U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______________ to ______________
Commission File Number: 0-17893
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: (941) 753-5000
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common stock, $.001 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S B 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: $34,673,407
The aggregate market value (closing sale price) of the Registrant's
Common Stock held by non-affiliates at March 20, 1998, was
approximately $7,898,374. For purposes of computing such market
value, the Registrant has assumed that affiliates include only its
executive officers, directors and 5% stockholders. This determination
of affiliate status has been made solely for the purpose of this
Report, and the Registrant reserves the right to disclaim that any
such individual is an affiliate of the Registrant for any other purposes.
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the
aggregate market value of the common equity held by non-affiliates on
the basis of reasonable assumptions, if the assumptions are stated.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of March 20, 1998, 3,415,513 shares of the Registrant's common
stock, par value $.001, were issued and outstanding.
Exhibit index appears on pages 22-24.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Teltronics, Inc. ("Teltronics" or "Company"), a Delaware
corporation, designs, develops, manufactures and markets
telecommunication equipment including the MENTIS (Registered),
wearable, multimedia computer, and application software products,
and engages in contract manufacturing.
In October 1995, the Company formed a subsidiary, AT Supply,
Inc. ("AT Supply"), to engage in sales and distribution of
telecommunications hardware, software and related products. The
Company, through its wholly-owned subsidiary TTG Acquisition
Corp. owned a majority of the outstanding Common Stock of AT
Supply. On March 6, 1998, the Company sold the assets and
transferred the liabilities of AT Supply to a corporation owned
by two former executive officers of AT Supply. See Footnote 13
to the Consolidated Financial Statements.
On April 18, 1996, ISL, Inc. ("ISI"), a majority owned
subsidiary of the Company acquired certain assets and technology
from Interactive Solutions, LLC, a Kentucky limited liability
company ("Interactive") and its three members ("Members")
pursuant to an Agreement of Sale dated March 27, 1996 as amended
by an Amendment to Agreement of Sale dated April 18, 1996
("Agreement"). Under the Agreement, ISI acquired all of
Interactive's and its Members' rights to and in certain
technology for a wearable, self-contained, voice activated,
portable, Pentium (Registered) processor driven, multimedia
computer ("Technology") and other Purchased Assets described in
the Agreement in exchange for the assumption of certain
indebtedness of Interactive and its Members and possible future
issuance of up to 1,000,000 shares of the Company's Non-Voting
Common Stock ("NVC Shares") upon the satisfaction of certain
conditions, including the award of a significant contract to ISI
utilizing the Technology. The NVC Shares, if issued, would be
convertible at the option of the holders on a one to one basis
into shares of the Voting Common Stock of the Company and would
be subject to several conditions, including an escrow to secure
certain indemnification obligations of Interactive and its
members. See BUSINESS - WEARABLE, MULTIMEDIA COMPUTERS.
On September 20, 1996, Teltronics/SRX, Inc.
("Teltronics/SRX"), a wholly owned Delaware subsidiary of the
Company acquired substantially all of the assets of Shared
Resource Exchange, Inc., a Delaware corporation ("Seller")
located in Dallas, Texas, under an Agreement of Sale among
Seller, Teltronics/SRX and the Company dated September 19, 1996
("Agreement") approved by order of the United States Bankruptcy
Court, Eastern District of Texas, Sherman Division. In addition
to the Company's issuing 650,000 restricted shares of its Voting
Common Stock for substantially all of the Seller's assets, the
Company issued 100,000 restricted shares of Voting Common Stock
to discharge the indebtedness Seller owed to certain lenders,
and the Company and Teltronics/SRX assumed certain obligations as
described in the Agreement. Teltronics/SRX sells PBX systems,
switches and related PBX telecommunication and peripheral
devices. See BUSINESS - PBX/ACD WIRELESS LOCAL LOOP.
The Company and its subsidiaries employ 206 people as of
March 20, 1998.
DESCRIPTION OF BUSINESS
PRODUCTS PRODUCED AND SERVICES PROVIDED
The Company designs, develops, manufactures, and markets
electronic hardware and application software for the
telecommunications marketplace, and engages in electronic
manufacturing. Through its majority owned subsidiary, ISI, it is
also engaged in the design of a small Pentium powered multimedia
computer.
<PAGE> 3
During the year ended December 31, 1997, sales to the
company's four largest customers accounted for approximately 35%
of total sales. One customer was 13% of total sales and no other
customers exceeded 10% of total sales.
The Company's key markets within the telecommunications
industry include: Long Distance Management, Remote Maintenance,
Electronic Manufacturing, and the Wearable, Multimedia Computer.
The Company also is now active in the PBX and wireless local loop
("WLL") switch market.
LONG DISTANCE MANAGEMENT ("LDM")
In today's largely deregulated telecommunications industry,
there are many long distance carriers. The largest and best
known are AT&T, Sprint, MCI, and Worldcom. However, there are
more than 300 smaller companies in the United States that sell or
re-sell long distance and Intra-lata telephone service. These
carriers compete to provide their customers with lower priced
telephone calling, and until recently, were known as Inter-
Exchange Carriers ("IXCs").
The advent of Intra-lata, or long distance calling within
the same area code, competition changed the definition of these
carriers, and added a new dimension to the market for the
Company's LDM products. Additionally regulatory changes have
allowed these carriers to compete in the area of long distance
call traffic, further broadening the market for the Company's
products. The Company's LDM product assist these carriers in
increasing revenue.
The Network Manager product, more commonly known as "one
plus" products, is purchased primarily by long distance and
Intra-lata 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 in a
totally transparent fashion to the caller.
As regulatory issues change, a niche may open for LDM
products which can, in general, translate the old way of doing
things to the new. The Company is now observing continued
regulatory changes around the world, as deregulation is
increasingly accepted by many telephone monopolies. As
deregulation and competition increase, the Company is adapting
its LDM products to take advantage of these domestic and
international market opportunities. Due to many changes in this
market, the Company has rationalized its product offering to one
product, the Network Manager +.
Management believes the Company has established a strong
competitive position in the Long Distance Management market. The
Company's product competing in the LDM market is the Network
Manager +.
Network Manager + (Trademark). The principal function of
the Network Manager + (Trademark) product is to route "one plus"
or direct dialed 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 Network Manager + (Trademark) 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.
<PAGE> 4
The Network Manager + is used primarily in businesses,
schools, prisons and hospitals. The market for Network Manager +
has been mature and stable, with new markets beginning to
open in other parts of the world.
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 believes that it has established a strong
competitive position in the Remote Maintenance market through
sales of the following products: Site Event Buffer-II
(Registered), SEB jr. (Trademark), and IRIS (Registered).
SITE EVENT BUFFER-II ("SEB-II (Registered)"). The SEB-II
(Registered) monitoring system monitors remotely located Network
elements.
The SEB-II product may simultaneously monitor up to four
Network elements. In addition to fault/alarm reporting and
security functionality 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 Private Automated Branch Exchange ("PABX") traffic
information. By using IRIS, the Company's Management Information
System (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 allows the SEB-II to clear fault
conditions present in the Network element and to perform more
complex analysis of maintenance data. Included in these
development activities is the design of high speed internal
modems required for more demanding applications and for
international markets. These developments were completed in
1994.
SEB jr. (Trademark). The SEB jr. (Trademark) remote monitor
was introduced to penetrate a new segment of the market. SEB jr.
(Trademark) is an affordable remote monitor for smaller, less
expensive Network elements, yet provides virtually all of the
features of the SEB-II. SEB jr. is positioned to allow service
providers to offer complete end-to-end monitoring of networks
consisting of a wide variety of elements. With the introduction
of SEB jr., Teltronics' Remote Maintenance product line now
offers one-stop capability of providing efficient, cost-effective
monitoring to every link in the chain of Network elements,
regardless of size or cost.
INTELLI.M@N (Trademark), and INTELL.@GENT (Trademark). The
INTELLI.M@N (Trademark), and INTELL.@GENT (Trademark) products,
introduced in late 1997, move the Remote Maintenance product line
into exciting new areas. The monitoring of local area networks
("LANs"), wide area networks ("WANs"), and equipment is critical
to the operation of data networks. The INTELLI.M@N (Trademark)
product works in conjunction with the SEB and allows Service
Providers to leverage their investment a new way. This device
lets the SEB monitor data networks and report faults and other
events through the same infrastructure that is used to monitor
PABXs, and voice mail systems in traditional voice network
applications. Since most service customers have both voice and
data systems, this offering provides a new revenue opportunity
for Service Providers. A single SEB can monitor a PABX, a voice
mail system, and through the INTELLI.M@N (Trademark) device many
network elements. The
<PAGE> 5
INTELLI.M@N (Trademark) is fully SNMP compliant and can receive
traps from network elements and actively query many parameters
(MIB objects) in the multiple network elements. In this role,
the INTELLI.M@N product serves as an SNMP manager responsible for
a segment of the network and reports alarms out-of-band to the
Service Provider. It can also serve as an SNMP agent reporting
in-band to a Network Management System ("NMS") in the enterprise.
The INTELL.@GENT (Trademark) product is based on the same
hardware but serves as a universal SNMP proxy agent for equipment
that is not SNMP compliant. Customers may now monitor a wide
variety of legacy telecom and data network devices with their
enterprise SNMP based NMS. INTELL.@GENT hardware will interface
to any equipment that outputs fault and status information via an
RS232C port. Received events are sent to the NMS as SNMP traps
and INTELL.@GENT's MIB may be queried and examined by the NMS.
The INTELL.@GENT product also has a WEB Server which allows the
MIB to be viewed with a simple WEB browser.
A third product, the INTELLI.M@N/Px remote maintenance SNMP
manager and proxy agent combines the capabilities of both INTELLI.M@N
and INTELL.@GENT. This product is used when both proxy agent and
out-of-band reporting is required at a single site.
IRIS (Registered). The IRIS (Registered) system is a
comprehensive software package that is used by service providers
in Technical Assistance Centers to monitor alarms and to process
data collected from the Network Elements. IRIS currently
utilizes a UNIX operating system.
Dispatcher and SEB remote monitors associated with remote
Network elements report events to the IRIS software. These
events may represent alarm conditions in the Network elements, or
may simply be status information to indicate that everything is
working properly. Using IRIS software, the service provider
often identifies and resolves problems before the customer is
aware of them. IRIS software is also used to collect data stored
in SEBs and direct the data to the proper software application
for processing. The software also provides the tools required to
manage remotely located SEBs and to access Network elements for
routine maintenance.
A database of Network element alarms is maintained in IRIS
so that the service provider may obtain reports on alarm status
at any time. Comprehensive reports that provide statistical
analysis of received alarms are also available. Service
personnel use them to isolate faulty components, identify trends,
and track the historical performance of Network Elements.
IRIS (Registered) Traffic. This optional IRIS (Registered)
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 more efficiently. The IRIS Traffic
system has proven to be a very effective revenue generator for
service providers. The system allows the service provider to
identify PABX enhancements that can be sold to the end-user to
improve PABX performance.
IRISnGEN (Trademark). Building on the success of the UNIX
based IRIS product, the IRISnGEN (Trademark) product brings the
next generation of alarms management to the marketplace. This
new product incorporates all the features of the original IRIS
product while introducing major new capabilities.
This advanced alarms management system is a client/server
application and takes full advantage of the power and flexibility
of Windows NT (Registered). Any number of users with PCs running
Windows (Registered) 95 or Window NT (Registered) Workstation can access
the system. The system has a relational database designed to
support the organization of a typical Service Provider operating
a Technical Assistance Center. It also supports the creation of
an unlimited number of relationships that logically group
customer sites and monitored systems. Geographical alarm display,
alarm escalation, alarm correlation, alarm forwarding, help desk,
and World Wide Web access are just a few of the new capabilities
being introduced. Heavy emphasis is placed on graphics and ad-hoc
reporting capabilities. A comprehensive Application Program
Interface (API) has been introduced to assist customers in
integrating IRISnGEN with legacy management systems and databases.
<PAGE> 6
IRISnGEN is designed for growth. Customers can purchase as
much as, or as little, as their business needs dictate by
selecting capabilities that are grouped into feature packages.
The basic package is a full-featured, highly capable alarms
management system that will allow both large service providers
and self-maintained end users to enter into the alarms management
arena. Customers may add optional feature packages as the
demands of their business change.
PBX/ACD AND WIRELESS LOCAL LOOP
VisionLS (Trademark)/VisionMS (Trademark). The Vision
(Registered) Systems are multi-function Key/PBX/CENTREX/Hybrid
telecommunications systems. They are used to process calls by:
general business and professional organizations, health care,
financial, government, technology, transportation, and education,
call centers, service centers, and other organizations that need
flexible, value added telecommunications capabilities. These
systems are also used to pass data to and receive commands from
computers via a Computer Telephone Interface ("CTI"). Inherent
in the software of these telecommunications platforms are
automatic call distribution (ACD), automated attendant (AIR),
intelligent call handling and dynamic call routing based on ANI,
DNIS, and Caller ID. Some features, such as automatic telephone
relocation, copy, and replace are unmatched in the
telecommunications industry.
QueVision (Trademark). QueVision (Trademark) is a call
center management product, using CTI techniques, that accepts
call events from Vision (Registered) systems and uses that data
to deliver real-time information enabling supervisors to
effectively manage either formal or informal call center
activity. The system provides on-demand and scheduled reports
and supports the use of a wall mounted display sign to let all
agents see the performance of the call center.
CENTRALINK911. This Vision switching platform provides both
the telecommunications link and automatic location identification
to over six-hundred Public Safety Answering Points (911 emergency
call centers). The system is comprised of two parts: The ANI
Controller, which is a Vision telecommunications platform with
specialized features and the ALI controller, a computer running
SRX software that allows it to retrieve and display information
about the location of a 911 caller based on the caller's
telephone number.
Wireless Digital Loop Concentrator (Trademark). This
product enables users to have telephone service in rural
locations and emerging countries where traditional "wire" service
is not available. The Wireless Digital Loop Concentrator voice
and data telecommunications platform provides an interface
between wireless loop full-duplex audio channels and two-wire
analog central office subscriber loops.
ELECTRONIC MANUFACTURING
The size of the Electronic Manufacturing market is currently
in excess of $19 billion annually worldwide, and has been growing
at approximately 20% per year.
The Company's current manufacturing capacity should allow
for increased growth of existing product lines, and should also
accommodate an increase in Electronic Manufacturing activities.
Electronic Manufacturing should enable 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 products. This
should make those products more profitable and competitive in
their respective markets.
WEARABLE, MULTIMEDIA COMPUTERS
MENTIS (Trademark). The MENTIS (Trademark) computer is a
wearable, Pentium (Registered) processor powered, multimedia
computer that could set the standard for multimedia computer
based instruction. MENTIS (Registered) hardware and MentiSoft
(Trademark) software provide full multimedia capability and a
human to human interface. The first product of its kind, MENTIS
computer's approach to training is called Real Time Mentoring or
RTM (Trademark).
