<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 June 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 July 28, 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............................3-10
Consolidated Balance Sheets at
June 30, 1998 and December 31, 1997.............3-4
Consolidated Statements of Operations
for the Three Months and Six Months
ended June 30, 1998 and 1997....................5
Consolidated Statements of Cash Flows
for the Six Months ended June 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...................................12-15
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>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1998 1997
============ ============
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 901,809 $ 435,538
Accounts receivable, net of
allowance for doubtful
accounts of $150,000 at
June 30, 1998 and $679,927
at December 31, 1997 3,886,840 4,823,382
Inventories 3,861,371 6,149,307
Prepaid expenses and other
current assets 615,897 615,743
------------ ------------
Total current assets 9,265,917 12,023,970
------------ ------------
PROPERTY AND EQUIPMENT, NET 3,761,433 3,666,881
------------ ------------
OTHER ASSETS 467,234 361,913
------------ ------------
Total assets $ 13,494,584 $ 16,052,764
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 4
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1998 1997
============ ============
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term
debt $ 4,816,317 $ 4,763,835
Current portion of capital
lease obligations 131,255 159,215
Accounts payable 2,833,263 5,610,101
Accrued expenses and other
current liabilities 1,195,474 1,541,228
------------ ------------
Total current liabilities 8,976,309 12,074,379
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt, net of
current portion 1,471,897 4,607,576
Capital lease obligations,
net of current portion 58,913 82,655
------------ ------------
Total long-term liabilities 1,530,810 4,690,231
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIENCY):
Common stock, $.001 par value,
40,000,000 shares authorized,
3,415,513 issued and outstanding. 3,416 3,867
Non-voting common stock, $.001
par value, 5,000,000 shares
authorized, zero shares issued
and outstanding 0 0
Preferred stock, $.001 par value,
5,000,000 shares authorized -
Preferred Series A stock,
$.001 par value, 100,000
shares authorized, 100,000
shares issued and outstanding 100 100
Preferred Series B Convertible
stock, $.001 par value, 25,000
shares authorized, 25,000
shares issued and outstanding 25 0
Additional paid-in capital 16,313,298 14,434,772
Accumulated deficit (13,329,374) (13,959,085)
Unpaid shares issued pursuant
to Employee Stock Payment Plan 0 (1,191,500)
------------ ------------
Total shareholders' equity
(deficiency) 2,987,465 (711,846)
------------ ------------
Total liabilities and share-
holders' equity (deficiency) $ 13,494,584 $ 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 June 30
===========================
1998 1997
------------ ------------
<S> <C> <C>
NET SALES $ 6,397,011 $ 8,488,426
Cost of goods sold 3,469,406 5,343,319
------------ ------------
GROSS PROFIT 2,927,605 3,145,107
------------ ------------
OPERATING EXPENSES:
General and administrative 845,175 1,134,727
Sales and marketing 1,123,374 1,170,072
Research and development 703,498 715,762
------------ ------------
2,672,047 3,020,561
------------ ------------
Income (loss) from operations 255,558 124,546
------------ ------------
OTHER INCOME (EXPENSE):
Interest (184,395) (294,755)
Financing (36,883) (29,975)
Litigation costs 0 (3,672)
Gain on dispositions 100,000 0
Other 56,287 8,073
------------ ------------
(64,991) (320,329)
------------ ------------
Income (loss) before income taxes 190,567 (195,783)
Income tax expense 0 0
------------ ------------
NET INCOME (LOSS) $ 190,567 $ (195,783)
============ ============
INCOME (LOSS) PER SHARE,
BASIC AND DILUTED: $ .03 $ (.06)
============ ============
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: 3,415,513 3,366,013
<CAPTION>
