U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended March 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Transition Period from __________ to __________.
COMMISSION FILE NUMBER: 0-17893
TELTRONICS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE
--------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
59-2937938
---------------------------------------
(I.R.S. Employer Identification Number)
2150 WHITFIELD INDUSTRIAL WAY
SARASOTA, FLORIDA 34243
------------------------------------------------------------
(Address of principal executive offices, including zip code)
941-753-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of May 13, 1999 there were 3,704,522 shares of the Registrant's Common
Stock outstanding.
<PAGE>
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . .3-14
Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998. . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the
Three Months ended March 31, 1999 and 1998 . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1999 and 1998 . . . . . . . 6-7
Notes to Interim Consolidated Financial Statements . . .8-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . 14-18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . .19
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . .19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . .19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . .19
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . .19
ITEM 6A. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . .19
ITEM 6B. REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . .19
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 308,534 $ 136,467
Accounts receivable, net of allowance for
doubtful accounts of $110,000 at
March 31, 1999 and December 31, 1998 5,554,522 4,755,963
Inventories, net 4,007,851 3,863,371
Prepaid expenses and other current assets 255,162 307,413
----------- -----------
Total current assets 10,126,069 9,063,214
----------- -----------
PROPERTY AND EQUIPMENT, NET 4,365,973 4,422,722
----------- -----------
OTHER ASSETS 1,008,566 944,833
----------- -----------
Total assets $15,500,608 $14,430,769
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 4,368,382 $ 4,184,639
Current portion of capital lease
obligations 304,227 315,605
Accounts payable 2,970,575 2,913,161
Accrued expenses and other current
liabilities 1,029,791 821,572
Deferred income 753,853 159,757
----------- -----------
Total current liabilities 9,426,828 8,394,734
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion 2,846,515 2,870,887
Capital lease obligations, net of
current portion 489,140 546,401
----------- -----------
Total long-term liabilities 3,335,655 3,417,288
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value, 40,000,000
shares authorized, 3,604,522 and
3,478,139 issued and outstanding at
March 31, 1999 and December 31, 1998,
respectively. 3,606 3,480
Non-voting common stock, $.001 par value,
5,000,000 shares authorized, zero shares
issued and outstanding. 0 0
Preferred Series A stock, $.001 par value,
100,000 shares authorized, 100,000
shares issued and outstanding at
March 31, 1999 and December 31, 1998. 100 100
Preferred Series B Convertible stock,
$.001 par value, 25,000 shares autho-
rized, 25,000 shares issued and out-
standing at March 31, 1999 and
December 31, 1998. 25 25
Additional paid-in capital 16,625,110 16,443,371
Accumulated deficit (13,890,716) (13,828,229)
----------- -----------
Total shareholders' equity 2,738,125 2,618,747
----------- -----------
Total liabilities and
shareholders' equity $15,500,608 $14,430,769
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended
March 31
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $ 6,824,986 $ 6,639,522
Cost of goods sold 3,529,812 4,115,372
----------- -----------
GROSS PROFIT 3,295,174 2,524,150
----------- -----------
OPERATING EXPENSES:
General and administrative 852,446 992,897
Sales and marketing 1,294,836 1,202,826
Research and development 937,736 652,379
----------- -----------
3,085,018 2,848,102
----------- -----------
Income (loss) from operations 210,156 (323,952)
----------- -----------
OTHER INCOME (EXPENSE):
Interest (208,379) (236,627)
Financing (103,239) (64,218)
Litigation costs (21,685) (4,096)
Gain on dispositions 111,614 1,148,250
Other 24,346 19,833
----------- -----------
(197,343) 863,142
----------- -----------
Income before income taxes 12,813 539,190
Income tax expense 300 0
----------- -----------
NET INCOME 12,513 539,190
Dividends on Series B Convertible
Preferred Stock 75,000 25,000
----------- -----------
