<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended September 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Transition Period from __________ to __________.
COMMISSION FILE NUMBER: 0-17893
TELTRONICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
59-2937938
(I.R.S. Employer Identification Number)
2150 WHITFIELD INDUSTRIAL WAY
SARASOTA, FLORIDA 34243
(Address of principal executive offices, including zip code)
941-753-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of October 23, 1998 there were 3,415,513 shares of the Registrant's
Common Stock outstanding.
<PAGE> 2
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . .3-11
Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the Three Months
and Nine Months ended September 30, 1998 and 1997 . . . . . . . 5
Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1998 and 1997 . . . . . . . . . . . . . . 6-7
Notes to Interim Consolidated Financial Statements. . . . . .8-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 12-16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . .16
ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . .16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . .16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . . . .16
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . .16
ITEM 6A. EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . .16
ITEM 6B. REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . .16
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
============= ============
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 120,560 $ 435,538
Accounts receivable, net of allowance
for doubtful accounts of $135,000
at September 30, 1998
and $679,927 at December 31, 1997 4,147,313 4,823,382
Inventories 4,375,188 6,149,307
Prepaid expenses and other current assets 576,930 615,743
----------- -----------
Total current assets 9,219,991 12,023,970
----------- -----------
PROPERTY AND EQUIPMENT, NET 4,601,538 3,666,881
----------- -----------
OTHER ASSETS 476,009 361,913
----------- -----------
Total assets $14,297,538 $16,052,764
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
============= ============
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 4,796,163 $ 4,763,835
Current portion of capital lease obligations 305,919 159,215
Accounts payable 3,036,204 5,610,101
Accrued expenses and other current
liabilities 1,291,467 1,541,228
----------- -----------
Total current liabilities 9,429,753 12,074,379
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 1,458,112 4,607,576
Capital lease obligations, net of current
portion 491,282 82,655
----------- -----------
Total long-term liabilities 1,949,394 4,690,231
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIENCY):
Common stock, $.001 par value, 40,000,000
shares authorized, 3,415,513 issued
and outstanding. 3,417 3,867
Non-voting common stock, $.001 par value,
5,000,000 shares authorized, zero shares
issued and outstanding 0 0
Preferred stock, $.001 par value, 5,000,000
shares authorized -
Preferred Series A stock, $.001 par value,
100,000 shares authorized, 100,000
shares issued and outstanding 100 100
Preferred Series B Convertible stock, $.001
par value, 25,000 shares authorized,
25,000 shares issued and outstanding 25 0
Additional paid-in capital 16,313,298 14,434,772
Accumulated deficit (13,398,449) (13,959,085)
Unpaid shares issued pursuant to Employee
Stock Payment Plan 0 (1,191,500)
----------- -----------
Total shareholders' equity (deficiency) 2,918,391 (711,846)
----------- -----------
Total liabilities and shareholders'
equity (deficiency) $14,297,538 $16,052,764
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 5
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
======================== ========================
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 6,396,714 $10,091,001 $19,433,247 $26,677,799
Cost of goods sold 3,423,332 6,648,797 11,008,112 17,610,875
----------- ----------- ----------- -----------
GROSS PROFIT 2,973,382 3,442,204 8,425,135 9,066,924
----------- ----------- ----------- -----------
OPERATING EXPENSES:
General and
administrative 809,905 1,337,895 2,647,976 3,200,321
Sales and marketing 1,190,309 1,202,751 3,516,508 3,500,321
Research and development 822,470 567,991 2,178,347 1,750,680
----------- ----------- ----------- -----------
2,822,684 3,108,637 8,342,831 8,451,322
----------- ----------- ----------- -----------
Income from operations 150,698 333,567 82,304 615,602
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest (206,585) (353,915) (627,607) (868,137)
Financing (52,447) (28,363) (153,548) (104,726)
Litigation costs (35,000) (1,381) (39,096) (81,777)
Gain on dispositions 0 0 1,248,250 0
Other 149,260 9,824 225,333 (18,968)
----------- ----------- ----------- -----------
(144,772) (373,835) 653,332 (1,073,608)
----------- ----------- ----------- -----------
Income (loss) before
income taxes 5,926 (40,268) 735,636 (458,006)
Income tax expense 0 0 0 0
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 5,926 $ (40,268) $ 735,636 $ (458,006)
=========== =========== =========== ===========