Six Months Ended June 30
===========================
1998 1997
------------ ------------
<S> <C> <C>
NET SALES $ 13,036,533 $ 16,586,798
Cost of goods sold 7,584,778 10,962,078
------------ ------------
GROSS PROFIT 5,451,755 5,624,720
------------ ------------
OPERATING EXPENSES:
General and administrative 1,838,118 1,862,426
Sales and marketing 2,326,200 2,297,570
Research and development 1,355,877 1,182,689
------------ ------------
5,520,195 5,342,685
------------ ------------
Income (loss) from operations (68,440) 282,035
------------ ------------
OTHER INCOME (EXPENSE):
Interest (421,022) (514,222)
Financing (101,101) (76,363)
Litigation costs (4,096) (80,396)
Gain on dispositions 1,248,250 0
Other 76,120 (28,792)
------------ ------------
798,151 (699,773)
------------ ------------
Income (loss) before income taxes 729,711 (417,738)
Income tax expense 0 0
------------ ------------
NET INCOME (LOSS) $ 729,711 $ (417,738)
============ ============
INCOME (LOSS) PER SHARE,
BASIC AND DILUTED: $ .18 $ (.12)
============ ============
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: 3,415,513 3,366,013
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 6
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
===========================
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 729,711 $ (417,738)
Adjustments to reconcile net
income (loss) to net cash
flows provided by (used in)
operating activities:
Bad debt expense 42,200 26,047
Provision for obsolete inventory 92,045 15,868
Depreciation and amortization 447,144 344,242
Gain on dispositions (1,248,250) 0
Changes in operating assets
and liabilities, net of
dispositions:
Accounts receivable (185,199) 171,344
Inventories 218,780 (296,956)
Prepaid expenses and other
current assets (516,829) (241,357)
Accounts payable 318,006 (2,768,883)
Accrued expenses and other
liabilities 63,212 68,541
------------ ------------
Net cash flows used in
operating activities (39,180) (3,098,892)
------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of property and
equipment (482,781) (657,039)
Increase in other assets 94,679 (134,409)
Proceeds from dispositions 150,000 0
Proceeds from sale of assets 1,000 0
------------ ------------
Net cash flows used in investing
activities (237,102) (791,448)
------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net change in cash overdraft 0 (25,180)
Net proceeds from line of credit 668,067 443,952
Loan proceeds 1,328,212 4,250,000
Principal repayments of loans,
notes and leases (1,153,726) (401,932)
Proceeds from sale of
preferred stock 0 24,125
Dividends on Series B
Preferred Stock (100,000) 0
------------ ------------
Net cash flows provided by
financing activities 742,553 4,290,965
------------ ------------
Net increase in cash and
cash equivalents 466,271 400,625
Cash and cash equivalents -
beginning of period 435,538 0
------------ ------------
Cash and cash equivalents -
end of period $ 901,809 $ 400,625
============ ============
</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>
Six Months Ended June 30
===========================
1998 1997
------------ ------------
<S> <C> <C>
SUPPLEMENTAL NON-CASH FINANCING
AND INVESTING ACTIVITIES:
Issuance of preferred stock $ 2,500,000 $ 0
============ ============
Issuance of warrants $ 569,600 $ 0
============ ============
Note receivable from
disposition of AT Supply $ 200,000 $ 0
============ ============
Cancellation of unpaid shares
issued pursuant to Employee
Stock Payment Plan $ 1,191,500 $ 0
============ ============
Lease of fixed assets $ 61,998 $ 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 (trademark), 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 six month period
ended June 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 convertible
preferred stock, stock options (vested and unvested) and warrants
and are computed using
<PAGE> 9
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 table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended June 30
===========================
1998 1997
------------ ------------
<S> <C> <C>