<PAGE> 7
Using full motion video and responding to voice activated commands,
MENTIS computer systems have the potential to minimize or eliminate
classroom training in the workplace.
PATENTS, COPYRIGHTS AND TRADEMARKS
Teltronics has no patents or copyright registrations. The
Company has registered the following trademarks: Ideas That
Communicate (Registered), Site Event Buffer (Registered),
SuperVizor (Registered), CallQuest (Registered), IRIS, Dispatcher
(Registered), Net-Path (Registered) and SEB InterAct(Registered), and
has applied for registration of the following trademarks:
IRISnGEN (Trademark), INTELLI@MAN (Trademark), INTELL@GENT (Trademark),
and INTELLI@N/Px (Trademark).
Teltronics/SRX has the following patents, copyrights and
trademarks: (i) Trademarks: Shared Resource Exchange, SRX, SRX
and design, Vision and design, OmniWorks and design, SRX
OmniWorks and design, VisionPath, VisionMS, VisionLS,
VisionPhone, VisionXPhone, VisionPhonePC, VisionACD, VisionVM,
VisionTAS, VisionOS, and QueVision; (ii) Copyrights: SRX Call
processing, CENTRALINK911 release 1.0 software, SRX E911
software, CENTRALINK911 ALI release 1.2 software (co-owned with
Pro-Tel, Inc.), VisionMS (System Two) release 2.2, and SRX call
processing, System One release 4.6 software and call processing;
(iii) US Patents: Station Controller for Enhanced Multi-Line
Pick-Up in a Centrex Exchange Telephone System and Station
Controller for Multi-Line Pick-Up and Automatic Monitoring of
Telephone System and Station Moves; and (iv) Canadian Patents:
Station Controller for Enhanced Multi-Line Pick-Up in a Centrex
Exchange Telephone System.
ISI markets products under the trademarks Interactive
Solutions, VoiceZoom (Trademark), VoiceProbe (Trademark),
rtmEditor (Trademark), rtmNavigator (Trademark), MentiSoft
(Trademark), RTM (Real Time Mentoring) and ISI and design.
The Company also seeks to protect its confidential and
proprietary information through the enforcement of
confidentiality together with non-compete agreements presently
executed by key employees.
WARRANTY AND SERVICE
The Company provides a limited warranty on most of its
products, for a period of 3 to 18 months (depending on the
product), under which the Company agrees to repair or replace, in
the Company's sole discretion, units defective in material or
workmanship, provided the equipment has not been subjected to
alteration or abuse. The Company's technical service and
engineering staff provide support services over the telephone to
customers with installation or operational questions. Warranty
and other repair services are provided by the Company at its
facility in Sarasota, Florida. To date, warranty expenses have
been insignificant in relation to the Company's gross sales.
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.
Purchase orders for components are placed from one month to
six months in advance, depending on the supply sensitivity of a
particular component. All of the necessary components are
available from 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 or 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 for the future, the
<PAGE> 8
Company has not experienced and does not anticipate experiencing
any significant difficulty in purchasing components.
BACKLOG
The Company's backlog at December 31, 1997 and 1996 was
$2,617,000 and $9,943,000 respectively. At March 18, 1998 and
February 29, 1997, the Company's backlog was $3,926,000 and
$11,319,000 respectively. The Company's business has changed and
only Electronic manufacturing operates on a sales order backlog
basis.
COMPETITION
The Company has two significant competitors in the Alarm
Management marketplace, Microframe, Inc. and TSB International.
The PBX market has many competitors with the dominant players
being Lucent and Northern Telecom. The Vision PBX is active in
the ACD and small PBX market. The Wireless Interface Switch
(WiLL) is supplied to a number of customers whose markets are in
third world countries. The Wearable, Multimedia Computer market
is new and evolving, with a small number of competitors. The
Company has one significant competitor in its Long Distance
Management product group (Mitel). 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.
RESEARCH AND PRODUCT DEVELOPMENT
The Company maintains continuing research and development
efforts directed toward enhancement of its existing product lines
and development of new products. The Company's research and
development expenditures during the fiscal years ended December
31, 1997, and 1996 were $2,428,000 and $1,391,000, respectively.
REGULATION
Part 68 of the Federal Communications Commission ("FCC")
Rules ("Part 68") contains the majority of the technical
requirements with which telephone systems must comply to qualify
for FCC registration for interconnection to the public telephone
network. Part 68 registration represents a determination by the
FCC that telecommunication equipment interfacing with the public
telephone network complies with certain interference parameters
and other technical specifications. FCC registration for the
Company's products has been granted and the Company intends to
apply for FCC registration for all of its new products.
Certain of the Company's products are also subject to and
comply with regulation under Part 15 of the FCC Rules ("Part 15")
which requires equipment classified as containing a Class A
computing device to meet certain radio and television signal
interference 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.
<PAGE> 9
ITEM 2. PROPERTIES
TELTRONICS - HEADQUARTERS AND PLANT
The Company's headquarters and principal facility consists
of approximately 72,000 square feet, located in a two story
concrete and steel building leased from ARE Sarasota Limited
Partnership, a limited partnership ("ARE Lease"). Approximately
36,000 square feet are used for laboratories and offices. The
plant is located at 2150 Whitfield Industrial Way, Sarasota,
Florida.
The monthly ARE Lease payment is $50,198. The ARE Lease
expires in August, 2005, and may be extended by the Company for
two five year periods. Included in the ARE Lease is another
single story building located at 2240 Whitfield Industrial Way. This
building consists of approximately 7,500 square feet.
The Company leases approximately 20,000 square feet of
warehouse space at 2245 Whitfield Industrial Way in Sarasota,
Florida. The monthly lease payments are $4,457 and this lease
expires in April, 1998.
The Company leases approximately 10,655 square feet of
office space for the Teltronics/SRX research and development
facility in Dallas, Texas. The monthly lease payment if $7,325
during years one through three and $7,636 per month during the
remaining two years of the Dallas lease, which expires in
December, 2001.
ITEM 3. 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 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 not yet 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. ("SRX") in connection with the sale of substantially all of
its assets to the Company in September, 1996. The Plaintiff
claims that the Company agreed to pay all of its fees under the
Agreement of Sale entered into between SRX and the Company on
September 20, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended December 31, 1997, no matters were
submitted to a vote of the stockholders of the Company.
<PAGE> 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of August 1, 1989, the Company listed its Common Stock
for trading on the National Association of Securities Dealers,
Inc. Automated Quotation System ("Nasdaq"). The Company's Common
Stock trades on The Nasdaq Small Cap Market tier of The Nasdaq
Stock Market under the symbol: TELT. The following table sets
forth for the fiscal periods indicated the high and low trade
prices in the over-the-counter market for the Company's Common
Stock as reported on Nasdaq.
<TABLE>
<CAPTION>
COMMON STOCK
1997 1996
Trade Trade
--------------- ---------------
High Low High Low
---- --- ---- ---
<C> <C> <C> <C> <C>
PERIOD
1st Quarter 4.75 3.25 6.38 4.13
2nd Quarter 4.13 2.25 10.25 4.25
3rd Quarter 5.50 1.69 7.75 4.50
4th Quarter 4.88 3.25 5.75 2.88
</TABLE>
On March 20, 1998, the closing bid quotation for the
Company's Common Stock as reported on Nasdaq was $2.3125. As of
March 20, 1998, there were approximately 1,400 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
GENERAL OVERVIEW
The Company has established itself in its traditional
markets. It developed its position in those markets principally
through organic growth. However, the Company believes that
future growth requires development or acquisition of new products
and new markets. To that end, the Company acquired the
technology of ISI in April, 1996 and the technology of SRX in
September, 1996. These acquisitions have enabled the Company to
enter other markets. In acquiring new technologies, the Company
has been able to reduce its dependence on mature and less
profitable markets. The Company has, therefore, been able to
either close down or sell products and/or companies. The Company
is now firmly focused in Telecommunications through its Vision
switching platform and Remote Maintenance products. ISI is
focused in the portable, multimedia computer market.
ISI, the Company's subsidiary developing MENTIS (Trademark),
a wearable, multimedia computer has successfully completed its
design and produced approximately eighty beta units for testing
and evaluation by customers. The Company is a member of a
consortium consisting of the Army National Guard, General Motors
- - Service Technology Group, Raytheon, and the New Jersey Institute
of Technology. The Company is experiencing considerable interest
in this product. The market for this product is in applications where
<PAGE> 11
complex equipment requires computer aided assistance for diagnostics
repair and maintenance. The Company expensed $2,064,000 in 1997 and
$1,276,000 in 1996.
During September, 1996 the Company through its subsidiary
Teltronics/SRX acquired substantially all of the assets and
technology of Shared Resource Exchange, Inc. Shared Resource
Exchange produced the SRX Vision digital switch which has a
number of applications in wireless PBX and 911 applications.
During 1997 the Company shipped approximately $7.4 million of
product to its customers. Due to the complex and evolving
digital technology employed in the SRX products, the Company
established a design and support center in Dallas, Texas, the
original headquarters of Shared Resource Exchange. The Company
believes that there is a position for this digital switch in a
number of markets, not only in the United States, but also
overseas in developing countries, where wireless network use is
expanding.
The Company's traditional markets of Remote Maintenance
continued to experience an increase during 1997 growing from $7.2
million to $7.5 million.
Electronic Manufacturing increased from $5.0 million to $6.1
million. The Company believes it is active in a niche market of
$1 million to $5 million per annum. The Company currently has
thru-hole technology as well as three Amistar surface mount
machines with capacity of over 12,000 placements per hour, per
machine. The facility achieved British Approvals Board for
Telecommunications ("BABT") approval (EC Council Directive
91/263/EEC) in December, 1997.
As previously expected, the Long Distance Management market
continued to decline and the Company's sales decreased from $4.3
million during 1996 to $1.4 million in 1997. The Company does
not believe that it will continue to realize any significant
sales in the United States marketplace. The Company is
successful in selling through its Australian distributor,
AdvaTel, and enjoys a high share of that market. The Company is
seeking approval for the European marketplace. Although the
European marketplace is deregulating, there can be no assurances
that the Company will be able to realize significant growth in
that marketplace.
The Company does not expect to see any increase in the stand
alone call accounting market, which is a very mature market that
does not warrant any increase in sales activity.
RESULTS OF OPERATIONS
The operating loss for 1997 was $1,085,000 as compared to an
operating loss of $2,042,000 for 1996. The 1997 loss resulted
from the Company's continued funding of ISI of $1,175,000 and an
operating loss of $156,000 at AT Supply.
Sales increased 20% from $28,878,000 to $34,674,000. This
increase is due to increased sales by AT Supply and SRX and
initial sales by ISI.
Cost of goods sold for 1997 was $23,648,000 or 68.2% as
compared to $19,519,000 or 67.6% for 1996. The change is
primarily due to product mix with increased high cost sales by AT
Supply and Electronic Manufacturing.
General and administrative expenses for 1997 were $4,873,000
as compared to $5,138,000 for 1996. The decrease was due to
personnel reductions.
Selling expenses for 1997 were $4,810,000 compared to
$4,872,000 in 1996.
Research and development expenses for 1997 were $2,428,000
as compared to $1,391,000 for 1996. The increase was due to
continued funding in ISI and SRX.
The net loss for 1997 was $2,487,000 as compared to a net loss of
$2,946,000 for 1996. The 1997 loss resulted from the Company's net
loss of $2,064,000 in ISI and a net loss of $608,000 in AT Supply.
<PAGE> 12
Interest and financing costs for 1997 were $1,246,000 as compared to
$590,000 for 1996. This increase resulted from the issuance of the
11% Debentures in February, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash requirements were met with cash provided primarily by
borrowings from The CIT Group/Credit Finance ("CIT") and the
Debentures discussed below. On August 1, 1997, the Company's
principal lender, CIT entered into a Ninth Amendment to the
Company's Line of Credit Facility and Term Loan. The Amendment
reduced the interest rate from 2.5% to 2.0% above prime rate,
increased maximum availability from $4,950,000 to $7,000,000,
increased the prepayment penalty for any payment prior to October
28, 1998 from 1% to 1.5%, extended the Initial Term to October
28, 2000, and added ISI as a co-borrower on the Line of Credit
Facility and Term Loan.
The Company's working capital ratio at December 31, 1997 was
1.0:1 as compared to .97:1 for 1996. Net working capital was
$(50,000) and $(482,000) for 1997 and 1996 respectively. Short
term requirements are expected to be met through cash flows from
operations and from the Line of Credit Facility, and additional
funding from Sirrom Capital Corporation as discussed.
Net cash flows from operating activities during 1997 was
$(2,422,000) compared to $(1,470,000) in 1996. This change is
primarily due to the continued funding of ISI markets and
products and the integration of Teltronics/SRX. Investing
activities are primarily fixed asset acquisitions were $1,388,000
in 1997 compared to $443,000 in 1996.
On February 13, 1997, the Company entered into a Debenture
Purchase Agreement and sold $4,250,000 aggregate principal amount
of its Subordinated Convertible Debentures Due on February 13,
2002 to Sirrom Capital Corporation. The Debentures required
interest at the rate of 11% per annum, payable quarterly
commencing May 1, 1997. Fees in connection with the Debentures
totaled $187,055. The Debentures were subordinated to certain
other indebtedness of the Company. Subject to and upon
compliance with certain provisions of the Agreement, the holder
of the Debentures had the right, at its option, at anytime, to
convert the principal amount of the Debenture, or any portion
thereof, into shares of the Company's Voting Common Stock, par
value $.001 per share at a conversion price (subject to
adjustment under certain conditions) of $4.00 per share.
The Company entered into an agreement on February 25, 1998
with Sirrom Capital. Pursuant to this agreement, the Company
issued $2,500,000 of Series B Preferred Stock and $1,750,000 of
12% Subordinated Secured Debentures due February 13, 2002. The
proceeds of this financing were used to repurchase $4,250,000 of
11% Subordinated Convertible Debentures due on February 13, 2002
described above. 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 at any time during a five
year period beginning on the date of issuance.
In addition, the Company is exploring the possibility of
other equity or debt financing.
<PAGE> 13
CURRENT OUTLOOK
The Vision product line was reintroduced in 1997. Vision
development had been neglected by the previous owners and was
behind technically with other comparable switches. The Company
has invested in engineering resources to modernize the product
line. The Company believes the significance of signing up a
major Regional Bell Operating Company and additional distributors
should contribute positively to sales for this product line
during 1998. It also provides the Company and other distributors
with the confidence that the Vision product has viability. It
still requires investment in modernizing and integrating more
exterior software products to enhance its computer telephony
interface along with its ACD features.
The Company's business in CENTRALINK 911 is also a very
important market for the Vision switch. The Company believes
this business will grow during 1998.