Income (loss) attributable to
Common Shareholders $ (62,487) $ 514,190
=========== ===========
INCOME (LOSS) PER SHARE, (BASIC AND DILUTED) $ (.02) $ .15
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
March 31
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,513 $ 539,190
Adjustments to reconcile net income to
net cash flows provided by operating
activities:
Bad debt expense 0 (13,000)
Provision for obsolete inventory (3,376) 58,928
Depreciation and amortization 318,541 208,832
Gain on dispositions 0 (1,148,520)
Amortization of deferred financing costs 56,396 0
Changes in operating assets and liabilities,
net of dispositions:
Accounts receivable (798,559) 690,364
Inventories (41,104) 381,269
Prepaid expenses and other current assets 52,251 (165,657)
Accounts payable 57,414 62,070
Accrued expenses and other liabilities 208,219 (32,212)
Deferred income 594,096 29,582
----------- -----------
Net cash flows provided by operating
activities 456,391 610,846
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (165,014) (233,695)
Increase in other assets (3,852) (126,133)
Proceeds from dispositions 0 50,000
Acquisition of assets of Cascade
Technology Corporation (57,500) 0
----------- -----------
Net cash flows used in investing activities (226,366) (309,828)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payment) from line of credit 157,787 (193,234)
Loan proceeds 1,099 1,281,115
Principal repayments of loans, notes
and leases (141,844) (1,022,509)
Dividends on Series B Convertible
Preferred Stock (75,000) (25,000)
----------- -----------
Net cash flows provided by (used in)
financing activities (57,958) 40,372
----------- -----------
Net increase in cash and cash equivalents 172,067 341,390
Cash and cash equivalents -
beginning of period 136,467 435,538
----------- -----------
Cash and cash equivalents -
end of period $ 308,534 $ 776,928
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
<TABLE>
<CAPTION>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - Continued
Three Months Ended
March 31
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
SUPPLEMENTAL NON-CASH FINANCING AND
INVESTING ACTIVITIES:
Acquisition of assets of Cascade
Technology Corporation $ 181,865 $ 0
=========== ===========
Lease of fixed assets $ 25,778 $ 0
=========== ===========
Issuance of preferred stock $ 0 $ 2,500,000
=========== ===========
Cancellation of unpaid shares issued
pursuant to Employee Stock Payment Plan $ 0 $ 1,191,500
=========== ===========
Issuance of warrants $ 0 $ 569,600
=========== ===========
Note receivable from disposition
of AT Supply $ 0 $ 200,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
Teltronics, Inc. ("Teltronics" or "Company"), a Delaware corporation,
designs, develops, manufactures and markets electronic hardware and
application software products, and engages in contract manufacturing for
the telecommunication industry. Through its majority owned subsidiary,
Interactive Solutions, Inc. ("ISI") it has also engaged in the design and
manufacturing of a small, Pentium (R) powered, multimedia computer for the
mobile computer 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% formerly owned
subsidiary AT Supply, Inc. ("AT Supply"), and its 85% owned subsidiary
Interactive Solutions, Inc. ("ISI"). AT Supply was sold on March 6, 1998.
All significant intercompany transactions and balances have been eliminated
in consolidation.
The unaudited consolidated financial statements and related notes have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and on substantially the same basis as the annual
consolidated financial statements. In the opinion of management, the
consolidated financial statements reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial position, operating results, and cash flows for those periods
presented. Operating results for the three month period ended March 31,
1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. These consolidated financial statements
should be read in conjunction with the consolidated financial statements,
and notes thereto, for the year ended December 31, 1998, as presented in
the Company's annual report on Form 10-K.
NOTE 2 - ACQUISITIONS
On February 19, 1999, the Company acquired certain assets and the
technology of Cascade Technology Corporation ("Cascade"). The Company
acquired all of Cascade's rights to and in certain technology for a
DiscoverMATE (tm) panel link display, open sales orders and other purchased
assets described in the Agreement. The display is sold to Ford Visteon,
Chrysler, General Motors and Kelsey Hayes and other companies.