BASIC
Net income $ 190,567 $ (195,783)
Preferred dividends (75,000) 0
------------ ------------
Adjusted net income 115,567 (195,783)
Weighted average shares
outstanding 3,415,513 3,366,013
------------ ------------
Net income (loss) per share $ .03 $ (.06)
============ ============
DILUTED
Net income $ 190,567 $ (195,783)
Preferred dividends (75,000) 0
------------ ------------
Adjusted net income 115,567 (195,783)
------------ ------------
Weighted average shares
outstanding 3,415,513 3,366,013
Net effect of dilutive stock
options using the treasury method 106,030 0
Net effect of dilutive warrants
using the treasury stock method 121,554 0
------------ ------------
Dilutive potential common shares 3,643,097 3,366,013
------------ ------------
Net Income (loss) per share $ .03 $ (.06)
============ ============
<CAPTION>
Six Months Ended June 30
===========================
1998 1997
------------ ------------
<S> <C> <C>
BASIC
Net income $ 729,711 $ (417,738)
Preferred dividends (100,000) 0
------------ ------------
Adjusted net income 629,711 (417,738)
Weighted average shares
outstanding 3,415,513 3,366,013
------------ ------------
Net income (loss) per share $ .18 $ (.12)
============ ============
DILUTED
Net income $ 729,711 $ (417,738)
Preferred dividends (100,000) 0
------------ ------------
Adjusted net income 629,711 (417,738)
------------ ------------
Weighted average shares
outstanding 3,415,513 3,366,013
Net effect of dilutive stock
options using the treasury method 89,194 0
Net effect of dilutive warrants
using the treasury stock method 60,777 0
------------ ------------
Dilutive potential common shares 3,565,484 3,366,013
------------ ------------
Net Income (loss) per share $ .18 $ (.12)
============ ============
</TABLE>
NOTE 4 - INVENTORIES
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
============ ============
(Unaudited)
<S> <C> <C>
Raw materials $ 2,133,210 $ 2,368,547
Work-in-process 1,029,474 789,227
Finished goods 698,687 2,991,533
------------ ------------
$ 3,861,371 $ 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 dividend, payable quarterly starting
May 15, 1998. The dividend increases to $20 after four years.
Fees paid in connection with this Preferred Stock totaled
$12,500. The holder of the Series B Convertible Preferred Stock
has the right at its option to convert to the Company's Common
Stock at $2.75 per share. The Series B Convertible Preferred
Stock cannot be called for two years and after two years, only if
the twenty-day average bid price exceeds $5.50 per share. After
four years, the Company has the right to redeem the Series B
Convertible Preferred Stock in full at 100% of the face value
plus accrued and unpaid dividends. The Series B Convertible
Preferred Stock contains certain financial covenants.
<PAGE> 11
(C) WARRANTS - As discussed, on February 25,1998, the Company
issued 890,000 warrants to purchase the Company's common stock at
an exercise price of $2.75 per share. These warrants are
exercisable in whole, or in part, at any time during a five year
period beginning on the date of issuance. The warrants are
valued at $569,600 or $.64 per share and are being amortized over
five years.
NOTE 7 - SUBSEQUENT EVENTS
On July 17, 1998, the Commstar Ltd. legal action against the
Company, a director of the Company, and a former majority owned
subsidiary of the Company, was dismissed with prejudice and
without payment of any costs.
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
A number of statements contained in this Report are forward-
looking statements within the meaning of the Private Securities
Litigation reform Act of 1995 that involve risks and
uncertainties that could cause actual results to differ
materially from those expressed or implied in the applicable
statements. These risks and uncertainties include, but are not
limited to the costs and the uncertainties associated with the
development and introduction of new products; risks related to
technological factors; potential manufacturing difficulties;
competitive market factors; and liability risks.