The Remote Maintenance business continues to attract new
customers. Once a customer purchases the Company's centralized
software, continuing SEB sales can be expected. The Company
invested in modernizing its original centralized software product
IRIS, from a UNIX based product to a Windows NT based product.
This should increase sales and a number of orders have already
booked for IRISnGEN.
As previously reported, the Dialer market has slowed down
and this trend has continued. However, the Company has achieved
BABT approval for our facility and are currently awaiting BABT
approval for its Dialer product. Although the market in Europe
and the rest of the world is not as significant as the original
market in America, some product should be sold.
The Company has focused on the two main telecommunications
products, Vision and Remote Maintenance.
Interactive Solutions, the Company's majority owned
subsidiary, is continuing to develop the voice driven,
multimedia, Pentium (Registered), wearable computer.
Approximately eighty pre-production units were produced during
1997, the majority of which were used as development tools and
are being evaluated by a number of customers. Production units
of this product are now becoming available and have been FCC Part
15 approved. Beta trials with major customers are scheduled to
commence in the second quarter of 1998.
AT Supply was sold on March 6, 1998. Sales and net loss
were $9,293,000 and $(608,000), respectively in 1997. The sale
of this subsidiary will decrease sales and should increase net
income in 1998. See Footnote 13 of the Consolidated Financial
Statements.
The Company is positioned to succeed in its markets and its
goal is to return to profitability in 1998.
YEAR 2000
The Company's administration computer programs were written
using two digits rather than four to define the applicable year.
As a result, those computer programs have time-sensitive software
that recognize a date using "00" as the year 1900 rather than the
year 2000. This could cause a system failure or miscalculations
causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed an assessment and will have to
replace its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter.
The total year 2000 project cost for the purchase of new software
is not expected to be material. To date, the Company has
incurred minor expenses, primarily for assessment of the year
2000 issue and the development of a plan to purchase new
software.
The project is estimated to be completed not later than December 31,
1999, which is prior to any anticipated impact on its operating systems.
The Company believes that, with conversions to new software,
<PAGE> 14
the year 2000 issue will not pose significant operational problems
for its computer systems. If such modifications and conversions are
not made, or are not completed timely, the year 2000 issue could
have a material impact on the operations of the Company.
The Company is soliciting information from all of its
significant suppliers and large customers in order to assess
their plans for addressing year 2000 issues. Such parties should
not have an adverse effect on their ability to interface with the
Company's systems.
The costs of the project and the date on which the Company
believes it will complete the year 2000 modifications are based
on management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued
availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved
and actual results could differ materially from those
anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and
correct all relevant computer codes, and similar uncertainties.
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Page
Report of Independent Certified Public Accountants,
Ernst & Young LLP F-2
Independent Auditor's Report - Millward & Co., CPAs F-3
Consolidated Balance Sheet - December 31, 1997 F-4
Consolidated Statements of Operations for
Years Ended December 31, 1997 and 1996 F-5
Consolidated Statements of Shareholders' Deficiency
for the Years Ended December 31, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997 and 1996 F-7/8
Notes to consolidated Financial Statements F-9/21
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING
AND FINANCIAL DISCLOSURE
No disagreements with accountants in any accounting and
financial disclosures occurred during the fiscal years ended
December 31, 1996 and December 31, 1997. Accountants were
changed during the fiscal year ended December 31, 1997 as
previously disclosed and more fully described in the Form 8-K
reports filed with the Securities and Exchange Commission on
September 5, 1997.
<PAGE> 15
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.
NAME AGE POSITION
Ewen R. Cameron 45 Director, President, Chief Executive
Officer and Assistant Secretary
Mark E. Scott 44 Vice President Finance, Secretary
and Treasurer
William L. Hutchison 52 Executive Vice President, Chief
Operating Officer
Peter G. Tuckerman 51 Vice President Product Management
Robert B. Ramey 40 Vice President
Electronic Manufacturing
Norman R. Dobiesz 50 Director and Senior Vice President
Business Development
Carl S. Levine 51 Director
Craig Macnab 42 Director
_______________
The Company's Directors will serve until the annual meeting
of stockholders or until their successors are elected and qualified.
EWEN R. CAMERON has served as President and Chief Executive
Officer since July 1993 and a Director since June 1994. Prior to
that, Mr. Cameron served as Managing Director of SRH plc, a
European telecommunications and computer maintenance company from
1989 to 1992. From January 1978 to December 1989, Mr. Cameron
served as Managing Director of Systems Reliability Europe SA/NV,
a wholly owned subsidiary of SRH plc based in Brussels, Belgium.
Mr. Cameron has spent the last 25 years in the computer and
telecommunications industry.
MARK E. SCOTT, Vice President of Finance joined the Company
in May, 1997. Prior to this, Mr. Scott held senior financial
positions with Protel, Inc. from 1995 to 1997, Crystals
International, Inc. from 1993 to 1995, RHM Holdings USA, Inc.
from 1983 to 1993, Schoenfeld Industries from 1980 to 1983 and
Arthur Andersen from 1976 to 1980. Mr. Scott received his
Bachelor of Arts degree in Accounting from the University of
Washington in 1976, his Washington CPA certification in 1977 and
his Florida CPA certification in 1994.
WILLIAM L. HUTCHISON, Executive Vice President of the
Company has been involved in the telecommunications industry for
29 years having held various outside plant and engineering
positions with the Bell System and United Telephone Company. He
was a Product Manager for Pulsecom Division of Harvey Hubbell, Inc.,
from 1970 to 1974 before leaving to form his own company, ComDev, Inc.,
where he worked from 1974 through 1985, which in 1990 was acquired by
the Company. He served as President and CEO and was a founder of Voice
Computer Technology from April 1984 through July 1990. He also served
<PAGE> 16
as Vice President of Marketing for Shared Resource Exchange from July
1989 through July 1992, Vice President of Marketing for Melita
International July 1992 through December 1994, and Vice President
for Computer Communications Systems from December 1994 through October
1996, both leaders in emerging computer-telephony integrated technology
industries. Mr. Hutchison received an undergraduate degree from
Texas Tech and holds an MBA from Emory University.
PETER G. TUCKERMAN, Vice President Product Management, has
been employed by the Company in various product management and
research and development positions since 1978.
ROBERT B. RAMEY joined the Company as Vice President,
Manufacturing Operations in January 1995. Prior to joining the
Company Mr. Ramey served twelve years with Loral Data Systems, a
Defense and Commercial electronic equipment manufacturer. Mr.
Ramey has held diverse management positions including,
Manufacturing Engineering, Industrial Engineering, Program
Management, Telecommunications Production, Surface Mount Assembly
and Total Quality Management. Mr. Ramey has been in the
electronics industry over 15 years.
NORMAN R. DOBIESZ has served as a Director of the Company
since October 25, 1991 and is the Company's Senior Vice
President, Business Development. Mr. Dobiesz has developed
substantial financial and general management experience as a
principal stockholder and executive of a group of privately held
companies controlled by Mr. Dobiesz. Mr. Dobiesz is a principal
stockholder of the Company.
CARL S. LEVINE has served as a Director of the Company since
July 27, 1988. Mr. Levine is an attorney who has been engaged in
private practice in New York, New York from 1977 to 1981, and in
Garden City, New York from 1981 to June 1985. Mr. Levine is
presently the senior partner in the law firm of Carl S. Levine &
Associates, Roslyn, New York. He specializes primarily in the
practice of energy, environmental and tax law. Prior to entering
private practice, Mr. Levine was employed as counsel for New York
Regional Office of the United States Department of Energy.
CRAIG MACNAB has served as a Director of the Company since
February 13, 1997. Mr. Macnab was appointed Director as nominee
of Sirrom Capital Corporation ("Sirrom") in connection with the
issuance of an aggregate $4,250,000 of 11% Subordinated
Convertible Debentures due February 13, 2002 to Sirrom pursuant
to a Debenture Purchase Agreement. The Debenture Purchase
Agreement requires that the Company's Board of Directors be
expanded to five members, including a nominee to be selected by
Sirrom. Since January 1997, Mr. Macnab has been the President of
Tandem Capital, Inc. which invests in micro-cap public companies.
From 1993 to 1996, Mr. Macnab served as the general partner of
MacNiel Advisors, Inc., the general partner of three private
funds that invested in the publicly traded securities of small
public companies. From 1987 to 1993, Mr. Macnab was a partner of
J.C. Bradford & Co., a regional brokerage firm, jointly
responsible for the merger and acquisition department and a
private mezzanine capital fund.
<PAGE> 17
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, 1997. As
indicated below, no executive officers of the Company other than
Ewen Cameron, William L. Hutchison, and Norman R. Dobiesz,
received total salary and bonus in excess of $100,000 during the
fiscal year ended December 31, 1997.
<TABLE>
SUMMARY COMPENSATION
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------- ----------------------------------
Awards Payouts
----------------------- ---------
Other Securities All
Annual Restricted Underlying Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Position Year Salary Bonus sation <F1> Awards SARs(#) Payouts sation
================== ==== ============ ===== ========== ========== ========== ======== ========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ewen R. Cameron 1997 $248,674 <F2> $--- --- --- --- --- ---
President & CEO 1996 248,272 --- --- --- 500,000 --- ---
1995 226,551 --- --- --- 30,000 --- ---
William L. Hutchison 1997 $175,300 $--- --- --- 30,000 --- ---
Executive Vice Presi- 1996 33,277 --- --- --- 20,000 --- ---
dent & COO
Norman R. Dobiesz 1997 $248,674 <F2> $--- --- --- --- --- ---
Senior Vice President 1996 248,434 --- --- --- --- --- ---
Business Development 1995 232,674 --- --- --- 30,000 --- ---
_______________________________
<F>
(1) Certain personal benefits that aggregate less than the ten
percent (10%) of the total cash compensation of any of the
executive officers or which cannot be readily ascertained
are not included.
(2) Does not include $25,000 earned and accrued by each of
Messrs. Cameron and Dobiesz, but not paid during 1997.
EMPLOYMENT AGREEMENTS
The Company entered into five (5) year employment agreements
with Ewen Cameron, President, Chief Executive Officer and
Assistant Secretary, and Norman R. Dobiesz, Senior Vice
President, Business Development commencing January 1, 1995. Mr.
Cameron's agreement was an amendment and restatement of a prior
agreement which he entered into with the Company in July 1993.
Each employment agreement provides for a base annual salary of
$225,000 subject to annual increases of $25,000 per year. Either
of the Company or the employee may terminate the employment
agreements upon the occurrence of certain events. Mr. Cameron's
employment agreement contains a covenant restricting him from
competing for a period of two years after termination. If the
Company terminates the employment of Mr. Cameron or Mr. Dobiesz,
the terminated employee will be entitled to severance equal to
one year's base salary.
On October 14, 1996, the Company entered into a three (3)
year employment agreement with William L. Hutchison, the
Company's Executive Vice President, Chief Operating Officer and
Assistant Secretary. The employment agreement provides for an
annual salary of $180,000 and is terminable prior to expiration
of its stated term upon the occurrence of certain events. If Mr.
Hutchison's employment agreement is terminated prior to its
scheduled expiration without cause or for failure to adequately
perform, in the Company's judgment, the services, duties and
responsibilities assigned by the Company, whether or not such
failure is intentional, Mr. Hutchison will be entitled to
severance equal to six (6) month's salary.
<PAGE> 18
On May 1, 1997, the Company entered into a one (1) year
employment agreement with Mark E. Scott, the Company's Vice
President Finance, Secretary and Treasurer. The employment
agreement provides for an annual salary of $85,000 and is
terminable prior to expiration of its stated term upon the
occurrence of certain events. If Mr. Scott's employment
agreement is terminated prior to its scheduled expiration without
cause, Mr. Scott will be entitled to a severance equal to three
(3) month's salary.
1995 INCENTIVE STOCK OPTION PLAN
The Company has adopted an Incentive Stock Option Plan, as
amended ("Plan") to enhance the Company's ability to retain the
services of outstanding personnel and encourage such employees to
have a greater financial investment in the Company. The Plan
authorizes the Board of Directors to grant incentive stock
options under the Internal Revenue Code of 1986, as amended, to
key employees of the Company or its subsidiaries. At the date of
this Form 10-KSB there are approximately fifty employees eligible
to participate in the Plan. The Plan is administered by the
Board of Directors which has full power and authority to
designate Participants, to determine the terms and provisions of
respective option agreements (which need not be identical) and to
interpret the provisions of the Plan. The Plan became effective
May 16, 1995, was amended July 30, 1996 and will terminate August
8, 2005 unless earlier terminated by the Board of Directors or
extended by the Board with approval of the stockholders.
An aggregate of 1,250,000 shares of the Company's Common
Stock may be issued or transferred to grantees under the Plan.
If there is a stock split, stock dividend or other relevant
change affecting the Company's shares, appropriate adjustments
will be made in the number of shares that may be issued or
transferred in the future and in the number of shares and price
in all outstanding grants made before such event. The option
price shall not be less than the fair market value of the
Company's Common Stock on the date of grant, unless the grantee
is the holder of more than 10% of the voting power of all classes
of stock of the Company, in which case the option price shall not
be less than 110% of the fair market value of the stock on the
date of grant.
Options may be exercised solely by the Participant or his or
her legal representative during his or her employment with the
Company, or any subsidiary, or after his or her death by the
person or persons entitled thereto under his or her will or the
laws of descent and distribution. In the event of termination of
employment for any reason other than death, permanent disability
as determined by the Board, or retirement with the consent of the
Company, Options may not be exercised by the Participant or his
or her legal representative and shall lapse effective upon the
earlier to occur of (i) notice of employment termination or (ii)
last day of employment with the Company or any Subsidiary.
During 1997, the Company issued options to purchase 50,000
shares to executive officers and options to purchase 74,000
shares to non-executive employees. During 1997 the Company
cancelled options previously granted to executive officers to
purchase 36,000 shares and non-executive employees to purchase
17,000 shares of common stock. In each case, unless the recipient
of a grant was the holder of more than 10% of the Company's
issued and outstanding Common Stock, the fair market value of the
Common Stock on the date of grant determined the exercise price.
<PAGE> 19
</TABLE>
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in or Base Expiration
Name Granted (#)<F1> Fiscal Year <F1> Price ($/Sh) Date
================== =============== =============== ============ =============
<S> <C> <C> <C> <C>
William L. Hutchison 20,000 16.13% $2.00 July 15, 2002
________________________________
<F>
(1) Represents options only. No SARs have been granted.
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-the-Money Options/SARs
FY-Ended (#) at FY-End ($)
==================== =========================
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
================= =============== ============ ==================== =========================
<S> <C> <C> <C> <C>
Ewen R. Cameron 0 0 12,000/18,000 $12,000/$18,000
100,000/400,000 $0/$0 <F1>
Norman R. Dobiesz 0 0 12,000/18,000 $10,080/$15,120
William L. Hutchison 0 0 6,000/24,000 $0/$0 <F2>
0/20,000 $0/$12,500
_________________
<F>
(1) None of the options granted to Mr. Cameron in 1996 to
purchase 500,000 shares were in-the-money at December 31,
1997 because they are exercisable at $5.50 per share, a
price greater than the fair market value of the Company's
Common Stock on such date.