The Company delivered an aggregate of 126,383 restricted shares (including
52,117 shares in escrow for potential claims by the Company) of its voting
common stock for selected assets of Cascade. 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 Securities Act of 1933, as amended, in an offering for cash. In
addition, the Company paid $57,500 at closing and issued a non-interest
bearing note for $47,913 that is due no later than May 19, 1999.
The acquisition has been accounted for using the purchase method of
accounting. The purchase price has been assigned to the net assets
acquired based on management's estimate of the fair value of such assets
and liabilities at the date of acquisition as follows:
Inventory $ 100,000
Fixed assets 71,000
Goodwill 116,278
Notes payable (47,913)
----------
Net assets acquired $ 239,365
==========
8
<PAGE>
The excess cost over fair value of the net assets acquired (goodwill and
identifiable tangible assets) is being amortized on a straight-line basis
as follows:
$ Life
-------- --------
Customer List $ 35,000 5 years
Patent 35,000 14 years, 7 months
General 46,278 15 years
The estimates are preliminary, however, management believes that any
adjustments to the amounts allocated will not have a material effect on the
Company's financial position or results of operations. Proforma financial
statements are not provided due to the immateriality of the acquisition.
NOTE 3 - 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.
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
for one year. The Company recognized a gain of $100,000 during the quarter
ending June 30, 1998 and a gain of $111,614 during the quarter ended March
31, 1999. Revenues for these product lines were $61,000 for the quarter
ended March 31, 1998.
NOTE 4 - NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income
(loss), adjusted for preferred stock dividends, by the weighted average
number of issued common shares outstanding during the applicable period.
Diluted net income (loss) per share is computed by dividing net income,
adjusted for preferred stock dividends, by the weighted average number of
issued common shares, adjusted for potential common shares. Potential
common shares consist of convertible preferred stock, stock options (vested
and unvested) and warrants and are computed using the treasury stock method
and were anti-dilutive and were not included in the calculation of diluted
loss per share for 1999.
9
<PAGE>
The following unaudited table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
BASIC
Net income $ 12,513 $ 539,190
Preferred dividends (75,000) (25,000)
----------- -----------
Income (loss) attributable to common
shareholders $ (62,487) $ 514,190
=========== ===========
Weighted average shares outstanding 3,534,309 3,415,513
=========== ===========
Net income (loss) per share $ (.02) $ .15
=========== ===========
DILUTED
Net income $ 12,513 $ 539,190
Preferred dividends (75,000) (25,000)
----------- -----------
Income (loss) attributable to common
shareholders $ (62,487) $ 514,190
=========== ===========
Weighted average shares outstanding 3,534,309 3,415,513
Net effect of dilutive stock options
using the treasury method 0 72,357
Net effect of dilutive warrants using
the treasury stock method 0 0
----------- -----------
Dilutive potential common shares 3,534,309 3,487,870
=========== ===========
Net Income (loss) per share $ (.02) $ .15
=========== ===========
</TABLE>
NOTE 5 - INVENTORIES
The major classes of inventories are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Raw materials $ 2,942,110 $ 2,909,470
Work-in-process 1,090,349 825,631
Finished goods 1,047,764 1,204,018
Allowance for obsolete inventory (1,072,372) (1,075,748)
----------- -----------
$ 4,007,851 $ 3,863,371
=========== ===========
</TABLE>
NOTE 6 - LONG TERM DEBT
On February 25, 1998, the Company issued $1,750,000 of Subordinated Secured
Debentures (the "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 Debentures are due February 13, 2002 and fees
paid in connection with the Debentures totaled $8,750. The Debentures do
not have a prepayment penalty and are collateralized by a first lien on
fixed assets and a second lien on all other assets. The Holder of the
Debentures 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 Debentures contain certain financial covenants,
including restrictions which could affect future funding of ISI by the
Company.
10
<PAGE>
On March 29, 1999, the Company and Sirrom Capital Corporation ("Sirrom")
amended and restated the $1,750,000 of Subordinated Secured Debentures
originally entered into on February 25, 1998 and due February 13, 2002.