RESULTS OF OPERATIONS
The following tables set forth certain data, expressed as a
percentage of revenue, from the company's consolidated Statements
of Operations for the three and six month periods ended June 30,
1998 and 1997.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
=============== ===============
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 54.2% 62.9% 58.2% 66.1%
------ ------ ------ ------
Gross profit 45.8% 37.1% 41.8% 33.9%
------ ------ ------ ------
Operating expenses:
General and administrative 13.2% 13.4% 14.1% 11.2%
Sales and marketing 17.6% 13.8% 17.8% 13.9%
Research and development 11.0% 8.4% 10.4% 7.1%
------ ------ ------ ------
41.8% 35.6% 42.3% 32.2%
------ ------ ------ ------
Income (loss) from
operations 4.0% 1.5% (.5%) 1.7%
------ ------ ------ ------
Other income (expense):
Interest (2.9%) (3.5%) (3.2%) (3.1%)
Financing (0.6%) (0.4%) (0.9%) (0.4%)
Litigation costs 0% 0% 0% (0.5%)
Gain on dispositions 1.6% 0% 9.6% 0%
Other 0.9% 0.1% 0.6% (0.2%)
------ ------ ------ ------
(1.0%) (3.8%) 6.1% (4.2%)
------ ------ ------ ------
Income (loss) before
income taxes 3.0% (2.3%) 5.6% (2.5%)
Income tax expense 0% 0% 0% 0%
------ ------ ------ ------
Net income (loss) 3.0% (2.3%) 5.6% (2.5%)
====== ====== ====== ======
</TABLE>
<PAGE> 13
THREE MONTHS ENDED JUNE 30, 1998 AND 1997.
Total sales for the three months ended June 30, 1998 decreased by
$2,091,000 over the same period of 1997. The sale of AT Supply
resulted in a sales decrease of $2,016,000 over the same period
of 1997. ISI sales increased $276,000 primarily due to billings
to the Operation Smart Force Consortium ("Consortium"). This
Consortium consists of Raytheon, Army National Guard, General
Motors-Service Technology Group and New Jersey Institute of
Technology.
Gross profit for the three months ended June 30, 1998 decreased
$218,000 over the same period of 1997. The decrease in gross
profit was the result of the sale of AT Supply in the first
quarter of 1998, offset by improved margins. The gross profit
percentage of sales increased to 45.8% from 37.1% for the same
period of 1997. This increase was due to product mix, with
increased ISI sales and decreased low margin AT Supply sales.
Also, personnel reductions were implemented in the first quarter
of 1998.
Total operating expenses for the three months ended June 30, 1998
decreased $349,000 over the same period of 1997. General and
administrative expenses decreased $290,000 for the quarter due to
the sale of AT Supply and personnel reductions implemented in the
first quarter of 1998.
Net income from operations was $256,000 for the quarter as
compared to a $125,000 profit for the same period of 1997. This
income relates to improved margins and reduced operating expenses
related to the sale of AT Supply. Interest expense for the
quarter was $185,000 as compared to $295,000 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 $191,000 for the quarter as compared to a loss of
$(196,000) for the same period of 1997. The customer list and
maintenance and support agreements for the ORBi-TEL for Windows
contract maintenance business were sold to MDR Telemanagement
Limited in April, 1998 for a gain of $100,000.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997.
Total sales for the six months ended June 30, 1998 decreased by
$3,550,000 over the same period of 1997. The sale of AT Supply
resulted in a sales decrease of $3,046,000 over the same period
of 1997. ISI sales increased $597,000 primarily due to billings
to the Consortium.
Gross profit for the six months ended June 30, 1998 decreased
$173,000 over the same period of 1997. The decrease in gross
profit was the result of the sale of AT Supply, offset by
improved margins. The gross profit percentage of sales increased
to 41.8% from 33.9% for the same period of 1997. This increase
was due to product mix, with increased ISI sales and decreased
low margin AT Supply sales. Also, personnel reductions were
implemented in the first quarter of 1998.
Total operating expenses for the six months ended June 30, 1998
increased $178,000 over the same period of 1997. Research and
development expenses increased $173,000 for the six months. This
increase is the result of the Company's continued funding of ISI
and the Vision (registered trademark) product line (SRX).
Net loss from operations was $(68,000) for the six months ended
June 30, 1998 as compared to a $282,000 profit for the same
period of 1997. This loss relates to increased operating
expenses and the Company's continued funding of ISI. Interest
expense for the six months was $421,000 as compared to $514,000
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.