(2) None of these options granted to Mr. Hutchison in 1996 to
purchase 30,000 shares were in-the-money at December 31,
1997 because they are exercisable at $3.50 per share, a
price greater than the fair market value of the Company's
Common Stock on such date.
</TABLE>
DIRECTOR COMPENSATION
On August 12, 1996 the Company adopted a policy to
compensate members of its Board of Directors in the amount of
$2,500 for each meeting and reimburse expenses for attending
meetings of the Board or committees of the Board of Directors.
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
voting securities by each person owning five percent (5%) or more
of such shares, by each director, by each executive officer
listed in Item 10 of this Report on Form 10-KSB, and by all
directors and officers as a group as of March 20, 1998. 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.
<PAGE> 20
<TABLE>
<CAPTION>
Amount and
Nature of
Name of Beneficial Beneficial Percentage
Owner and Address Title of Class Ownership <F1> of Class <F1>
================== ======================== ============== =============
<S> <C> <C> <C>
Norman R. Dobiesz <F2><F3><F4> Common Stock 1,432,097 41.9%
2150 Whitfield Industrial Way Series A Preferred Stock 100,000 100%
Sarasota, Florida 34243
Carl S. Levine <F2> Common Stock 2,240 <F5><F6>
1800 Northern Blvd.
Roslyn, New York 11576
Ewen R. Cameron <F2><F4> Common Stock 3,360 <F5><F7>
2150 Whitfield Industrial Way
Sarasota, Florida 34243
William L. Hutchison <F4> Common Stock 5,000 <F5><F8>
2150 Whitfield Industrial Way
Sarasota, Florida 34243
Craig Macnab <F2> Common Stock 0 0
500 Church Street, Suite 200
Nashville, Tennessee 37219
Shared Resource Exchange <F9> Common Stock 650,000 19.0%
3480 Lotus Drive
Plano, Texas 75075
Sirrom Capital Corporation Series B Preferred Stock 25,000 100%
500 Church Street, Suite 200
Nashville, Tennessee 37219
All Directors and Officers Common Stock 1,442,697 42.2%
as a Group (8 persons)
______________________________
<F>
(1) Does not include (i) an aggregate of 377,000 shares of
Common Stock which may be issued upon exercise of incentive
stock options granted under the Company's 1995 Incentive
Stock Option Plan and 4,000 shares of Common Stock which may
be issued upon exercise of stock options granted to the
Company's former President, (ii) possible issuance of up to
1,000,000 shares of Common Stock in connection with the
transfer to ISI of certain technology (See BUSINESS -
GENERAL); OR (iii) possible issuance of up to 1,526,000
shares of Common Stock subject to adjustment, which may be
issued upon: (a) conversion of the Series B Preferred
Stock, and (b) the exercise of 890,000 Warrants issued to
Sirrom Capital exercisable at a price of $2.75 per share,
subject to adjustment. See BUSINESS - GENERAL.
(2) Director of the Company.
(3) Includes 56,000 shares owned by virtue of 100% ownership of
H & N Management Co., Inc. ("H&N"), 1,295,000 shares owned
by virtue of 100% ownership of W&D Consultants, Inc., and
4,455 shares owned by virtue of 67% ownership of Whitfield
Capital of Sarasota, Inc. Excludes: (i) 100,000 shares of
Series A Preferred Stock owned by Mr. Dobiesz, and (ii)
30,000 shares which may be issued upon exercise of incentive
stock options by Mr. Dobiesz.
(4) Executive Officer of the Company named in Item 10 of this
Report on Form 10-KSB.
(5) Beneficially owns less than 1% of the Company's outstanding
Common Stock.
<PAGE> 21
(6) Does not include up to 50,000 shares which may be issued
upon exercise of incentive stock options by Mr. Levine.
(7) Does not include up to 530,000 shares which may be issued
upon exercise of incentive stock options by Mr. Cameron.
(8) Does not include up to 50,000 shares which may be issued
upon exercise of incentive stock options by Mr. Hutchison.
(9) 120,000 shares are held in escrow to cover certain
reimbursement and/or indemnity claims owed to the Company
for the acquisition of SRX.
<F/>
</TABLE>
Change of Control. The holders of the Series B Preferred Stock
have the right to elect a majority of the Board of Directors of
the Company if and whenever four quarterly dividends (whether or
not consecutive) payable on the Series B Preferred Stock shall be
in arrears.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective January 1, 1995 the Company entered into five (5)
year employment agreements with Ewen Cameron, President & CEO,
and Norman R. Dobiesz, Senior Vice President Business
Development. See EXECUTIVE COMPENSATION - Employment Agreements.
The Company has an outstanding note payable to an officer,
which is payable on demand with interest accruing at 8% per
annum. The balance at December 31, 1997 is $50,412.
During the year ended December 31, 1996, the Company sold
100,000 shares of its $.001 par value Series A Preferred Stock to
its Director and Senior Vice President of Business Development
for $.25 per share for an aggregate consideration of $25,000.
Such shares are restricted securities and subject to resale
restrictions including the right of the Company to approve or
disapprove any sale, transfer or disposition to any third party
not controlled by the Director. Additionally, each share is
entitled to 400 votes and is not entitled to any dividends.
Accordingly, this would give the Director voting control of the
Company.
A Director personally guaranteed the Company's obligations
to the lessor over the term of the lease. The Company agreed to
pay 6% of the total future value of the lease payments, excluding
executory costs, as consideration for the personal guarantee.
This amount was paid during 1995. The cost of the guarantee to
the Company, 6% of $7,000,000 or $420,000 has been deferred as a
financing cost (prepaid lease guarantee) in the accompanying
financial statements and is amortized on a straight line basis
over the term of the lease. Accumulated amortization of this
amount at December 31, 1997 was $205,308.
A company owned by a Director and principal shareholder of
the Company rents offices from the Company and was billed $19,280
in 1997. In addition, the Company provided the company owned by
the Director with technical services and was billed $87,232 in
1997.
<PAGE> 22
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
Page
(1) Financial Statements:
Report of Independent Certified Public Accountants -
Ernst & Young LLP F-2
Independent Auditor's Report - Millward & Co., CPAs F-3
Consolidated Balance Sheet - December 31, 1997 F-4
Consolidated Statements of Operations for
Years Ended December 31, 1997 and 1996 F-5
Consolidated Statements of Shareholders' Deficiency
for the Years Ended December 31, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997 and 1996 F-7/8
Notes to Consolidated Financial statements F-9/21
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the fourth quarter
of fiscal year ended
December 31, 1997.
(c) Exhibits:
3.1 Restated Certificate of Incorporation of Registrant, as amended. . (a)
3.2 By-Laws of the Registrant, as amended. . . . . . . . . . . . . . . (b)
3.3 Certificate of Designations of Preference of Series A
Preferred Stock of Teltronics, Inc. filed with the Delaware
Secretary of State on August 19, 1996 . . . . . . . . . . . . . . .(m)
3.4 Certificate of Designations Establishing Series of Shares
and Articles of Amendment of Teltronics, Inc., filed with
the Delaware Secretary of State on February 24, 1998 . . . . . . .(q)
3.5 Amended Designation of Teltronics, Inc. filed with the
Delaware Secretary of State on February 25, 1998. . . . . . . . . .(q)
10.127 Amended and Restated Employment Agreement between the
Company and Ewen Cameron dated January 1, 1995 . . . . . . . . . .(c)
10.128 Employment Agreement between the Company and Norman R.
Dobiesz dated January 1, 1995 . . . . . . . . . . . . . . . . . . .(c)
10.132 Teltronics Employee Stock Payment Plan, as amended
dated November 12, 1993 . . . . . . . . . . . . . . . . . . . . . .(c)
10.135 Subscription Agreement between the Company and W&D
Consultants, Inc. dated May 11, 1995 . . . . . . . . . . . . . . .(c)
10.136 Specimen of Stock Option Agreement. . . . . . . . . . . . . . . . .(d)
10.137 Teltronics, Inc. 1995 Incentive Stock Option Plan. . . . . . . . .(e)
10.138 Promissory Note between Barnett Bank of Manatee County,
N.A. and Teltronics, Inc. dated July 7, 1995. . . . . . . . . . . .(f)
10.139 Purchase Agreement between SR Comms Management Ltd.,
and Teltronics, Inc. dated October 2, 1995. . . . . . . . . . . . .(f)
10.142 Memorandum of Agreement covering Technology Transfer
dated March 11, 1996 . . . . . . . . . . . . . . . . . . . . . . .(g)
10.143 Line Note #1 dated November 7, 1995 payable in the
maximum aggregate amount of $100,000 by AT Supply, Inc.
to TTG Acquisition Corp. . . . . . . . . . . . . . . . . . . . . . (g)
10.144 Line Note #2 dated November 29, 1995 payable in the
maximum aggregate amount of $100,000 by AT Supply, Inc.
to TTG Acquisition Corp. . . . . . . . . . . . . . . . . . . . . . (g)
10.145 Amended Loan and Security Agreement dated December 29,
1995 by and among The Cit Group/Credit Finance, the Company
and AT Supply, Inc. . . . . . . . . . . . . . . . . . . . . . . . .(g)
<PAGE> 23
10.146 Agreement of Sale dated as of March 27, 1996 among ISL,
Inc., Interactive Solutions, LLC, Bruce W. Hanks, Kevin
Rogers and Michael Jonas. . . . . . . . . . . . . . . . . . . . . .(i)
10.147 Amendment to Agreement of Sale dated April 18, 1996
among ISL, Inc., Interactive Solutions, LLC, Bruce W.
Hanks, Kevin Rogers and Michael Jonas . . . . . . . . . . . . . . .(j)
10.148 Amendment to Loan and Security Agreement dated December
29, 1995 between The CIT Group/Credit Finance, AT Supply,
Inc. and Teltronics, Inc. dated May 14, 1996. . . . . . . . . . . .(k)
10.149 Promissory Note between Barnett Bank of Manatee County,
N.A. and Teltronics, Inc. dated April 22, 1996. . . . . . . . . . .(k)
10.150 Stock Option Agreement dated as of October 15, 1996
among Teltronics, Inc. and certain parties. . . . . . . . . . . . .(l)
10.151 Term Note dated September 20, 1996 in the principal
amount of $490,423 delivered to Solectron Texas, L.P. . . . . . . .(l)
10.152 Secured Promissory Note dated October 18, 1996 in the
principal amount of $616,300 delivered to The CIT Group/Credit
Finance, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . .(l)
10.153 Agreement of Sale dated September 19, 1996 by and among
Shared Resource Exchange, Inc., Teltronics/SRX, Inc. and
Teltronics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . (m)
10.154 Escrow Agreement made and entered into September 19,
1996 by and among Shared Resource Exchange, Inc.,
Teltronics/SRX, Inc.,Teltronics, Inc. and Sevin Rosen
Bayless Management Company . . . . . . . .. . . . . . . . . . . . .(m)
10.155 Registration Rights Agreement among Shared Resource
Exchange, Inc., Teltronics, Inc. and certain parties
dated as of September 19, 1996. . . . . . . . . . . . . . . . . . .(m)
10.156 Debenture Purchase Agreement of Sirrom Capital
Corporation and Teltronics, Inc. dated February 11, 1997 . .. . . .(n)
10.157 11% Subordinated Convertible Debenture Due February 13,
2002, issued by Teltronics, Inc. to Sirrom Capital Corporation. . .(n)
10.158 Ninth Amendment to Loan and Security Agreement and
First Note Modification Agreement dated July 23, 1997
between The CIT Group/Credit Finance, Inc. and Teltronics,
Inc., AT Supply, Inc. and Interactive Solutions, Inc. . . . . . . .(o)
10.159 Tenth Amendment to Loan and Security Agreement dated
January 16, 1998 between The CIT Group/Credit Finance,
Inc., Teltronics, Inc., AT Supply, Inc. and Interactive
Solutions, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .(p)
10.160 Eleventh Amendment to Loan and Security Agreement dated
February 25, 1998 between The CIT Group/Credit Finance,
Inc., Teltronics, Inc., AT Supply, Inc. and Interactive
Solutions, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .(p)
10.161 Preferred Stock Purchase Agreement between Sirrom
Capital Corporation (d/b/a Tandem Capital) and Teltronics,
Inc. dated February 25, 1998. . . . . . . . . . . . . . . . . . . .(q)
10.162 Debenture Purchase Agreement between Sirrom Capital
Corporation, d/b/a Tandem Capital and Teltronics, Inc.
dated February 25, 1998. . . . . . . . . . . . . . . . . . . . . . (q)
10.163 12% Subordinated Secured Debenture Due February 13, 2002
issued by Teltronics, Inc. to Sirrom Capital Corporation . . . . ..(q)
10.164 Loan and Security Agreement between Sirrom Capital
Corporation and Teltronics, Inc. and its Subsidiaries
dated February 25, 1998. . . . . . . . . . . . . . . . . . . . . . (q)
10.165 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 . . . . . . . . . . . . . . . . . . . . . . . .(q)
10.166 Secured Senior Promissory Note of Teltronics, Inc. in
the principal amount of $280,000 dated February 26, 1998
delivered to Sirrom Capital Corporation . . . . . . . . . . . . . .(q)
10.167 Common Stock Purchase Warrant covering 525,000 shares
of Common Stock of Teltronics, Inc. issued to Sirrom
Capital Corporation dated February 26, 1998 . . . . . . . . . . . .(q)
10.168 Common Stock Purchase Warrant covering 365,000 shares
of Common Stock of Teltronics, Inc. issued to Sirrom
Capital Corporation dated February 26, 1998 . . . . . . . . . . . .(q)
10.169 Registration Rights Agreement dated February 25, 1998
between Teltronics, Inc. and Sirrom Capital Corporation . . . . . .(q)
10.170 Agreement of Sale dated March 5, 1998 between AT
Supply, Inc. and AT2 Communications, Incorporated . . . . . . . . .(r)
<PAGE> 24
16.1 Letter regarding change in certifying accountant from
James Moore & Company to the SEC dated January 3, 1995. . . . . . .(c)
16.2 Letter regarding change in certifying accountant from KPMG
Peat Marwick LLP to the SEC dated February 28, 1995 . . . . . . . .(c)
21.1 List of Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . .(p)
27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . .(p)
________________
(a) Filed as an Exhibit to Teltronics' Definitive Proxy Statement
filed June 24, 1996.
(b) Filed as an Exhibit to this Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996.
(c) Filed as an Exhibit to Teltronics' Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994.
(d) Filed as an Exhibit to Teltronics' Report on Form 10-QSB for the
three month period ended June 30, 1995.