INCOME (LOSS) PER SHARE,
BASIC AND DILUTED: $ (.02) $ (.01) $ .16 $ (.14)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 6
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
===========================
1998 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 735,636 $ (458,006)
Adjustments to reconcile net income (loss)
to net cash flows provided by (used in)
operating activities:
Bad debt expense 55,082 58,547
Provision for obsolete inventory 274,346 123,622
Depreciation and amortization 652,837 646,423
Gain on dispositions (1,248,520) 0
Gain on sale of assets (118) 0
Changes in operating assets and liabilities,
net of dispositions:
Accounts receivable (458,554) 152,697
Inventories (477,338) 627,757
Prepaid expenses and other current assets (397,461) (286,968)
Accounts payable 520,948 (2,988,713)
Accrued expenses and other liabilities 159,205 169,008
----------- -----------
Net cash flows used in operating activities (183,937) (1,955,633)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (704,147) (1,247,902)
Increase in other assets 5,503 (127,410)
Proceeds from dispositions 150,000 0
Proceeds from sale of assets 1,000 0
----------- -----------
Net cash flows used in investing activities (547,644) (1,375,312)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in cash overdraft 0 (25,180)
Net proceeds from line of credit 699,861 189,580
Loan proceeds 1,363,768 4,250,000
Principal repayments of loans, notes
and leases (1,472,026) (541,058)
Dividends on Series B Preferred Stock (175,000) 0
Cash received from stock issuance 0 82,625
----------- -----------
Net cash flows provided by financing activities 416,603 3,955,967
----------- -----------
Net increase (decrease) in cash and
cash equivalents (314,978) 625,022
Cash and cash equivalents - beginning of period 435,538 0
----------- -----------
Cash and cash equivalents - end of period $ 120,560 $ 625,022
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 7
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
========================
1998 1997
---------- ----------
SUPPLEMENTAL NON-CASH FINANCING AND
INVESTING ACTIVITIES:
<S> <C> <C>
Issuance of preferred stock $2,500,000 $ 0
========== ==========
Issuance of warrants $ 569,600 $ 0
========== ==========
Note receivable from disposition of
AT Supply $ 200,000 $ 0
========== ==========
Cancellation of unpaid shares issued pursuant
to Employee Stock Payment Plan $1,191,500 $ 0
========== ==========
Lease of fixed assets $ 857,562 $ 0
========== ==========
Issuance of shares pursuant to Employee
Stock Payment Plan at an average price
of $2.50 per share $ 0 $1,250,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 8
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS/BASIS OF PRESENTATION
Teltronics, Inc. (the "Company") was incorporated in Delaware in February,
1989. The Company is engaged in product research, design and manufacturing
of electrical components, equipment and software, primarily relating to the
telecommunications industry, including the Mentis , wearable, multimedia
computer, and application software products, and engages in contract
manufacturing.
The accompanying consolidated financial statements include the accounts of
the Company and is comprised of its wholly-owned subsidiaries TTG
Acquisition Corp. and Teltronics/SRX, Inc. ("SRX"), and its 80% owned
subsidiary AT Supply, Inc. ("AT Supply"), and its 85% owned subsidiary
Interactive Solutions, Inc. ("ISI"). AT Supply was sold on March 6, 1998.
The unaudited consolidated financial statements and related notes have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and on substantially the same basis as the annual
consolidated financial statements. In the opinion of management, the
consolidated financial statements reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial position, operating results, and cash flows for those periods
presented. Operating results for the nine month period ended September 30,
1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998. These consolidated financial statements
should be read in conjunction with the consolidated financial statements,
and notes thereto, for the year ended December 31, 1997, as presented in
the Company's annual report on Form 10-KSB.
NOTE 2 - DISPOSITIONS
On March 6, 1998, the Company sold the assets and liabilities of AT Supply,
a majority owned subsidiary. The subsidiary was sold to the minority
owners of the subsidiary for $424,836 in cash and a note receivable for
$200,000. Interest on the note receivable is payable at 12% and principal
and interest are due monthly over three years starting April 1, 1998. The
note receivable is secured by a second lien on assets and is personally
guaranteed by the principals of the buyer. The buyer paid $972,450 at
closing to terminate all liens and security interests with the Company's
principal lender. The buyer assumed responsibility for payment of all
liabilities. The Company recognized a gain of $1,148,250 during the
quarter ending March 31, 1998. Revenues and net income for AT Supply were
$1,278,000 and $6,000, respectively for the quarter ended March 31, 1998.