The Debentures have a revised maturity of $500,000 on April 30, 2000 and
$1,250,000 on February 13, 2002.
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 March 29, 1999, the Company and Sirrom amended and restated the
$1,000,000 Loan Agreement originally entered into on February 25, 1998 and
originally due February 25, 1999. The Loan Agreement has a revised
maturity of April 30, 2000. If the Loan is not repaid by September 30,
1999, the interest rate increases from 12% to 13.5%. This Loan has been
classified as long-term debt at December 31, 1998.
NOTE 7 - SHAREHOLDERS' EQUITY
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) 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
of the Company's common stock 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.
11
<PAGE>
(B) WARRANTS - 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 fair
value of the warrants was recorded as deferred financing costs and totaled
$569,600. This amount is being amortized to financing expense over the
life of the Subordinated Secured Debentures and Senior Secured Loans.
(C) EMPLOYEE STOCK PAYMENT PLAN - On February 16, 1998, the Company
cancelled the remaining 211,100 shares.
(D) CONSULTANT STOCK PAYMENT PLAN - On February 16, 1998, the Company
cancelled the remaining 105,000 shares.
NOTE 8 - SEGMENT INFORMATION
The Company's operations are classified into two reportable segments,
Teltronics and ISI. Each reportable segment is staffed separately,
requires different technology and marketing strategies and sells to
different customers.
The accounting policies of the Segments are the same. Intersegment sales
and transfers are recorded at Teltronics' cost plus a normal margin for
electronic manufacturing. Corporate overhead is allocated between
Teltronics and ISI based on estimated dollar usage for administration
expenses and net investment for interest. Company management evaluates
performance based on segment profit, which is net income or (loss) before
taxes, excluding nonrecurring gains or losses.
12
<PAGE>
The following table presents information about reportable segment
operations and assets.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET SALES
Teltronics:
Telecommunications $ 6,881,000 $ 5,057,000
AT Supply (distribution) (1) 0 1,278,000
ISI 17,000 370,000
Elimination of Intersegment sales (73,000) (65,000)
----------- -----------
Total sales $ 6,825,000 $ 6,640,000
=========== ===========
DEPRECIATION AND AMORTIZATION
Teltronics:
Telecommunications $ 198,000 $ 188,000
AT Supply (distribution) (1) 0 1,000
ISI 121,000 20,000
----------- -----------
Total depreciation and amortization $ 319,000 $ 209,000
=========== ===========
INTEREST AND FINANCING COSTS
Teltronics:
Telecommunications $ 187,000 $ 144,000
AT Supply (distribution) (1) 0 32,000
ISI 125,000 125,000
----------- -----------
Total interest and financing costs $ 312,000 $ 301,000
=========== ===========
SEGMENT PROFITS
Teltronics:
Telecommunications $ 581,000 $ (459,000)
AT Supply (distribution) (1) 0 6,000
ISI (680,000) (156,000)
----------- -----------
Total (99,000) (609,000)
Gain on dispositions 112,000 1,148,000
----------- -----------
Net income (loss) before taxes $ 13,000 $ 539,000
=========== ===========
SEGMENT ASSETS
Teltronics:
Telecommunications $14,206,000 $10,470,000
AT Supply (distribution) (1) 0 0
ISI 1,295,000 1,715,000
----------- -----------
Total segment assets $15,501,000 $12,185,000
=========== ===========
ACQUISITION OF PROPERTY AND EQUIPMENT
Teltronics:
Telecommunications $ 119,000 $ 18,000
AT Supply (distribution) (1) 0 0
ISI 46,000 216,000
----------- -----------
Total acquisition of property and equipment $ 165,000 $ 234,000
=========== ===========
(1) AT Supply was sold on March 6, 1998.