(e) Filed as an Exhibit to Teltronics' Definitive Proxy Statement
filed July 12, 1995.
(f) Filed as an Exhibit to Teltronics' Report on Form 10-QSB for the
three month period ended September 30, 1995.
(g) Filed as an Exhibit to Teltronics' Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995.
(h) Filed at Page F-2 of the Financial Statements filed pursuant to
Item 7 of the Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996.
(i) Filed as an Exhibit to Teltronics' Form 8-K filed April 5, 1996.
(j) Filed as an Exhibit to Teltronics' Form 8-K/A-1 filed April 25, 1996.
(k) Filed as an Exhibit to Teltronics' Report on Form 10-QSB for the
three month period ended June 30, 1996.
(l) Filed as an Exhibit to Teltronics's Report on Form 10-QSB for the
three month period ended September 30, 1996.
(m) Filed as an Exhibit to Teltronics' Form 8-K filed October 4, 1996.
(n) Filed as an Exhibit to Teltronics' Form 8-K filed February 27, 1997.
(o) Filed as an Exhibit to Teltronics' Report on Form 10-QSB for the
six month period ended June 30, 1997.
(p) Filed as an Exhibit to this Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
(q) Filed as an Exhibit to Teltronics' Form 8-K filed March 6, 1998.
(r) Filed as an Exhibit to Teltronics' Form 8-K filed March 19, 1998.
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TELTRONICS, INC.
Dated: March 27, 1998 By: Ewen R. Cameron
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
the Registrant in the capacities on the dates indicated.
SIGNATURES TITLE DATE
Ewen R. Cameron Director, President and March 27, 1998
Chief Executive Officer
Mark E. Scott Vice President Finance, March 27, 1998
Secretary & Secretary
Norman R. Dobiesz Director March 27, 1998
Carl S. Levine Director March 27, 1998
Craig Macnab Director March 27, 1998
<PAGE> F-1
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997<PAGE>
<PAGE> F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Teltronics, Inc.
We have audited the accompanying consolidated balance sheet of
Teltronics, Inc. and Subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, shareholders'
deficiency, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
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 audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Teltronics, Inc. and Subsidiaries at December 31, 1997,
and the consolidated results of their operations and their cash
flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Tampa, Florida
March 20, 1998
<PAGE> F-3
To the Board of Directors and Shareholders of Teltronics, Inc.
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated statements of
operations, shareholders' equity and cash flows of Teltronics, Inc.
and Subsidiaries for the year ended December 31, 1996. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of
consolidated operations and consolidated cash flows of Teltronics,
Inc. and Subsidiaries for the year ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ Millward & Co., CPAs
Fort Lauderdale, Florida
March 13, 1997
<PAGE> F-4
<TABLE>
<CAPTION>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 435,538
Accounts receivable, net of allowance
for doubtful accounts of $679,927 4,823,382
Inventories 6,149,307
Prepaid expenses and other current assets 615,743
------------
Total current assets 12,023,970
------------
PROPERTY AND EQUIPMENT, NET 3,666,881
------------
OTHER ASSETS 361,913
------------
Total assets $ 16,052,764
============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
<S> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 4,763,835
Current portion of capital lease obligations 159,215
Accounts payable 5,610,101
Accrued expenses and other current liabilities 1,541,228
------------
Total current liabilities 12,074,379
------------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 4,607,576
Capital lease obligations, net of
current portion 82,655
------------
Total long-term liabilities 4,690,231
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIENCY:
Common stock, $.001 par, 40,000,000
shares authorized, 3,866,013
issued and outstanding 3,867
Non-voting common stock, $.001 par,
5,000,000 shares authorized,
zero shares issued and outstanding 0
Preferred stock, $.001 par value,
5,000,000 shares authorized,
100,000 shares issued and outstanding 100
Additional paid-in-capital 14,434,772
Accumulated deficit (13,959,085)
Unpaid shares issued pursuant to
Employee Stock Payment Plan (1,191,500)
------------
Total shareholders' deficiency (711,846)
------------
Total liabilities and shareholders' deficiency $ 16,052,764
============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> F-5
<TABLE>
<CAPTION>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
NET SALES $ 34,673,407 $ 28,878,016
------------ ------------
COSTS AND EXPENSES:
Cost of goods sold 23,647,743 19,518,540
General and administrative 4,872,743 5,138,491
Selling 4,809,949 4,872,353
Research and development 2,428,234 1,390,919
------------ ------------
35,758,669 30,920,303
------------ ------------
Loss from operations (1,085,262) (2,042,287)
------------ ------------
OTHER INCOME (EXPENSE):
Interest (1,110,530) (547,743)
Financing (135,793) (42,250)
Litigation costs (189,645) (323,094)
Other 33,850 9,703
------------ ------------
(1,402,118) (903,384)
------------ ------------
Loss before provision for income taxes (2,487,380) (2,945,671)
Provision for income taxes 0 0
------------ ------------
NET LOSS $ (2,487,380) $ (2,945,671)
============ ============
NET LOSS PER SHARE (BASIC AND DILUTED) $ (.74) $ (1.05)
============ ============
Average number of common shares outstanding 3,382,223 2,817,586
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> F-6
<TABLE>
<CAPTION>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
For the Years Ended December 31, 1997 and 1996
UNPAID
EMPLOYEE
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK
------------------ --------------- PAID-IN (ACCUMULATED PAYMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) PLAN SHARES TOTAL
--------- ------ ------- ------ ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 2,610,168 $2,611 0 $ 0 $10,861,593 $ (8,526,034) $ 0 $2,338,170
Shares issued for 750,000 750 0 0 2,286,750 0 0 2,287,500
acquisition of net assets
of Shared Resource
Exchange, Inc.
Issuance of stock on 4,000 4 0 0 6,496 0 0 6,500
exercise of options
Issuance of stock on 1,845 2 0 0 5,533 0 0 5,535
exercise of warrants
Issuance of Series A 0 0 100,000 100 24,900 0 0 25,000
Preferred Stock
Net loss 0 0 0 0 0 (2,945,671) 0 (2,945,671)
--------- ------ ------- ---- ----------- ------------ ----------- ----------
Balance, December 31, 1996 3,366,013 $3,367 100,000 $100 $13,185,272 $(11,471,705) $ 0 $1,717,034
Shares issued pursuant to 500,000 500 0 0 1,249,500 0 (1,191,500) 58,500
Employee Stock Payment Plan
Net loss 0 0 0 0 0 (2,487,380) 0 (2,487,380)
--------- ------ ------- ---- ----------- ------------ ----------- ----------
Balance, December 31, 1997 3,866,013 $3,867 100,000 $100 $14,434,772 $(13,959,085) $(1,191,500) $(711,846)
========= ====== ======= ==== =========== ============ =========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE> F-7
<TABLE>
<CAPTION>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,487,380) $ (2,945,671)
Adjustments to reconcile net loss
to net cash flows used in
operating activities:
Bad debt expense 590,078 60,011
Provision for obsolete inventory 528,389 0
Depreciation 628,485 789,981
Amortization of intangibles 0 161,528
Changes in operating assets and liabilities:
Accounts receivable 284,021 (2,316,761)
Inventories 964,509 (1,755,165)
Prepaid expenses and other current assets (86,817) (335,821)
Accounts payable (2,711,775) 4,733,607
Accrued expenses and other liabilities (131,046) 138,532
------------ ------------
Net cash flows used in operating activities (2,421,536) (1,469,759)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (1,387,627) (442,829)
Other assets 34,610 (83,280)
Cash received in acquisition of Shared
Resource Exchange, Inc. net assets 0 195,917
------------ ------------
Net cash flows used in investing activities (1,353,017) (330,192)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in cash overdraft (25,180) 25,180
Net proceeds from line of credit 255,781 1,909,067
Debenture proceeds 4,250,000 0
Principle repayments of loans, notes and leases (353,135) (411,585)
Net proceeds from sale of common stock and
preferred stock 82,625 12,035
Proceeds from sale of preferred stock 0 875
------------ ------------
Net cash flows from financing activities 4,210,091 1,535,572
------------ ------------
Net increase (decrease) in cash
and cash equivalents 435,538 (264,379)
Cash and cash equivalents - beginning of year 0 264,379
------------ ------------
Cash and cash equivalents - end of year $ 435,538 $ 0
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> F-8
<TABLE>
<CAPTION>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
SUPPLEMENTAL NONCASH FINANCING
AND INVESTING ACTIVITIES:
Issuance of common stock for Purchase of net
assets of Shared Resource Exchange, Inc. $ 0 $ 2,287,500
============ ============
Purchase of equipment under capital lease $ 183,914 $ 305,382
============ ============
Subscription receivable for issuance of
Preferred Stock $ 0 $ 24,125
============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 1,017,757 $ 583,802
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE> F-9
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - NATURE OF BUSINESS AND 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., and
its 80% owned subsidiary AT Supply, Inc., and its 85% owned
subsidiary Interactive Solutions, Inc. All significant
intercompany transactions and balances have been eliminated in
consolidation.
AT Supply, Inc. ("AT Supply") is engaged in the distribution of
products relating to the telecommunications industry.
On September 23, 1996, the Company, through its newly formed
wholly-owned subsidiary, Teltronics/SRX, Inc. ("Teltronics/SRX"),
acquired substantially all the assets of Shared Resource
Exchange, Inc., which designs, markets, sells, manufactures and
supports digital voice and data transmission systems. The
Company's revenues are derived primarily from sales to customers
throughout the United States.
On April 18, 1996, Interactive Solutions, Inc. ("ISI"), a
Delaware corporation formed by the Company and an 85% owned
subsidiary of the Company, acquired certain assets and technology
from Interactive Solutions, LLC, a Kentucky limited liability
company and its three members (the "Members") pursuant to an
Agreement of Sale dated March 27, 1996.
For the year ended December 31, 1997, losses applicable to the
20% minority interest of AT Supply and the 15% minority interest
of ISI exceeded the minority interest in the equity capital of
such companies and the losses accordingly, are included in the
determination of net income. However, to the extent of future
earnings, if any, the Company shall be credited to the extent of
such losses that were previously absorbed.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS - For the purpose of the consolidated
Statements of Cash Flows, the Company considers all highly liquid
investments purchased with an original maturity of three months
or less to be cash equivalents. As of December 31, 1997 and
1996, the Company did not hold any cash equivalents.
CONCENTRATION OF CREDIT RISK - The Company's largest customer was
13% and 6% of sales in 1997 and 1996, respectively. No other
single customer accounted for more than 10% of the Company's
sales in 1997 or 1996. The Company's principal customers
includes Regional Bell Operating Companies, independent telephone
companies and alternative service providers located throughout
the United States.
INVENTORIES - Inventories are stated at the lower of cost or
market. Costs are determined principally on the weighted average
method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at
cost. Depreciation is provided over the estimated useful lives
(three to ten years) of the respective assets using the
straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. 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.
<PAGE> F-10
INCOME TAXES - Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that
includes the enactment date. Deferred tax assets are reduced to
estimated amounts to be realized by use of a valuation allowance.
LOSS PER SHARE - Loss per share is computed by dividing net loss
by the weighted average number of common shares outstanding
during each period presented. Common stock equivalents
outstanding during each period presented were anti-dilutive and
therefore 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 earnings per share amounts for
all periods presented have been restated to conform to the SFAS
No. 128 requirements.
REVENUE RECOGNITION - Revenues from product sales are recognized
when the product is shipped. Revenue from software development
contracts are recognized upon delivery of software product to
customer. Revenue from software maintenance contracts is
deferred and recognized ratably over the contract period and
other service revenues are recognized upon performance.
RESEARCH AND DEVELOPMENT - Company sponsored research and
development costs are expensed as incurred.
STOCK BASED COMPENSATION - The Company accounts for its stock
based compensation under the provisions of Accounting Principles
Board Opinion No. 25 ("APB No. 25"), ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and presents disclosures required by Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123")
ACCOUNTING FOR STOCK-BASED COMPENSATION.
WARRANTY - The Company provides currently for the estimated cost
which may be incurred under product warranties. The Company
provides a limited warranty on its products, for a period from
3 to 18 months (depending on the product), under which the
Company agrees to repair or replace, in the Company's sole
discretion, units defective in material or workmanship, provided
the equipment has not been subjected to alteration or abuse.
RECLASSIFICATIONS - Certain prior year amounts have been
reclassified to conform with the current year's presentation.
RECENT ISSUED ACCOUNTING STANDARDS - In June, 1997, the Financial
Accounting Standards Board issued statement of Financial
Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION ("SFAS No. 131"). This
supersedes Financial Accounting Standards No. 14. SFAS No. 131
uses a management approach to report financial and descriptive
information about a Company's operating segments. Operating
segments are revenue-producing components of the enterprise for
which separate financial information is produced internally for
the Company's management. SFAS No. 131 is effective for fiscal
years beginning after December 31, 1997. Management is currently
assessing the impact of this Standard.
In October, 1997, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 97-2, SOFTWARE
REVENUE RECOGNITION, which changes the requirements for revenue
recognition effective for transactions that the company will
enter into beginning January 1, 1998. Management believes
adoption of SOP 97-2 will not have a material impact on the
Company's financial position or results of operations.
<PAGE> F-11
NOTE 3 - ACQUISITIONS
On April 18, 1996, Interactive Solutions, Inc. ("ISI"), a
Delaware corporation formed by the Company and an 85% owned
subsidiary of the Company, acquired certain assets and technology
from Interactive Solutions, LLC, a Kentucky limited liability
company and its three members (the "Members") pursuant to an
Agreement of Sale dated March 27, 1996. Pursuant to the
Agreement, ISI acquired all of Interactive's and its Members'
rights to and in certain technology for a small, self-contained,
voice activated, portable, Pentium processor driven, multimedia
computer ("Technology") and other Purchased Assets described in
the Agreement. Teltronics assumed certain indebtedness of
Interactive and its Members and provided for future issuance of
up to 1,000,000 shares of the Company's Non-Voting Common Stock
(the "NVC Shares"), upon the satisfaction of certain conditions,
including the award of significant contracts ("Contract") to ISI
utilizing the Technology. The NVC Shares, if issued, would be
convertible at the option of the holders on a one to one basis
into shares of the Voting Common Stock of the Company and would
be subject to several conditions, including an escrow to secure
certain indemnification obligations of Interactive and its
Members. There can be no assurance that a Contract will be
awarded or, if awarded, that the Contract will contain the terms
and conditions required to obligate ISI to deliver any or all of
the NVC Shares. The remaining 15% ownership of ISI is held by
two officers and a Director of the Company. At December 31,
1997, ISI had a deficiency in assets.
On September 20, 1996, the Company's wholly-owned subsidiary,
Teltronics/SRX acquired substantially all of the assets and
certain liabilities of Shared Resource Exchange, Inc. (the
"Seller"), a Delaware corporation located in Dallas, Texas. This
transaction has been accounted for as a purchase.