Revenues and net loss were $2,308,000 and $(79,000), respectively for the
quarter ended March 31, 1997.
On April 23, 1998, the Company sold the customer list and maintenance and
support agreements for the ORBi-TEL for Windows and non-Unix call
accounting product lines to MDR Telemanagement Limited. These product
lines were sold for $100,000 in cash, a contingent consideration payable in
one year of $112,000 and a 30% commission based on sales, payable monthly.
The gain on the sale is $100,000 and the contingent gain of $112,000 and
30% commission will be recorded when realized. Revenues for these product
lines were $21,000 for the quarter ended June 30, 1998 and $82,000 for the
six months ending June 30, 1998.
NOTE 3 - NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed by dividing net income (loss),
adjusted for preferred stock dividends, by the weighted average number of
issued and issuable common shares and dilutive common equivalent shares
outstanding during the applicable period. Common equivalent shares consist
of
<PAGE> 9
convertible preferred stock, stock options (vested and unvested) and
warrants and are computed using the treasury stock method. Common
equivalent shares for 1998 and 1997 relating to Preferred Series B
Convertible Stock were anti-dilutive and were not included in the
calculation of dilutive loss per share.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), Earnings Per
Share. SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. All earnings
per share amounts for all periods presented have been restated to conform
to the SFAS No. 128 requirements.
The following unaudited table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
======================== =======================
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC
Net income $ 5,926 $ (40,268) $ 735,636 $ (458,006)
Preferred dividends (75,000) 0 (175,000) 0
---------- ---------- ---------- ----------
Adjusted net income (69,074) (40,268) 560,636 (458,006)
Weighted average shares
outstanding 3,415,513 3,380,173 3,415,513 3,370,785
---------- ---------- ---------- ----------
Net income (loss)
per share $ (.02) $ (.01) $ .16 $ (.14)
========== ========== ========== ==========
DILUTED
Net income $ 5,926 $ (40,268) $ 735,636 $ (458,006)
Preferred dividends (75,000) 0 (175,000) 0
---------- ---------- ---------- ----------
Adjusted net income (69,074) (40,268) 560,636 (458,006)
Weighted average shares
outstanding 3,415,513 3,380,173 3,415,513 3,370,785
---------- ---------- ---------- ----------
Net effect of dilutive
stock options using the
treasury method 82,159 0 86,849 0
---------- ---------- ---------- ----------
Net effect of dilutive
warrants using the
treasury stock method 6,008 0 42,520 0
---------- ---------- ---------- ----------
Dilutive potential
common shares 3,503,680 3,380,173 3,544,882 3,370,785
---------- ---------- ---------- ----------
Net Income (loss)
per share $ (.02) $ (.01) $ .16 $ (.14)
========== ========== ========== ==========
</TABLE>
NOTE 4 - INVENTORIES
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
============ ===========
(Unaudited)
<S> <C> <C>
Raw materials $ 2,166,792 $ 2,368,547
Work-in-process 1,324,036 789,227
Finished goods 884,360 2,991,533
----------- -----------
$ 4,375,188 $ 6,149,307
=========== ===========
</TABLE>
<PAGE> 10
NOTE 5 - LONG TERM DEBT
On February 25, 1998, the Company issued $1,750,000 of Secured Subordinated
Debentures. The proceeds of the Debentures were used for the partial
repayment of the $4,250,000 Convertible Debentures issued on February 13,
1997. Interest is paid at 12% per annum, payable quarterly starting May 1,
1998. The note is due February 13, 2002 and fees paid in connection with
the loan totaled $8,750. The Debenture does not have a prepayment penalty
and is collateralized by a first lien on fixed assets and a second lien on
all other assets. The Holder of the Debenture received 525,000 warrants to
purchase the Company's Common Stock at an exercise price of $2.75 per
share. These warrants are exercisable in whole, or in part, at any time
during a five-year period beginning on the date of issuance. The Debenture
contains certain financial covenants, including restrictions which could
affect future funding of ISI by the Company.