</TABLE>
13
<PAGE>
NOTE 9 - SUBSEQUENT EVENTS
On May 7, 1999, Sirrom Capital Corporation converted 2,750 shares of Series
B Convertible Preferred Stock into 100,000 shares of Common Stock at an
exercise price of $2.75 per share of Common Stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
A number of statements contained in this Quarterly Report on Form 10-Q 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, the ability to comply with the rules
for inclusion in the Nasdaq Stock Market and other factors described in the
Company's filings with the Securities and Exchange Commission. 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 unaudited tables set forth certain data, expressed as a
percentage of revenue, from the company's consolidated Statements of
Operations for the three month periods ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 51.7% 62.0%
------ ------
Gross profit 48.3% 38.0%
------ ------
Operating expenses:
General and administrative 12.5% 15.0%
Sales and marketing 19.0% 18.1%
Research and development 13.7% 9.8%
------ ------
45.2% 42.9%
------ ------
Income (loss) from operations 3.1% (4.9%)
------ ------
Other income (expense):
Interest (3.1%) (3.6%)
Financing (1.5%) (1.0%)
Litigation costs (0.3%) (0.1%)
Gain on dispositions 1.6% 17.3%
Other 0.4% 0.3%
------ ------
(2.9%) 12.9%
------ ------
Income before income taxes 0.2% 8.0%
Income tax expense 0.0% 0.0%
------ ------
Net income 0.2% 8.0%
====== ======
</TABLE>
14
<PAGE>
THREE MONTHS ENDED MARCH 31, 1999 AND 1998.
Sales were $6,825,000 for 1999 as compared to $6,640,000 for 1998. This
increase was due to improved Remote Maintenance and Vision sales. The
prior year included $1,278,000 of AT Supply sales.
Gross profit was $3,295,000 or 48.3% for 1999 as compared to $2,524,000 or
38.0% for 1998. The increase was due to a change in product mix, with
increased Remote Maintenance and Vision sales, and the sale of AT Supply.
General and administrative expenses were $852,000 for 1999 as compared to
$993,000 for 1998. The decrease was due to the sale of AT Supply.
Sales and marketing expenses were $1,295,000 for 1999 as compared to
$1,203,000 for 1998. The increase is due to increased commission and
travel expenses.
Research and development expenses were $938,000 for 1999 as compared to
$652,000 for 1998. The increase was due to continued funding for ISI and
Teltronics Remote Maintenance and Vision products.
Income from operations was $210,000 for 1999 as compared to a loss from
operations of $324,000 for 1998. This increase relates to increased sales
and margins, and the sale of AT Supply.
Other expense was $197,000 for 1999 as compared to income of $863,000 for
1998. Interest and financing was $312,000 for 1999 as compared to $301,000
for 1998. The customer list and maintenance and support agreements for the
OBRi-TEL for Windows contract maintenance business were sold to MDR
Telemanagement Limited in April, 1998 for a gain of $100,000 in the second
quarter of 1998 and $112,000 in the first quarter of 1999. AT Supply was
sold for a gain of $1,148,000 during the first quarter of 1998.
Income tax expense was offset by a corresponding reduction in the deferred
tax asset valuation allowance.
The net income was $13,000 for 1999 as compared to a net income of $539,000
for 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash requirements were met with borrowings from The CIT Group/Credit
Finance ("CIT"). On December 22, 1998, the Ninth Amendment of the
Agreement with CIT was changed reducing the maximum availability to
$5,500,000 due to the sale of AT Supply.
The Company's working capital ratio was 1.07:1 at March 31, 1999 as
compared to 1.08:1 at December 31, 1998. Net working capital was $699,000
at March 31, 1999 as compared to $668,000 at December 31, 1998. Included
in current liabilities was $4,155,000 and $3,998,000 of borrowings under
the Company's line of credit at March 31, 1999 and December 31, 1998,
respectively.
Net cash increased by $172,000 for the quarter ended March 31, 1999 as
compared to a net cash increase of $341,000 for the quarter ended March
31, 1998. Net cash flows from operating activities totaled $456,000 for
the quarter ended March 31, 1999 as compared to $611,000 for the quarter
ended March 31, 1998.