The Company delivered an aggregate of 750,000 restricted shares
(including 100,000 shares to discharge certain debt) of its
voting common stock for substantially all of the assets of the
Seller. The holders of these restricted shares have been granted
certain registration rights under a Registration Rights Agreement
which allows them to elect to have their shares registered if the
Company proposes to register any of its securities under the Act
in an offering for cash.
The following are the net assets acquired:
Current assets primarily inventory $ 3,060,117
Property and equipment 1,075,000
Accounts payable and other liabilities (1,847,617)
-----------
$ 2,287,500
===========
The following unaudited pro forma information for the year ended
December 31, 1996 have been prepared to reflect the acquisition
of Shared Resource Exchange, Inc. as if it had occurred on
January 1, 1996. The pro forma financial information set forth
below is unaudited and not necessarily indicative of the results
that would actually have occurred if the transactions had been
consummated as of that date or the results which may be obtained
in the future.
1996
------------
Net revenues $ 34,500,042
Net loss $ (4,538,642)
Net loss per common share $ (1.61)
The Company entered into an Escrow Agreement under which 120,000
of the shares issued to the seller have been placed in escrow
until the first full year of results are completed and reported.
The purpose of the escrowed shares was to cover certain
reimbursement and/or indemnification rights of the Company.
<PAGE> F-12
NOTE 4 - INVENTORIES
The major classes of inventories at December 31, 1997, are as
follows:
Raw materials $ 2,368,547
Work-in-progress 789,227
Finished goods 2,991,533
-----------
$ 6,149,307
===========
NOTE 5 - PROPERTY AND EQUIPMENT
The major classifications of property and equipment at December
31, 1997, are as follows:
Machinery and equipment $ 2,465,261
Furniture and fixtures 2,450,836
Equipment under capital lease 1,792,551
Leasehold improvements 293,123
-----------
7,001,771
Accumulated depreciation (3,334,890)
-----------
$ 3,666,881
===========
NOTE 6 - DEBT
Debt at December 31, 1997 consists of the following:
Bank line of credit - On August 1, 1997, the
Company's principal lender, The CIT Group/Credit
Finance, Inc. ("CIT") entered into a Ninth
Amendment to the Company's Line of Credit
Facility and Term Loan. The Amendment reduced
the interest rate from 2.5% to 2.0% above prime
rate, increased maximum availability from
$4,950,000 to $7,000,000, increased the
prepayment penalty for any payment prior to
October 28, 1998 from 1% to 1.5%, extended the
Initial Term to October 28, 2000, and added ISI
as a co-borrower on the Line of Credit Facility
and Term Loan. Substantially all of the
Company's present and future assets are pledged
as collateral with borrowings limited to certain
gross availability formulas based on accounts
receivable and inventory as defined in the
agreement. The facility provides for minimum
loan fees, unused line fees and renewal term
fees. The outstanding borrowings are classified
as a current liability. During 1997, the Company
incurred minimum loan fees of $75,000. A
director of the Company has personally guaranteed
a portion of the facility. At December 31, 1997,
the Company had $2,246,249 available pursuant to
this facility. The availability of this unused
line of credit is restricted based on the
availability formulas above. $ 4,463,451
11% Subordinated Convertible Debentures payable
in quarterly interest payments only and due
February, 2002. The Debentures are subordinated
to certain other indebtedness of the Company. 4,250,000
Term loan agreement, as described above, payable
in monthly principal installments of $10,200 and
due October 1, 2000. Interest is payable monthly
at 2% above the prime rate: Collateralized by
substantially all the assets of the Company. 290,300
<PAGE> F-13
Note payable - bank, due in monthly installments
of $3,816 of principal plus interest at prime
plus 1% with a final balloon payment due April
1999. 185,058
Note payable - bank, due in monthly installments
of $7,323 including interest at 10.5% per annum
with a final payment due October, 1998.
Collateralized by production equipment. 69,159
Notes payable - officer, payable upon demand with
interest accruing at 8% per annum. 50,412
Note payable - bank, due in monthly installments
of $6,760 including interest at 14% per annum
with a final payment due July 1998.
Collateralized by production equipment. 44,374
Unsecured note payable to insurance company in
monthly installments of $2,158, including
interest at 9.75% per annum with a final payment
due in September, 1998. 18,657
------------
9,371,411
Less current portion 4,763,835
------------
Long-term portion $ 4,607,576
============
Future maturities of note principal are as follows:
Year Ending December 31,
1998 $ 4,763,835
1999 312,076
2000 45,500
2001 0
2002 4,250,000
------------
$ 9,371,411
============
The covenants in the Loan And Security Agreement with CIT
restrict certain sales of assets; mergers and acquisitions;
borrowings and guarantees; dividends and redemptions; creation of
liens; and transactions with affiliates.
The covenants in the Debenture Purchase Agreement for the
Subordinated Convertible Debentures restrict certain sales of
assets; mergers and acquisitions; borrowings and guarantees;
dividends and redemptions; creation of liens; investments;
issuance of subsidiary shares; and transactions with affiliates.
<PAGE> F-14
NOTE 7 - CAPITAL LEASE OBLIGATIONS
Leased assets include office equipment and machinery and
equipment. The present value of future minimum lease payments
pursuant to the leases and the corresponding liability have been
recorded in the financial statements as property and equipment
under capital lease obligations. Interest on these obligations
range from approximately 6% to 11%.
At December 31, 1997, leased property under capital leases
consists of the following:
Machinery and equipment cost $ 1,792,551
Less: accumulated depreciation (1,011,049)
-----------
Net book value $ 781,502
===========
The future minimum lease payments under capital leases together
with the present value of the net minimum lease payments at
December 31, 1997 are as follows:
Fiscal Year Amount
----------- ----------
1998 $ 173,805
1999 65,050
2000 22,568
----------
Total minimum lease payments 261,423
Less: amount representing interest (19,553)
----------
Present value of minimum lease payments 241,870
Less: current portion (159,215)
----------
Long-term capital lease obligations $ 82,655
==========
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued
liabilities are reflected in the financial statements at their
carrying amount which approximates fair value because of the
short-term maturity of those instruments. The carrying amount of
long-term debt is assumed to approximate fair value because there
have not been any significant changes in market conditions or
specific circumstances since the instruments were recorded at
fair value.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
(A) EMPLOYMENT AGREEMENTS - The Company entered into five
year employment agreements with the Company's President and CEO
and its Senior Vice President of Business Development commencing
January 1, 1995. The President's agreement was an amendment and
restatement of a prior agreement which he entered into with the
Company in July 1993. Each employment agreement established a
base annual salary of $225,000 subject to annual increases of
$25,000 per year. Either the Company or the employee may
terminate the employment agreements upon the occurrence of
certain events. The President's employment agreement contains
covenants restricting the employee from competing for a period of
two years after termination of the agreement. If the Company
terminated either of the President or Senior Vice President, the
terminated employee would be entitled to severance equal to one
year's base salary. In addition, the employees are eligible to
participate in any stock option plan that may be adopted by the
Company.
<PAGE> F-15
The Company's 80% owned subsidiary entered into three year
employment agreements with the subsidiary's President and Vice
President of Sales and Marketing commencing October 23, 1995.
Each employment agreement established a base annual salary of
$80,000 and issuance of the subsidiary's voting common stock
which at the time represents ten percent (10%) of the outstanding
common stock of the subsidiary. Either the subsidiary or the
employee may terminate the employment agreement upon the
occurrence of certain events. In addition, the employees are
eligible to participate in any incentive compensation plan
established for key salaried employees of the subsidiary based
upon net profits of the subsidiary.
The Company entered into a three year employment agreement with
its Executive Vice President and Chief Operating Officer
commencing October 14, 1996. The agreement provides for an
annual salary of $180,000 and is terminable prior to expiration
upon the occurrence of certain events.
(B) OPERATING LEASES - The Company leases its manufacturing
facilities, including land and building, under a 15 year
operating lease expiring August 31, 2005.
The terms of the lease provide the Company with an option at any
time during the lease term to purchase the property at the
greater of its fair market value or $4,320,000. The Company has
the option to renew the lease for up to two additional five-year
periods. The Company is responsible for paying all taxes,
insurance and maintenance cost relating to the leased property.
The lease provides for an adjustment in the annual rent based on
changes in the Consumer Price Index, limited to a minimum of the
prior year's rent and a maximum of 6%.
The Company also leases various equipment under operating leases
expiring in one to two years.
Future minimum lease payments for all noncancellable operating
leases are as follows:
Year Ending December 31,
1998 $ 793,852
1999 733,235
2000 701,005
2001 698,023
2002 606,390
Thereafter 1,610,341
----------
$5,142,846
==========
Rental expense for operating leases totaled approximately
$637,000 for the years ended December 31, 1997 and 1996.
(C) 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
<PAGE> F-16
defenses. A Reply to Affirmative Defenses was served by the
Plaintiff in December, 1997. Discovery has not yet 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. ("SRX") in
connection with the sale of substantially all of its assets to
the Company in September, 1996. The Plaintiff claims that the
Company agreed to pay all of its fees under the Agreement of Sale
entered into between SRX and the Company on September 20, 1996.
Management believes that none of the above legal cases will
materially affect the Company's consolidated financial position
or results of operation.
NOTE 10 - SHAREHOLDERS' DEFICIENCY
The total number of shares of all classes of capital stock which
the Company has the authority to issue is 50,000,000 shares
divided into three classes of which 5,000,000 shares, par value
$.001 per share are designated Preferred stock, 40,000,000
shares, par value $.001 per share are designated Common stock and
5,000,000 shares, par value $.001 per share, are designated
Non-Voting Common stock.
(A) COMMON STOCK - On May 15, 1997, the Company issued
500,000 shares of its Common Stock registered on Form S-8 to an
escrow agent for the benefit of its employees for future services
under the Company's Employee Stock Payment Plan in an aggregate
amount of $1,250,000. The shares were held under an Escrow
Agreement. As the shares were sold, proceeds are placed in an
escrow account and used to fund the Company's payroll. During
1997, $58,500 was received from the Escrow Agent. As of December
31, 1997, the Company recorded the $1,191,500 as a reduction in
shareholders' deficiency. The shares were issued at the fair
market value and no expense was recorded under this arrangement.
On February 16, 1998, the remaining 450,500 shares were
cancelled.
(B) INCENTIVE STOCK OPTION PLAN - The Company has adopted an
Incentive Stock Option Plan ("Plan") to enhance the Company's
ability to retain the services of outstanding personnel and
encourage such employees to have a greater financial investment
in the Company. The Plan authorized the Board of Directors to
grant incentive stock options under the Internal Revenue Code of
1986, as amended, to key employees of the Company or its
subsidiaries. The Plan will terminate August 8, 2005 unless
terminated earlier by the Board of Directors or extended by the
Board with approval of the stockholders.
The Plan authorizes the Board to grant stock options intended to
qualify as incentive stock options under the Internal Revenue
Code of 1986, as amended and are limited to 1,250,000 shares of
the Company's common stock. The term of an option shall be fixed
by the Board. The option price shall not be less than the fair
market value of the Company's Common Stock on the date of grant,
unless the grantee is the holder of more than 10% of the voting
power of all classes of stock of the Company, in which case the
option price shall not be less than 110% of the fair market value
of the stock on the date of grant.
<PAGE> F-17
<TABLE>
<CAPTION>
The following table summarizes certain weighted average data for
options outstanding and currently exercisable as of December 31, 1997:
Outstanding Exercisable
---------------------- --------------------
Weighted Average
---------------------- Weighted
Remaining Average
Exercise Exercise Contractual Exercise
Price Range Shares Price Life Shares Price
============================================================================
<C> <C> <C> <C> <C> <C>
$1.63 - $2.45 254,000 $1.81 8.4 140,000 $1.66
$3.00 - $4.50 67,000 3.49 8.6 59,000 3.50
$5.50 - $5.50 550,000 5.50 8.5 550,000 5.50
------- --- -------
871,000 8.5 749,000
======= === =======
</TABLE>
The per share weighted average fair value of options granted
during the years ended December 31, 1997 and 1996 were $1.57 and
$3.94, respectively.
All options were granted at not less than the fair market value
at date of grant. All grants outstanding May 16, 1995 expire May
15, 2005. All other options are exercisable over a ten-year
period from the date of grant unless employment is terminated.
Options totaling 375,000 shares were available for grant at
December 31, 1997.
The Company has adopted the disclosure-only provisions of SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly,
no compensation cost has been recognized for the Plan. Had
compensation costs for the Plan been determined based on the fair
value at the grant dates for the awards consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss
per share would have been adjusted to the pro forma amounts
indicated below.
Information regarding the Company's Stock Option Plan is
summarized below:
Weighted Average Assumptions:
1997 1996
------------ ------------
Risk-free interest rates 5.76% 6.66%
Weighted average expected life of the options 5.0 years 5.0 years
Volatility factor of the expected market price
of the Company's Common Stock 95% 94%
Dividend yield None None
Loss as reported $(2,487,380) $(2,945,671)
Pro forma net loss $(4,093,380) $(4,350,671)
Pro forma net loss per share:
Basic and diluted $(1.21) $(1.54)
<PAGE> F-18
<TABLE>
<CAPTION>
Weighted average exercise prices for option activity:
1997 1996
-------------------- -------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 800,000 $4.54 210,000 $1.63
Granted at exercise price equal
to market price 124,000 2.09 644,000 5.24
Exercised 0 .00 (4,000) 1.63
Forfeited (53,000) 3.23 (50,000) 1.63
Expired 0 .00 0 .00
------- ----- ------- -----
Balance - end of year 871,000 $4.27 800,000 $4.54
======= ===== ======= =====
Exercisable at end of year 749,000 $4.62 156,000 $1.66
======= ===== ======= =====
</TABLE>
The pro forma information is based on options granted which
varies from year-to-year and is not necessarily indicative of pro
forma information for future periods.
(C) EMPLOYEE STOCK PAYMENT PLAN - The Employee Stock Payment
Plan was established for the purpose of issuance of shares to
participants for full payment of wages and/or benefits for
services rendered or to be rendered as employees of the Company.
Such Employee Stock Payment Plan has been registered on Form S-8.
At December 31, 1997, 211,100 shares were reserved for possible
future issuance under the Employee Plan. On February 16, 1998,
the Company cancelled the remaining 211,100 shares.
(D) CONSULTANT STOCK PAYMENT PLAN - The Company reserved an
aggregate of 440,000 shares of its common stock for possible
issuance under a Consultant Stock Payment Plan ("Consultant
Plan") established for the purpose of issuance of shares to
consultants in full satisfaction of compensation and/or expenses
for services rendered or to be rendered as consultants to the
Company. Such Plan has registered its shares pursuant to a Form
S-8. As of December 31, 1997, 105,000 shares were reserved for
possible future issuance to consultants. On February 16, 1998,
the Company cancelled the remaining 105,000 shares.