On February 25, 1998, the Company entered into senior Secured Loans
("loans") for $1,000,000 and $280,000. The proceeds of the loans were used
for working capital ($1,000,000) and to repay the $290,300 term loan
agreement. Interest is paid at 12% per annum. The $1,000,000 loan is due
February 25, 1999 and interest is payable quarterly starting May 15, 1998.
The monthly principal and interest payment on the $280,000 loan is $10,272
starting May 15, 1998 and the note is due October 1, 2000. Fees paid in
connection with these loans totaled $32,000. The loans do not have a
prepayment penalty and are collateralized by a first lien on property and
equipment and a second lien on all other assets. The holder of the loans
received 365,000 warrants to purchase the Company's Common Stock at an
exercise price of $2.75 per share. These warrants are exercisable in whole
or in part, at any time during a five-year period beginning on the date of
issuance. The loan contains certain financial covenants, including
restrictions which could affect future funding of ISI by the Company.
NOTE 6 - SHAREHOLDERS' EQUITY (DEFICIENCY)
(A) COMMON STOCK - On February 5, 1998, 450,500 shares of the Company's
Common Stock issued on May 15, 1997 and registered on Form S-8 under the
Employee Stock Payment Plan were cancelled.
On February 16, 1998, the Company cancelled reservations of the following
shares of the Company's Common Stock:
Teltronics Employee Stock Payment Plan: 661,600 shares
Teltronics Consultant Stock Payment Plan: 105,000 shares
(B) PREFERRED STOCK - On February 16, 1998, the Company reduced the number
of authorized shares designated as Series A Preferred Stock from 250,000 to
100,000 such shares.
On February 16, 1998, the Company authorized 25,000 shares of Series B
Convertible Preferred Stock at a par value of $.001 per share.
On February 25, 1998, the Company issued $2,500,000 of Series B Convertible
Preferred Stock. The Company issued 25,000 shares at a par value of $.001
per share. The proceeds were used for the partial repayment of the
$4,250,000 Convertible Debentures issued on February 13, 1997. The Series
B Convertible Preferred Stock provides for a $12 per share annual dividend,
payable quarterly starting May 15, 1998. The dividend increases to $20
after four years. Fees paid in connection with this Preferred Stock
totaled $12,500. The holder of the Series B Convertible Preferred Stock
has the right at its option to convert to the Company's Common Stock at
$2.75 per share. The Series B Convertible Preferred Stock cannot be called
for two years and after two years, only if the twenty-day average bid price
exceeds $5.50 per share. After four years, the Company has the right to
redeem the Series B Convertible Preferred Stock in full at 100% of the face
value plus accrued and unpaid dividends. The Series B Convertible
Preferred Stock contains certain financial covenants.
<PAGE> 11
(C) WARRANTS - As discussed, on February 25, 1998, the Company issued
890,000 warrants to purchase the Company's common stock at an exercise
price of $2.75 per share. These warrants are exercisable in whole, or in
part, at any time during a five year period beginning on the date of
issuance. The warrants are valued at $569,600 or $.64 per share and are
being amortized over five years.
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
A number of statements contained in this Report are forward-looking
statements which are made pursuant to the Safe Harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward- looking
statements involve a number of risks and uncertainties, including the
timely development, and market acceptance of products and technologies,
competitive market conditions, successful integration of acquisitions, the
ability to secure additional sources of financing, the ability to reduce
operating expenses and other factors described in the Company's filings
with the Securities and Exchange Commission, including its 1997 Form
10-KSB. The actual results that the Company achieves may differ materially
from any forward-looking statements due to such risks and uncertainties.
RESULTS OF OPERATIONS
The following tables set forth certain data, expressed as a percentage of
revenue, from the company's consolidated Statements of Operations for the
three and nine month periods ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
================== =================
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 53.5% 65.9% 56.6% 66.0%
------ ------ ------ ------
Gross profit 46.5% 34.1% 43.4% 34.0%
------ ------ ------ ------
Operating expenses:
General and administrative 12.7% 13.3% 13.7% 12.0%
Sales and marketing 18.6% 11.9% 18.1% 13.1%
Research and development 12.8% 5.6% 11.2% 6.6%
------ ------ ------ ------
44.1% 30.8% 43.0% 31.7%
------ ------ ------ ------
Income (loss) from operations 2.4% 3.3% 0.4% 2.3%
------ ------ ------ ------
Other income (expense):
Interest (3.2%) (3.5%) (3.2%) (3.3%)
Financing (0.8%) (0.3%) (0.8%) (0.4%)
Litigation costs (0.6%) 0.0% (0.2%) (0.3%)
Gain on dispositions 0.0% 0.0% 6.4% 0.0%
Other 2.3% 0.1% 1.2% 0.0%
------ ------ ------ ------
(2.3%) (3.7%) 3.4% (4.0%)
------ ------ ------ ------
Income (loss) before income taxes 0.1% (.4%) 3.8% (1.7%)
Income tax expense 0.0% 0.0% 0.0% 0.0%
------ ------ ------ ------
Net income (loss) 0.1% (0.4%) 3.8% (1.7%)
====== ====== ====== ======
<PAGE> 13
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997.
