ewen R. Cameron
President & Chief Executive Officer
May 5, 1998 Mark E. Scott
Vice President of Finance and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO FORM 10-KSB FOR YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 776,928
<SECURITIES> 0
<RECEIVABLES> 3,191,477
<ALLOWANCES> (125,000)
<INVENTORY> 3,731,998
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<PP&E> 3,657,001
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,185,175
<CURRENT-LIABILITIES> 7,790,501
<BONDS> 1,522,731
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<COMMON> 3,416
<OTHER-SE> 2,868,402
<TOTAL-LIABILITY-AND-EQUITY> 12,185,175
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<TOTAL-REVENUES> 6,639,522
<CGS> 4,115,372
<TOTAL-COSTS> 2,848,102
<OTHER-EXPENSES> (1,086,769)
<LOSS-PROVISION> (13,000)
<INTEREST-EXPENSE> 236,627
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<EXTRAORDINARY> 539,190
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