<PAGE> 14
Income tax expense for the six months was offset by the
realization of net operating loss carry forwards.
Net income was $730,000 for the six months ended June 30, 1998 as
compared to a loss of $(418,000) 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 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 June 30, 1998 was 1.03:1
as compared to 1.0:1 at December 31, 1997. Net working capital
was $290,000 at June 30, 1998 as compared to $(50,000) at
December 31, 1997.
Net cash increased $466,000 during the six months ended June 30,
1998. Net cash flow used in operating activities was $39,000 for
the six months ended June 30, 1998. Accounts receivable
increased by $185,000 and inventory decreased by $219,000 for the
six months ended June 30, 1998. Net cash flow used in investing
activities for the six months ended June 30, 1998 was $237,000.
Acquisition of property and equipment totaled $483,000 for the
six months ended June 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
The Company continues to see slow sales in its Vision (registered trademark)
PBX line although the quote activity has increased. The 911 switching
business continues to grow. IRISnGEN (trademark) beta software will be
released at the end of July and a number of orders have already
been taken for this next generation Remote Alarm Management
product.
<PAGE> 15
ISI, with the Consortium, successfully completed the Science and
Technology proof of concept for the Smart Truck, which was
completed on time and within budget. The customer is evaluating
whether it intends to give ISI a new contract to take this
project to the next stage. ISI currently has a number of
customers that are testing its products and has received orders
of low quantities during this proof of concept period. There can
be no assurances that any of the current customers will order any
major quantities of ISI products in the near future.
Both the Remote Maintenance product line and the Electronic
Manufacturing business are achieving projections.
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about September 12, 1995, Commstar, Ltd., a Canadian
corporation, commenced an action in the Circuit court of the
Thirteenth Judicial District, Hillsborough County, Florida,
against the Company, a director of the Company, and a former
majority owned subsidiary of the Company, seeking damages in
connection with a 1993 sale of shares of the former subsidiary.
The complaint sought 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 commenced. On July 17, 1998 the
Court approved a Stipulation among the parties dismissing the
action with prejudice and without payment of any costs.
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
At the annual meeting of stockholders on June 8, 1998, the
stockholders of the Company:
(1) Elected Norman R. Dobiesz, Ewen R. Cameron, Craig
Macnab and Carl S. Levine directors to serve until
the next annual meeting of the stockholders
(3,190,355 Common Stock votes and all of the Series A
Preferred and Series B Preferred stock votes in
favor, 16,208 votes withheld/abstentions); and
(2) Ratified the appointment of Ernst & Young LLP as the
Company's independent auditors for the 1998 fiscal
year (3,199,911 Common Stock votes and all of the
Series A Preferred and Series B Preferred stock in
favor, 2,498 votes opposed, 4,174 abstentions).
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 six month period ended June 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.
July 28, 1998 Ewen R. Cameron
President & Chief Executive Officer
July 28, 1998 Mark E. Scott
Vice President of Finance and
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR QUARTERLY PERIOD
ENDED JUNE 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 901,809
<SECURITIES> 0
<RECEIVABLES> 4,036,840
<ALLOWANCES> (150,000)
<INVENTORY> 3,861,371
<CURRENT-ASSETS> 9,265,917
<PP&E> 3,761,433
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,494,584
<CURRENT-LIABILITIES> 8,976,309
<BONDS> 1,530,810
0
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<COMMON> 3,416
<OTHER-SE> 2,983,924
<TOTAL-LIABILITY-AND-EQUITY> 13,494,584
<SALES> 13,036,533
<TOTAL-REVENUES> 13,036,533
<CGS> 7,584,778
<TOTAL-COSTS> 5,477,995
<OTHER-EXPENSES> (1,219,173)
<LOSS-PROVISION> 42,200
<INTEREST-EXPENSE> 421,022
<INCOME-PRETAX> 729,711
<INCOME-TAX> 0
<INCOME-CONTINUING> 729,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 729,711
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
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