Accounts receivable increased by $799,000 for the quarter ended March 31,
1999 as compared to a decrease of $690,000 for the quarter ended March 31,
1998. This increase was due to strong first
15
<PAGE>
quarter, 1999 sales. Inventories increased by $56,000 for the quarter
ended March 31, 1999 as compared to a decrease of $381,000 for the quarter
ended March 31, 1998.
Net cash flows from investing activities totaled $226,000 for the quarter
ended March 31, 1999 as compared to $310,000 for the quarter ended March
31, 1998. Acquisition of property and equipment totaled $165,000 for the
quarter ended March 31, 1999 as compared to $234,000 for the quarter ended
March 31, 1998. The decrease was due to reduced expenditures for dies and
molds for ISI.
Cash flows used in financing activities totaled $58,000 for the quarter
ended March 31, 1999 as compared to cash flows provided by financing
activities of $40,000 for the quarter ended March 31, 1998.
The Company entered into an agreement on February 25, 1998 with Sirrom
Capital. Pursuant to this agreement, the Company issued $2,500,000 of
Series B 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 Secured Debentures,
the Company issued 525,000 warrants to purchase the Company's Common Stock
at an exercise price of $2.75 per share. The warrants were recorded at
fair value and are being amortized to financing expense over the life of
the related obligation. These warrants are exercisable in whole, or in
part, at any time during a five year period beginning on the date of
issuance.
On March 29, 1999, the Company and Sirrom amended and restated the
$1,750,000 of Subordinated Secured Debentures originally entered into on
February 25, 1998 and due February 13, 2002. The Debentures have a revised
maturity of $500,000 on April 30, 2000 and $1,250,000 on February 13, 2002.
The Company borrowed $1,280,000 from Sirrom Capital under a Loan and
Security Agreement between the Company 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
were 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. The warrants were recorded at fair
value and are being amortized to financing expense over the life of the
related obligation. These warrants are exercisable in whole, or in part,
at any time during a five year period beginning on the date of issuance.
On March 29, 1999, the Company and Sirrom amended and restated the
$1,000,000 Loan Agreement originally entered into on February 25, 1998 and
originally due February 25, 1999. The Loan Agreement has a revised
maturity of April 30, 2000. If the Loan is not repaid by September 30,
1999, the interest rate increases from 12% to 13.5%. This Loan has been
classified as long-term debt at December 31, 1998.
In addition, the Company is exploring other equity financing.
CURRENT OUTLOOK
The key to increased sales in the Vision product line is additional
distribution. To this end, all of the current distributors of Vision were
invited to the factory to see first hand the advances that have been made
for this product line. This has already resulted in new sales. At the
same meeting, we also launched the Vision Si, a low end switch which will
compete with key phone systems. The advantage of this switch is that it
will have all the features of our other PBX and have an upgrade path to
larger
16
<PAGE>
systems. The new voice mail systems were also introduced with an entry
level system as well as VisionWorks that allows screen pops and unified
messaging to Microsoft Outlook.
The Remote Maintenance business continues to grow and the Company has also
started to receive upgrade orders from its major customers for older non
year 2000 compliant products.
The Company has developed a number of new orders for electronic
manufacturing from new customers. These orders continue to help the
product line contribute to the profitability of the Company.
Interactive Solutions has signed an agreement with Siemens ElectroCom
whereby Siemens will market SIMON, their version of the MENTIS (R) computer
to their customers. Siemens continues to develop software for SIMON. The
Company continues to pursue a number of high level customers that are
developing solutions for their customers.