(E) PREFERRED STOCK - During the year ended December 31,
1996, the Company sold 100,000 shares of its $.001 par value
Series A Preferred Stock to its Director and Senior Vice
President of Business Development for $.25 per share for an
aggregate consideration of $25,000. Such shares are restricted
securities and subject to resale restrictions including the right
of the Company to approve or disapprove any sale, transfer or
disposition to any third party not controlled by the Director.
Additionally, each share is entitled to 400 votes and is not
entitled to any dividends. Accordingly, this would give the
Senior Vice President voting control of the Company. At December
31, 1996, the Company recorded a subscription receivable of
$24,125, which was subsequently collected.
<PAGE> F-19
NOTE 11 - RELATED PARTY TRANSACTIONS
The following is a summary of transactions with related parties:
(A) PREPAID LEASE GUARANTEE - A Director personally
guaranteed the Company's obligations to the lessor over the term
of the lease. The Company agreed to pay 6% of the total future
value of the lease payments, excluding executory costs, as
consideration for the personal guarantee. This amount was paid
during 1991. The cost of the guarantee to the Company, 6% of
$7,000,000 or $420,000 has been deferred as a financing cost
(prepaid lease guarantee) in the accompanying financial
statements and is amortized on a straight line basis over the
term of the lease. Accumulated amortization of this amount at
December 31, 1997, was $205,308.
(B) OFFICE SUBLEASE - A company owned by a Director and
principal shareholder of the Company rents offices from the
Company and was billed $19,280 in 1997. In addition, the Company
provided the company owned by the Director with administrative
services and this company was billed $87,232 in 1997.
NOTE 12 - INCOME TAXES
The following is a reconciliation of income tax expense
recognized to that computed by applying the federal statutory
rate of 34% in 1997 and 1996 to income before income taxes:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Federal tax at the statutory rate $ (845,709) $(1,030,985)
State income taxes net of federal
tax benefit (87,240) 0
Change in valuation allowance for
deferred tax asset 1,112,902 1,030,985
Change in effective tax rate (212,545) 0
Other items 32,592 0
----------- -----------
$ 0 $ 0
=========== ===========
</TABLE>
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will
not be realized. Due to the uncertain nature of the ultimate
realization of deferred tax assets based upon the company's
financial performance during 1997 and 1996 and the potential
expiration of the net operating loss carryforward, the Company
has established a valuation allowance against its deferred tax
assets. The Company will recognize the benefits associated with
the deferred tax assets only as reassessment demonstrates they
are realizable. Realization is entirely dependent upon future
earnings in specific tax jurisdictions. While the need for this
valuation allowance is subject to periodic review, if the
allowance is reduced, the tax benefits will be recorded in future
operations as a reduction of the Company's income tax expense.
<PAGE> F-20
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 3,267,771 $ 2,470,362
Accrued vacation 155,843 120,689
Inventory 425,136 225,469
Deferred revenue 0 88,325
Bad debt reserve 260,748 43,837
Accrued expenses 67,095 0
------------ ------------
4,176,593 2,948,682
Valuation allowance (3,913,106) (2,800,204)
Deferred tax liabilities:
Depreciation (232,149) (119,330)
Software costs (31,338) (29,148)
------------ ------------
Net deferred tax asset $ 0 $ 0
============ ============
</TABLE>
During the years ended December 31, 1997 and 1996, the Company
recorded a valuation allowance of $3,913,106 and $2,800,204
respectively, on its deferred tax assets to reduce the total to
an amount that management believes will not be realized.
Realization of deferred tax assets is dependent upon sufficient
taxable income during the period that temporary differences and
carryforwards are expected to be available to reduce taxable
income.
At December 31, 1997, for federal income tax purposes, the
Company had a federal net operating loss carryforward of
approximately $8,499,000 and a Florida state net operating loss
carryforward of approximately $9,500,000, which will expire in
the years 2008 through 2012. Such net operating losses are
available to offset future taxable income.
NOTE 13 - SUBSEQUENT EVENTS
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 25, 1998, the Company entered into Senior Secured
Loans ("loans") for $1,000,000 and $280,000. The proceeds of the
loans were used for working capital ($1,000,000) and to repay the
$290,300 term loan agreement. Interest is paid at 12% per annum.
The $1,000,000 loan is due February 25, 1999 and interest is
payable quarterly starting May 15, 1998. The monthly principal
and interest payment on the $280,000 loan is $10,272 starting May
15, 1998 and the note is due October 1, 2000. Fees paid in
connection with these loans totaled $32,000. The loans do not
have a prepayment penalty and are collateralized by a first lien
on property and equipment and a second lien on all other assets.
The holder of the loans received 365,000 warrants to purchase the
Company's Common Stock at an exercise price of $2.75 per share.
These warrants are exercisable in whole or in part, at any time
during a five-year period beginning on the date of issuance. The
loan contains certain financial covenants including restrictions
which could affect future funding of ISI by the Company.
On February 25, 1998, the Company issued $2,500,000 of
Convertible Preferred Stock. The Company issued 25,000 shares at
a par value of $100 per share. The proceeds were used for the
partial repayment of the $4,250,000 Convertible Debentures issued
on February 13, 1997 and discussed in Footnote 6. The 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 Preferred Stock has the right at its
option to convert to the Company's Common Stock at $2.75 per
share. The Preferred Stock cannot be called for two years and
after two years, only if
<PAGE> F-21
the twenty-day average bid price exceeds $5.50 per share. After
four years, the Company has the right to redeem the Preferred
Stock in full at 100% of the face value plus accrued and unpaid
dividends. The Preferred Stock contains certain financial
covenants.
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
Debentures issued on February 13, 1997 and as discussed in
Footnote 6. 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 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 buyers. The buyer paid $972,450 at closing to
terminate all liens and security interests with the Company's
lender. The buyer assumed responsibility for payment of all
liabilities. The sales price exceeded book value by $813,000.
Revenues and net loss for AT Supply was $9,293,000 and
($608,000), respectively for the year ended December 31, 1997.
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.
On February 16, 1998, the Company cancelled the previous
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
These shares are discussed in detail in Footnote 10.
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 $100 per
share. The Company issued 25,000 shares of this stock in
conjunction with the $2,500,000 of Convertible Preferred Stock as
discussed.
NOTE 14 - FOURTH QUARTER ADJUSTMENTS
The Company recognized charges during the fourth quarter of 1997
totaling approximately $686,000, which increased the cost of
operations by $188,000 and general and administrative expense by
$498,000. Charges to the cost of operations were primarily
related to a provision for obsolete inventory based on
information which became available during the fourth quarter of
1997. The charges to general and administrative expense included
the provision of allowances for doubtful accounts of
approximately $498,000. This amount was related to accounts
receivable originating primarily in the third and fourth quarter
of 1997, collection of which became doubtful in the fourth
quarter of 1997. Additionally, during the fourth quarter of
1997, $1,191,500 was reclassified from current assets to an
increase in shareholders' deficiency for unpaid shares issued
pursuant to the Employee Stock Payment Plan.
TENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS TENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment") is made and entered into as of January 16, 1998, by
and among TELTRONICS, INC., a Delaware corporation (hereinafter
referred to as "Teltronics"), with its chief executive office and
principal place of business at 2150 Whitfield Industrial Way,
Sarasota, Florida 34243; AT SUPPLY, INC., a Texas corporation
(hereinafter referred to as "ATS"), with its chief executive
office and principal place of business at 4706 Shavano Oak, Suite
104, San Antonio, Texas 78249; and INTERACTIVE SOLUTIONS, INC.,
a Delaware corporation (hereinafter referred to as
"Interactive"), with its chief executive office and principal
place of business at 2150 Whitfield Industrial Way, Sarasota,
Florida 34243 (Teltronics, ATS and Interactive are hereinafter
referred to collectively as "Borrowers" and individually as a
"Borrower"); and THE CIT GROUP/CREDIT FINANCE, INC., a Delaware
corporation (hereinafter referred to as "Lender"), with an office
at 1211 Avenue of the Americas, New York, New York 10036.
RECITALS:
Lender and Borrowers are parties to a certain Loan and
Security Agreement dated October 28, 1994, as amended by a
certain letter agreement dated December 27, 1994, a certain
Second Amendment to Loan and Security Agreement dated as of
December 29, 1995, a certain letter agreement dated March 11,
1996, a certain letter agreement dated May 14, 1996, a certain
letter agreement dated June 4, 1996, a certain letter agreement
dated July 31, 1996, a certain Seventh Amendment to Loan and
Security Agreement dated January 13, 1997, a certain Eighth
Amendment to Loan and Security Agreement dated February 11, 1997,
and a certain Ninth Amendment to Loan and Security Agreement and
First Note Modification Agreement dated July 23, 1997 (as at any
time amended, the "Loan Agreement"), pursuant to which Lender has
made revolving credit and term loans to Borrowers.
The parties now desire to further amend the Loan Agreement
as hereinafter set forth.
NOW, THEREFORE, for and in consideration of TEN DOLLARS
($10.00) in hand paid and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound hereby, agree as
follows:
1. DEFINITIONS. All capitalized terms used in this
Amendment, unless otherwise defined herein, shall have the
meaning ascribed to such terms in the Loan Agreement.
2. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement
is hereby amended as follows:
(a) Subsection (ii) of Section 10.1(b) is hereby
deleted in its entirety and the following new subsection (ii) is
hereby substituted in lieu thereof:
(ii) Eligible Inventory Percentage:
Teltronics: Raw Materials-20%
Finished Goods-24%
ATS: 45%
Interactive: Raw Materials-20%
Finished Goods-24%
(b) Subsection (c) of Section 10.1 of the Loan
Agreement is hereby deleted in its entirety and the following new
subsection (c) is hereby substituted in lieu thereof:
(c) Inventory Sublimit: at any time, the
lesser of (a) $2,000,000 or (b) 75% of the amount
of (Eligible Accounts outstanding at such time
multiplied by the Eligible Accounts Percentage);
provided, however, the inventory of ATS included
in this Inventory Sublimit shall not exceed
$800,000.
3. AMENDMENT FEE. In consideration of the amendments
contained herein, Borrowers hereby jointly and severally agree to
pay to Lender a fee of $5,000 which fee shall be fully earned and
charged to Borrowers' loan account upon their execution of this
Amendment.
4. RATIFICATION AND REAFFIRMATION. Each Borrower
hereby ratifies and reaffirms each of the loan documents executed
in connection with or pursuant to the Loan Agreement
(collectively, the "Loan Documents") and all of each Borrower's
covenants, duties, indebtedness and liabilities thereunder.
5. ACKNOWLEDGMENTS AND STIPULATIONS. Each Borrower
acknowledges and stipulates that the Loan Agreement and the other
Loan Documents executed by Borrowers are legal, valid and binding
obligations of each Borrower that are enforceable against each
Borrower in accordance with the terms thereof; all of the
Obligations are owing and payable without defense, offset or
counterclaim (and to the extent there exists any such defense,
offset or counterclaim on the date hereof, the same is hereby
waived by each Borrower); and the security interests and liens
granted by each Borrower in favor of Lender are duly perfected,
first priority security interests and liens.
6. REPRESENTATIONS AND WARRANTIES. Each Borrower
represents and warrants to Lender, to induce Lender to enter into
this Amendment, that no default or Event of Default exists on the
date hereof; the execution, delivery and performance of this
Amendment have been duly authorized by all requisite corporate
action on the part of each Borrower and this Amendment has been
duly executed and delivered by each Borrower; and all of the
representations and warranties made by each Borrower in the Loan
Agreement are true and correct on and as of the date hereof.
7. EXPENSES OF LENDER. Each Borrower jointly and
severally agrees to pay, on demand, all costs and expenses
incurred by Lender in connection with the preparation,
negotiation and execution of this Amendment and any other Loan
Documents executed pursuant hereto and any and all amendments,
modifications, and supplements thereto, including, without
limitation, the costs and fees of Lender's legal counsel and any
taxes or expenses associated with or incurred in connection with
any instrument or agreement referred to herein or contemplated
hereby.
8. EFFECTIVENESS; GOVERNING LAW. This Amendment
shall be effective upon acceptance by Lender in New York, New
York (notice of which acceptance is hereby waived), whereupon the
same shall be governed by and construed in accordance with the
internal laws of the State of New York.
9. SUCCESSORS AND ASSIGNS. This Amendment shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
10. NO NOVATION, ETC.. Except as otherwise expressly
provided in this Amendment, nothing herein shall be deemed to
amend or modify any provision of the Loan Agreement or any of the
other Loan Documents, each of which shall remain in full force
and effect. This Amendment is not intended to be, nor shall it
be construed to create, a novation or accord and satisfaction,
and the Loan Agreement as herein modified shall continue in full
force and effect.
11. COUNTERPARTS; TELECOPIED SIGNATURES. This
Amendment may be executed in any number of counterparts and by
different parties to this Agreement on separate counterparts,
each of which, when so executed, shall be deemed an original,
but all such counterparts shall constitute one and the same
agreement. Any signature delivered by a party by facsimile
transmission shall be deemed to be an original signature hereto.
12. FURTHER ASSURANCES. Each Borrower agrees to take
such further actions as Lender shall reasonably request from time
to time in connection herewith to evidence or give effect to the
amendments set forth herein or any of the transactions
contemplated hereby.
13. SECTION TITLES. Section titles and references
used in this Amendment shall be without substantive meaning or
content of any kind whatsoever and are not a part of the
agreements among the parties hereto.
14. RELEASE OF CLAIMS. To induce Lender to enter into
this Amendment, each Borrower hereby releases, acquits and
forever discharges Lender, and all officers, directors, agents,
employees, successors and assigns of Lender, from any and all
liabilities, claims, demands, actions or causes or actions of any
kind or nature (if there be any), whether absolute or contingent,
disputed or undisputed, at law or in equity, or known or unknown,
that such Borrower now has or ever had against Lender arising
under or in connection with any of the Loan Documents or
otherwise.
15. WAIVER OF JURY TRIAL. To the fullest extent
permitted by applicable law, the parties hereto each hereby
waives the right to trial by jury in any action, suit,
counterclaim or proceeding arising out of or related to this
Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed under seal, and delivered by their
respective duly authorized officers as of the date first written
above.
TELTRONICS, INC.
("Borrower")
By: Ewen R. Cameron,
President
AT SUPPLY, INC.
("Borrower")
By: Ewen R. Cameron,
Chairman of the Board
[Signatures continued on following page]
<PAGE>
INTERACTIVE SOLUTIONS, INC.