Total sales for the three months ended September 30, 1998 decreased by
$3,694,000 over the same period of 1997. The sale of AT Supply resulted in
a sales decrease of $2,641,000 over the same period of 1997. Also, 1997
included a onetime switching equipment sale of $935,000 that did not occur
in 1998.
Gross profit for the three months ended September 30, 1998 decreased
$469,000 over the same period of 1997. The decrease in gross profit is
explained above and is offset by improved margins. The gross profit
percentage of sales increased to 46.5% from 34.1% for the same period of
1997. This increase was due to product mix, with decreased low margin AT
Supply sales.
Total operating expenses for the three months ended September 30, 1998
decreased $286,000 over the same period of 1997. General and
administrative expenses decreased $528,000 for the quarter due to the sale
of AT Supply. Research and development expenses increased $254,000 for the
quarter due to continued funding of ISI and the Vision product line (SRX).
Net income from operations was $151,000 for the quarter as compared to a
$334,000 profit for the same period of 1997. This decrease is explained
above. Interest expense for the quarter was $207,000 as compared to
$354,000 for the same period of 1997. This decrease relates to the sale of
AT Supply, reduced borrowings with CIT and the repurchase of Subordinated
Convertible debentures from Sirrom Capital Corporation.
Income tax expense for the quarter was offset by the realization of net
operating loss carry forwards.
Net income was $6,000 for the quarter as compared to a loss of $40,000 for
the same period of 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997.
Total sales for the nine months ended September 30, 1998 decreased by
$7,245,000 over the same period of 1997. The sale of AT Supply resulted in
a sales decrease of $5,687,000 over the same period of 1997. Also, 1997
included a onetime switching equipment sale for $935,000 that did not occur
in 1998.
Gross profit for the nine months ended September 30, 1998 decreased
$642,000 over the same period of 1997. The decrease in gross profit is
explained above and is offset by improved margins. The gross profit
percentage of sales increased to 43.4% from 34.0% for the same period of
1997. This increase was due to product mix, with increased ISI sales and
decreased low margin AT Supply sales.
Total operating expenses for the nine months ended September 30, 1998
decreased $108,000 over the same period of 1997. General and
administrative expenses decreased $552,000 due to the sale of AT Supply.
Research and development expenses increased $428,000 for the nine months.
This increase is the result of the Company's continued funding of ISI and
the Vision product line (SRX).
Net income from operations was $82,000 for the nine months ended September
30, 1998 as compared to a $616,000 profit for the same period of 1997.
This decrease is explained above. Interest expense for the nine months was
$628,000 as compared to $868,000 for the same period of 1997. This
decrease relates to the sale of AT Supply, reduced borrowings with CIT and
the repurchase of Subordinated Convertible Debentures from Sirrom Capital
Corporation.
Income tax expense for the nine months was offset by the realization of net
operating loss carry forwards.
Net income was $736,000 for the nine months ended September 30, 1998 as
compared to a loss of $(458,000) for the same period of 1997. AT Supply
was sold for a gain of $1,148,000 during the first quarter of 1998. The
customer list and maintenance and support agreements for the ORBi-TEL for
<PAGE> 14
Windows contract maintenance business were sold to MDR Telemanagement
Limited in April, 1998 for a gain of $100,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash requirements were met with cash provided primarily by operations,
borrowings from The CIT Group/Credit Finance ("CIT"), Debentures and Senior
Secured Loans discussed below and the disposition of AT Supply.
The Company's working capital ratio at September 30, 1998 was .98:1 as
compared to 1.0:1 at December 31, 1997. Net working capital was $(210,000)
at September 30, 1998 as compared to $(50,000) at December 31, 1997.