YEAR 2000 READINESS DISCLOSURE
The Company is preparing for the impact of the arrival of the Year 2000 on
its business. The "Year 2000 Issue" is a term used to describe the
problems created by systems that are unable to accurately interpret dates
after December 31, 1999. These problems are derived predominantly from the
fact that many software programs have historically categorized the "year"
in a two-digit format. The Year 2000 Issue creates potential risks for the
Company, including potential problems in the Company's products as well as
in the Information Technology ("IT") and non-IT systems that the Company
uses in its business operations. The Company may also be exposed to risks
from third parties with whom the Company interacts who fail to adequately
address their own Year 2000 Issues.
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 all products.
The modification of all products and related testing was completed by
December 31, 1998. Selected older and discontinued products are not Year
2000 compliant and customers have been advised. The Company has
established an Internet site as contemplated by the Year 2000 Readiness
Disclosure Act to assist customers and provide information related to the
Year 2000 Issue. 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 audit and assessment of production equipment
and related infrastructure. 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, which includes finance and production hardware and
software. The Company's computer system is not Year 2000 compliant. 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.
17
<PAGE>
The Company has leased a new computer system that is year 2000 compliant.
This system cost $570,000 and was received in August and September, 1998.
Internal costs are expected to increase $100,000 per year due to the
computer system installation. The external installation and training costs
are estimated to be $130,000 and the installation is estimated to be
completed by June 30, 1999, which would be prior to any significant impact
of the Year 2000 on its operating systems. Training and installation costs
of $100,000 related to the new computer system have been incurred as of
March 31, 1999. The $130,000 will be paid from operating cash flow. The
system installation should not defer any additional systems projects.
The Company has initiated formal communications with its significant
suppliers to determine the extent to which its raw materials are vulnerable
to the Year 2000 Issue. If any suppliers indicate that they are not Year
2000 compliant, the Company plans to develop contingency plans to address
the issue.
There can be no assurance that the Company will be completely successful in
its efforts to address Year 2000 Issues. If the Company's products are not
Year 2000 compliant, the Company could suffer lost sales or other negative
consequences, including, but not limited to, diversion of resources, damage
to the Company's reputation, increased service and warranty costs and
litigation, any of which could materially adversely affect the Company's
business operations or financial statements.
The Company is also dependent on third parties, such as its customers,
suppliers, service providers and other business partners. If these or
other third parties fail to adequately address Year 2000 Issues, the
Company could experience a negative impact on its business operations or
financial statements. For example, the failure of certain of the Company's
principal suppliers to have Year 2000 compliant systems could impact the
Company's ability to manufacture and/or ship its products or to maintain
adequate inventory levels for production.
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 second quarter
of 1999 suggests that there is a significant risk that the computer system,
products and raw materials might not be Year 2000 compliant, the Company
anticipates developing a contingency plan.
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, the ability to
install the new computer system on a timely basis, 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.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is a party to litigation which arises in the
normal course of business. There is no litigation pending against the
Company which, if determined adversely, would have a material adverse
effect upon the business or financial condition of the Company.
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
10.1 Global Amendment dated March 29, 1999 between
Sirrom Capital Corporation and Teltronics, Inc.
and its Subsidiaries........................................(a)
10.2 Amended and Restated Senior Secured Promissory Note
in the amount of $1,000,000.00 dated and delivered
March 29, 1999 by the Company to Sirrom Capital
Corporation.................................................(a)
10.3 Amended and Restated 12% Subordinated Secured
Debenture Due February 13, 2002 dated and
delivered March 29, 1999 by the Company to
Sirrom Capital Corporation..................................(a)
10.4 Lease Rider No. 990325 dated march 25, 1999 between
the Company and SunShore Leasing Corporation................(a)
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
three month period ended March 31, 1999.
19
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELTRONICS, INC.