("Borrower")
By: Ewen R. Cameron,
Chairman of the Board
Accepted in New York, New York:
THE CIT GROUP/CREDIT FINANCE,
INC. ("Lender")
By: Ian Brown
Title: Assistant Secretary
<PAGE>
CONSENT AND REAFFIRMATION
The undersigned guarantors of the Obligations of each
Borrower at any time owing to Lender hereby (i) acknowledge
receipt of a copy of the foregoing Tenth Amendment to Loan and
Security Agreement; (ii) consent to Borrowers' execution and
delivery thereof and of the other documents, instruments or
agreements Borrowers agree to execute and deliver pursuant
thereto; (iii) agree to be bound thereby; and (iv) affirm that
nothing contained therein shall modify in any respect whatsoever
its respective guaranty of the Obligations and reaffirm that such
guaranty is and shall remain in full force and effect.
IN WITNESS WHEREOF, each of the undersigned has executed
this Consent and Reaffirmation on and as of the date of such
Tenth Amendment to Loan and Security Agreement.
TTG ACQUISITION CORP.
By: Ewen R. Cameron,
Chairman of the Board
NORMAN R. DOBIESZ (SEAL)
TELTRONICS/SRX, INC.
By: Ewen R. Cameron,
Chairman of the Board
ELEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS ELEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment") is made and entered into as of February 25, 1998, by
and among TELTRONICS, INC., a Delaware corporation (hereinafter
referred to as "Teltronics"), with its chief executive office and
principal place of business at 2150 Whitfield Industrial Way,
Sarasota, Florida 34243; AT SUPPLY, INC., a Texas corporation
(hereinafter referred to as "ATS"), with its chief executive
office and principal place of business at 4706 Shavano Oak, Suite
104, San Antonio, Texas 78249; and INTERACTIVE SOLUTIONS, INC.,
a Delaware corporation (hereinafter referred to as
"Interactive"), with its chief executive office and principal
place of business at 2150 Whitfield Industrial Way, Sarasota,
Florida 34243 (Teltronics, ATS and Interactive are hereinafter
referred to collectively as "Borrowers" and individually as a
"Borrower"); and THE CIT GROUP/CREDIT FINANCE, INC., a Delaware
corporation (hereinafter referred to as "Lender"), with an office
at 1211 Avenue of the Americas, New York, New York 10036.
RECITALS:
Lender and Borrowers are parties to a certain Loan and
Security Agreement dated October 28, 1994, as amended by a
certain letter agreement dated December 27, 1994, a certain
Second Amendment to Loan and Security Agreement dated as of
December 29, 1995, a certain letter agreement dated March 11,
1996, a certain letter agreement dated May 14, 1996, a certain
letter agreement dated June 4, 1996, a certain letter agreement
dated July 31, 1996, a certain Seventh Amendment to Loan and
Security Agreement dated January 13, 1997, a certain Eighth
Amendment to Loan and Security Agreement dated February 11, 1997,
a certain Ninth Amendment to Loan and Security Agreement and
First Note Modification Agreement dated July 23, 1997, and a
certain Tenth Amendment to Loan and Security Agreement dated
January 16, 1998 (as at any time amended, the "Loan Agreement"),
pursuant to which Lender has made revolving credit and term loans
to Borrowers.
The parties now desire to further amend the Loan Agreement
as hereinafter set forth.
NOW, THEREFORE, for and in consideration of TEN DOLLARS
($10.00) in hand paid and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound hereby, agree as
follows:
1. DEFINITIONS. All capitalized terms used in this
Amendment, unless otherwise defined herein, shall have the
meaning ascribed to such terms in the Loan Agreement.
2. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is
hereby amended as follows:
(a) Subsections (a), (b) and (c) of Section 6.12 of the
Loan Agreement are hereby deleted in their entirety and the
following new subsections (a), (b) and (c) are hereby substituted
in lieu thereof:
(a) lend or advance money or property to,
guarantee or assume indebtedness of, or invest (by
capital contribution or otherwise) in any person,
firm, corporation or other entity; provided,
however, Borrowers may incur indebtedness to
Sirrom Capital Corporation d/b/a Tandem Capital
("Sirrom") pursuant to the terms of that certain
Loan and Security Agreement by and among
Borrowers, TTG Acquisition Corp. and Sirrom dated
February __, 1998 and that certain Debenture
Purchase Agreement by and between Teltronics and
Sirrom dated February __, 1998, as such agreements
are in effect on the date hereof; or
(b) declare, pay or make any dividend,
redemption or other distribution on account of any
shares of any class of stock of Borrower now or
hereafter outstanding; provided, however, that for
so long as no default or Event of Default exists,
on the date of or after giving effect to such
dividend, redemption or other distribution and
Borrowers have positive Net Availability on the
date of and after giving effect to such dividend,
redemption or other distribution, then Teltronics
may make distributions to Sirrom with respect to
the Series B Convertible Preferred Stock of
Teltronics in accordance with its terms; or
(c) make any payment of the principal amount
of or interest on any indebtedness owing to any
officer, director, shareholder or affiliate of any
Borrower, except to the extent expressly permitted
pursuant to subsection (b) above; or
(b) Subsection (n) of Section 7.1 of the Loan
Agreement is hereby deleted in its entirety and the following new
subsection (n) is hereby substituted in lieu thereof:
(n) Any default or event of default occurs
under any of the Sirrom Documents. For purposes
hereof, the term "Sirrom Documents" shall mean any
and all documents, agreements or instruments by
and among any or all Borrowers and Sirrom,
including, without limitation, (i) that certain
Loan and Security Agreement dated February 25,
1998 by and among Borrowers, TTG Acquisition Corp.
and Sirrom ( the "Sirrom Loan Agreement"), (ii)
that certain Senior Secured Promissory Note dated
February 25, 1998 by and among Borrowers, TTG
Acquisition Corp. and Sirrom, (iii) that certain
Preferred Stock Purchase Agreement dated February
25, 1998 by and between Teltronics and Sirrom and
(iv) that certain Debenture Purchase Agreement
dated February 25, 1998 by and between Teltronics
and Sirrom (the "Debenture Agreement").
(c) Subsection (ix) of Appendix A to the Loan
Agreement is hereby renumbered subsection (x) and the following
new subsection (ix)is hereby inserted into Appendix A:
(ix) lien in favor of Sirrom pursuant to the
terms of the Sirrom Loan Agreement and the
Debenture Agreement; provided, however, such lien
shall be subject to the terms of that certain
Intercreditor Agreement between Lender and Sirrom
dated February 25, 1998; and
3. CONSENT TO TRANSACTIONS WITH SIRROM CAPITAL. Borrowers
have advised Lender that Teltronics proposes to (i) sell to
Sirrom Capital Corporation d/b/a Tandem Capital ("Sirrom") 25,000
shares of Series B Convertible Preferred Stock of Teltronics for
an aggregate purchase price of $2,500,000; (ii) sell to Sirrom a
twelve percent (12%), subordinated, secured debenture due on
February 13, 2002, in the principal amount of $1,750,000; (iii)
grant to Sirrom a warrant for the purchase of 525,000 shares of
Teltronics common stock; (iv) repurchase from Sirrom the eleven
percent (11%) Subordinated Convertible Debenture due February 13,
2000, in the principal amount of $4,250,000; and (v) grant to
Sirrom a warrant for the purchase of 325,000 shares of the common
stock of Teltronics. Sections 6.5 and 6.12 of the Loan Agreement
may prohibit the foregoing transactions. Subject to Lender's
receipt of (i) a duly executed original of this Amendment from
Borrowers and Guarantors, (ii) a duly executed original of the
Intercreditor Agreement between Lender and Sirrom, and (iii)
$280,000 in immediately available funds, in connection with
Borrowers' payment in full of the outstanding principal balance,
togther with accrued interest thereon, of the Term Loan, Lender
hereby consents to the foregoing transactions.
4. RATIFICATION AND REAFFIRMATION. Each Borrower hereby
ratifies and reaffirms each of the loan documents executed in
connection with or pursuant to the Loan Agreement (collectively,
the "Loan Documents") and all of each Borrower's covenants,
duties, indebtedness and liabilities thereunder.
5. ACKNOWLEDGMENTS AND STIPULATIONS. Each Borrower
acknowledges and stipulates that the Loan Agreement and the other
Loan Documents executed by Borrowers are legal, valid and binding
obligations of each Borrower that are enforceable against each
Borrower in accordance with the terms thereof; all of the
Obligations are owing and payable without defense, offset or
counterclaim (and to the extent there exists any such defense,
offset or counterclaim on the date hereof, the same is hereby
waived by each Borrower); and the security interests and liens
granted by each Borrower in favor of Lender are duly perfected,
first priority security interests and liens.
6. REPRESENTATIONS AND WARRANTIES. Each Borrower
represents and warrants to Lender, to induce Lender to enter into
this Amendment, that no default or Event of Default exists on the
date hereof; the execution, delivery and performance of this
Amendment have been duly authorized by all requisite corporate
action on the part of each Borrower and this Amendment has been
duly executed and delivered by each Borrower; and all of the
representations and warranties made by each Borrower in the Loan
Agreement are true and correct on and as of the date hereof.
7. EXPENSES OF LENDER. Each Borrower jointly and
severally agrees to pay, on demand, all costs and expenses
incurred by Lender in connection with the preparation,
negotiation and execution of this Amendment and any other Loan
Documents executed pursuant hereto and any and all amendments,
modifications, and supplements thereto, including, without
limitation, the costs and fees of Lender's legal counsel and any
taxes or expenses associated with or incurred in connection with
any instrument or agreement referred to herein or contemplated
hereby.
8. EFFECTIVENESS; GOVERNING LAW. This Amendment shall be
effective upon acceptance by Lender in New York, New York (notice
of which acceptance is hereby waived), whereupon the same shall
be governed by and construed in accordance with the internal laws
of the State of New York.
9. SUCCESSORS AND ASSIGNS. This Amendment shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
10. NO NOVATION, ETC.. Except as otherwise expressly
provided in this Amendment, nothing herein shall be deemed to
amend or modify any provision of the Loan Agreement or any of the
other Loan Documents, each of which shall remain in full force
and effect. This Amendment is not intended to be, nor shall it
be construed to create, a novation or accord and satisfaction,
and the Loan Agreement as herein modified shall continue in full
force and effect.
11. ENTIRE AGREEMENT. This Amendment and the other Loan
Documents, together with all other instruments, agreements and
certificates executed by the parties in connection therewith or
with reference thereto, embody the entire understanding and
agreement between the parties hereto and thereto with respect to
the subject matter hereof and thereof and supersede all prior
agreements, understandings and inducements, whether express or
implied, oral or written.
12. COUNTERPARTS; TELECOPIED SIGNATURES. This Amendment
may be executed in any number of counterparts and by different
parties to this Agreement on separate counterparts, each of
which, when so executed, shall be deemed an original, but all
such counterparts shall constitute one and the same agreement.
Any signature delivered by a party by facsimile transmission
shall be deemed to be an original signature hereto.
13. FURTHER ASSURANCES. Each Borrower agrees to take such
further actions as Lender shall reasonably request from time to
time in connection herewith to evidence or give effect to the
amendments set forth herein or any of the transactions
contemplated hereby.
14. SECTION TITLES. Section titles and references used in
this Amendment shall be without substantive meaning or content of
any kind whatsoever and are not a part of the agreements among
the parties hereto.
15. RELEASE OF CLAIMS. To induce Lender to enter into this
Amendment, each Borrower hereby releases, acquits and forever
discharges Lender, and all officers, directors, agents,
employees, successors and assigns of Lender, from any and all
liabilities, claims, demands, actions or causes or actions of any
kind or nature (if there be any), whether absolute or contingent,
disputed or undisputed, at law or in equity, or known or unknown,
that such Borrower now has or ever had against Lender arising
under or in connection with any of the Loan Documents or
otherwise.
16. WAIVER OF JURY TRIAL. To the fullest extent permitted
by applicable law, the parties hereto each hereby waives the
right to trial by jury in any action, suit, counterclaim or
proceeding arising out of or related to this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed under seal, and delivered by their
respective duly authorized officers as of the date first written
above.
TELTRONICS, INC.
("Borrower")
By: Ewen R. Cameron,
President
AT SUPPLY, INC.
("Borrower")
By: Ewen R. Cameron,
Chairman of the Board
INTERACTIVE SOLUTIONS, INC.
("Borrower")
By: Ewen R. Cameron,
Chairman of the Board
Accepted in New York, New York:
THE CIT GROUP/CREDIT FINANCE, INC.
("Lender")
By: Ian Brown
Title: Assistant Secretary
<PAGE>
CONSENT AND REAFFIRMATION
The undersigned guarantors of the Obligations of each
Borrower at any time owing to Lender hereby (i) acknowledge
receipt of a copy of the foregoing Eleventh Amendment to Loan and
Security Agreement; (ii) consent to Borrowers' execution and
delivery thereof and of the other documents, instruments or
agreements Borrowers agree to execute and deliver pursuant
thereto; (iii) agree to be bound thereby; and (iv) affirm that
nothing contained therein shall modify in any respect whatsoever
its respective guaranty of the Obligations and reaffirm that such
guaranty is and shall remain in full force and effect.
IN WITNESS WHEREOF, each of the undersigned has executed
this Consent and Reaffirmation on and as of the date of such
Eleventh Amendment to Loan and Security Agreement.
TTG ACQUISITION CORP.
By: Ewen R. Cameron,
Chairman of the Board
NORMAN R. DOBIESZ (SEAL)
TELTRONICS/SRX, INC.
By: Ewen R. Cameron,
Chairman of the Board
Exhibit No. 21.1
TELTRONICS, INC.
SUBSIDIARIES
TTG ACQUISITION CORP.
2150 Whitfield Industrial Way
Sarasota, Florida 34243
(100%)
AT SUPPLY, INC.
4703 Shavano Oak Drive, Suite 104
San Antonio, Texas 78249
(100%)
INTERACTIVE SOLUTIONS, INC.
2150 Whitfield Industrial Way
Sarasota, Florida 34243
(85%)
TELTRONICS/SRX, INC.
2150 Whitfield Industrial Way
Sarasota, Florida 34243
(100%)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Financial Statements for the Year Ending December 31, 1997 and is qualified
in its entirely by reference to such Form 10-KSB for the Year Ended
December 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 435,538
<SECURITIES> 0
<RECEIVABLES> 5,503,309
<ALLOWANCES> (679,927)
<INVENTORY> 6,149,307
<CURRENT-ASSETS> 12,023,970
<PP&E> 7,001,771
<DEPRECIATION> (3,334,890)
<TOTAL-ASSETS> 16,052,764
<CURRENT-LIABILITIES> 12,074,379
<BONDS> 4,690,231
0
100
<COMMON> 3,867
<OTHER-SE> (715,813)
<TOTAL-LIABILITY-AND-EQUITY> 16,052,764
<SALES> 34,673,407
<TOTAL-REVENUES> 34,673,407
<CGS> 23,647,743
<TOTAL-COSTS> 12,110,926
<OTHER-EXPENSES> 291,588
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,110,530
<INCOME-PRETAX> (2,487,380)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,487,380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,487,380)
<EPS-PRIMARY> (.74)
<EPS-DILUTED> (.74)
</TABLE>