Net cash decreased $315,000 during the nine months ended September 30,
1998. Net cash flow used in operating activities was $184,000 for the nine
months ended September 30, 1998. Accounts receivable increased by $459,000
and inventory increased by $477,000 for the nine months ended September 30,
1998. Net cash flow used in investing activities for the nine months ended
September 30, 1998 was $548,000. Acquisition of property and equipment
totaled $704,000 for the nine months ended September 30, 1998. Cash flows
from financing activities totaled $417,000 for the nine months ended
September 30, 1998.
The Company entered into an agreement on February 25, 1998 with Sirrom
Capital. Pursuant to this agreement, the Company issued $2,500,000 of
Series B Convertible Preferred Stock and $1,750,000 of 12% Subordinated
Secured Debentures due February 13, 2002. The proceeds of this financing
were used to repurchase $4,250,000 of 11% Subordinated Convertible
Debentures due on February 13, 2002. In connection with the Subordinated
Convertible Debentures, the Company issued 525,000 warrants to purchase the
Company's common Stock at an exercise price of $2.75 per share. These
warrants are exercisable in whole, or in part, at any time during a five
year period beginning on the date of issuance.
The Company borrowed $1,280,000 from Sirrom Capital under a Loan and
Security Agreement between the Registrant and Sirrom Capital dated February
25, 1998 ("Loan Agreement") and delivered its: (i) Secured Senior
Subordinated Promissory Note in the principal amount of $1,000,000 with
interest at 12% per annum maturing in February, 1999, the proceeds of which
are to be used for working capital of the Company and (ii) Secured Senior
Subordinated Promissory Note in the principal amount of $280,000 with
interest at 12% per annum maturing in October, 2000, the proceeds of which
were used to pay an equipment loan made to the Company by CIT. The Company
issued 365,000 warrants to purchase the Company's Common Stock at an
exercise price of $2.75 per share. These warrants are exercisable in
whole, or in part, at any time during a five year period beginning on the
date of issuance.
In addition, the Company is exploring other equity financing.
CURRENT OUTLOOK
Although Vision (registered TM) sales continue to be disappointing, the
Company has aggressively pursued new distributors. A number of these new
distributors have now been trained and are commencing to order systems.
The Company has received a partial order for a contract for the 911
switching systems for the State of Connecticut. It anticipates delivery of
a number of these systems before the end of this year.
The Company continues to see growth in its Remote Maintenance products with
record sales of the Site Event Buffer (registered TM) ("SEB") products
during August. The release of IRISnGEN (TM) has allowed the Company to
sign up new customers who should ultimately purchase SEBs.
<PAGE> 14
ISI products continue to be tested and the Company does not anticipate any
major sales prior to the end of this fiscal year. There are a number of
companies that are considering quantity purchases during 1999. However,
the Company can make no assurances that these orders will be forthcoming.
Electronic Manufacturing continues on target and the Company achieved ISO
9002 for its manufacturing, service and installation departments.
IMPACT OF YEAR 2000
The following Year 2000 discussion is provided in response to the
Securities and Exchange Commission's recent interpretative statement,
expressing its view that public companies should include detailed
discussion of Year 2000 issues in their MD&A.
The Company is pursuing an organized program to assure the Company's
products, production equipment and information systems and related
infrastructure will be Year 2000 compliant. The Company's Year 2000
program includes four phases: (1) an audit and assessment phase designed
to identify Year 2000 issues; (2) a modification and testing phase designed
to correct Year 2000 issues internally; (3) a purchase phase designed to
correct Year 2000 issues externally; and (4) an implementation and test
phase to install and test the system for Year 2000 compliance for external
purchases.
The Company has completed the audit and assessment phases for major
products. The modification of major products and related testing should be
completed by December 31, 1998. Selected older and discontinued products
are not Year 2000 compliant and customers have been advised. The cost to
update products for Year 2000 compliance was not significant and was
completed in conjunction with ongoing development efforts.
The Company has completed the assessment of production equipment and
related infrastructure. All such equipment and infrastructure is Year 2000
compliant.
The Company has completed an audit and assessment of the Year 2000 issue
for the computer system. The Company's computer system were written using
two digits rather than four to define the applicable year. As a result,
this system is time sensitive which would recognize a date using "00" as
the year 1900 rather than the Year 2000. This could cause a system failure
or miscalculations, causing operation disruption and a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
The Company has leased a new computer system that is Year 2000 compliant.
This system cost $550,000 and was received in August and September, 1998.
Internal costs are not expected to increase due to the computer system
installation. The external installation and training costs are budgeted at
$170,000 and the installation is estimated to be completed by June 30,
1999, which is prior to any significant impact on its operating systems.
None of the training and installation costs have been incurred as of
September 30, 1998. The $170,000 will be paid from operating cash flow.
The system installation should not defer any additional systems projects.
The Company is initiating formal communications with its significant
suppliers to determine the extent to which its raw materials are vulnerable
to the Year 2000 issue. If any such suppliers indicate that they are not
Year 2000 compliant, the Company will develop contingency plans to address
the issue. This audit and assessment should be completed by December 31,
1998.
At the present time, the Company does not have a contingency plan to
operate in the event that its business systems, products and raw materials
are not Year 2000 compliant. If testing scheduled for the
<PAGE> 16
first and second quarters of 1999 suggests that there is a significant risk
that the computer system, products and raw materials might not be Year 2000
compliant, a contingency plan will be developed.
Notice: Various statements in this discussion of Year 2000 are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include statements of the
Company's expectations, statements with regard to schedules, cost and
expected completion dates and statements regarding expected Year 2000
compliance. These forward-looking statements are subject to various risk
factors which may materially affect the Company's efforts to achieve Year
2000 compliance. These risk factors include, but are not limited to, the
availability and cost of personnel trained in this area, and the ability to
install the new computer system on a timely basis and the ability to source
Year 2000 compliant raw materials, and the completion of product
modifications. The Company is attempting to reduce the risks by utilizing
an organized approach, extensive testing, and allowance of ample
contingency time to address issues identified by tests.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about November 12, 1997, an action was commenced against the Company
by a former employee ("Plaintiff") seeking damages exceeding $50,000 and
injunctive relief, arising out of alleged violations of the Americans With
Disabilities Act, The Family Medical Leave Act, and The Florida Human
Rights Act. An answer was served by the Company in December, 1997 denying
liability and asserting various affirmative defenses. A Reply to
Affirmative Defenses was served by the Plaintiff in December, 1997.
Discovery has commenced.
On January 28, 1998, an action was commenced against the Company by Kelley
Drye & Warren, LLP seeking approximately $172,000 for legal fees incurred
by Shared Resource Exchange, Inc. in connection with the sale of
substantially all of its assets to the Company in September, 1996. The
Plaintiff claims that the Company agreed to pay all of its fees under the
Agreement of Sale entered into between Shared Resource Exchange, Inc. and
the Company on September 20, 1996. An answer was served by the Company in
April, 1998, denying liability and asserting various affirmative defenses.
Discovery has not yet commenced.
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6A. EXHIBITS
27 Financial Data Schedule. . . . . . . . . . . . . . . . . .(a)
ITEM 6B. REPORTS ON FORM 8-K - None
__________________________
(a) Filed as an Exhibit to this Quarterly Report on Form 10-Q for the nine
month period ended September 30, 1998.
<PAGE> 17
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELTRONICS, INC.
October 23, 1998 Ewen R. Cameron
President & Chief Executive Officer
October 23, 1998 Mark E. Scott
Vice President of Finance and
Principal Accounting Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 120,560
<SECURITIES> 0
<RECEIVABLES> 4,282,313
<ALLOWANCES> (135,000)
<INVENTORY> 4,375,188
<CURRENT-ASSETS> 9,219,991
<PP&E> 4,601,538
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,297,538
<CURRENT-LIABILITIES> 9,429,753
<BONDS> 1,949,394
0
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<COMMON> 3,417
<OTHER-SE> 2,914,849
<TOTAL-LIABILITY-AND-EQUITY> 14,297,538
<SALES> 19,433,247
<TOTAL-REVENUES> 19,433,247
<CGS> 11,008,112
<TOTAL-COSTS> 8,287,749
<OTHER-EXPENSES> (1,280,939)
<LOSS-PROVISION> 55,082
<INTEREST-EXPENSE> 627,607
<INCOME-PRETAX> 735,636
<INCOME-TAX> 0
<INCOME-CONTINUING> 735,636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 735,636
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
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