May 13, 1999 Ewen R. Cameron
President & Chief Executive Officer
May 13, 1999 Mark E. Scott
Vice President Finance, Secretary,
Treasurer and Principal Accounting
Officer
20
GLOBAL AMENDMENT
This GLOBAL AMENDMENT (the "Global Amendment"), dated as of the 29th day of
March, 1999, is made and entered into on the terms and conditions hereinafter
set forth, by and among TELTRONICS, INC., a Delaware corporation ("Teltronics"
or the "Issuer"), TTG ACQUISITION CORP., a Delaware corporation, Teltronics/SRX,
Inc., a Delaware corporation, AT SUPPLY, INC., a Texas corporation, and
INTERACTIVE SOLUTIONS, INC., a Delaware corporation (each of the foregoing
entities, including Teltronics, is sometimes referred to herein as a "Borrower",
and the foregoing entities, including Teltronics, are sometimes collectively
referred to herein as the "Borrowers"), and SIRROM CAPITAL CORPORATION d/b/a
TANDEM CAPITAL, a Tennessee corporation ("Sirrom").
WITNESSETH:
WHEREAS, Borrowers and Sirrom are all the parties to that certain Loan and
security Agreement (the "Loan Agreement"), dated as of the February 25, 1998,
by and among the Borrowers and Sirrom, providing for loans from Sirrom to
Borrower in the original principal amounts of $1,000,000 (the "Primary Loan")
and $280,000 (the "Secondary Loan");
WHEREAS, pursuant to the Loan Agreement, Borrowers have executed that
certain Senior Secured Promissory Note, dated February 26, 1998, in the
Primary Loan amount, payable to the order of Sirrom (together with any
extensions, modifications, renewals and/or replacements thereof, as the
"Primary Note") and that certain Senior Secured Promissory Note, dated
February 26, 1998, in the Secondary Loan amount, payable to the order of Sirrom
(together with any extensions, modifications, renewals and/or replacements
thereof, as the "Secondary Note");
WHEREAS, Borrowers and Sirrom are all the parties to that certain
Trademark, Copyright and Patent Security Agreement (the "Trademark Security
Agreement"), dated as of the February 26, 1998, by and among Borrowers and
Sirrom, providing for the grant of a security interest in certain assets of
Borrowers to secure their obligations to Sirrom;
WHEREAS, Issuer and Sirrom are the parties to that certain Debenture
Purchase Agreement (the "Debenture Purchase Agreement"), dated as of the
February 25, 1998, by and among Issuer and Sirrom providing for the issuance
and sale to Sirrom by Issuer of its 12% subordinated secured debentures due
February 13, 2002;
WHEREAS, pursuant to the Debenture Purchase Agreement, Issuer has executed
that certain 12% Subordinated Secured Debenture due February 13, 2002, dated
February 26, 1999, payable to the order of Sirrom (together with any
extensions, modifications, renewals and/or replacements thereof, the
"Debenture");
WHEREAS, Borrowers and Issuer have requested that Sirrom permit certain
amendments to the Primary Note and the Debenture (the "Amendments");
NOW, THEREFORE, in consideration of the agreement of Sirrom to permit the
Amendments, the mutual covenants and agreements hereinafter set forth, and
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Borrowers, Issuer and Sirrom hereby agree as follows:
Section 1. AMENDMENT OF LOAN AGREEMENT; SECURED INDEBTEDNESS.
(a) The definition of "A Loan Note" provided in Section 1.1 of the Loan
Agreement shall be, and hereby is, amended to mean the Amended and Restated
Senior Secured Promissory Note in the principal amount of $1,000,000
in the form attached hereto as EXHIBIT A to be executed in connection with this
Global Amendment (the "Amended and Restated Note").
(b) Borrowers, and each of them, acknowledge and agree that the
indebtedness evidenced by the Amended and Restated Note, and the obligations
of Borrowers thereunder, shall constitute a Secured Obligation (as defined in
Section 2.2 of the Loan Agreement) and as such shall be secured by the
Collateral to be executed in connection with this Global Amendment (as
defined in Section 2.1 of the Loan Agreement).
(c) The definition of "Obligations" provided in Section 1 of the
Trademark Security Agreement shall be, and hereby is, amended to include the
Amended and Restated Note.
Section 2. AMENDMENT OF DEBENTURE PURCHASE AGREEMENT; SECURED
INDEBTEDNESS.
(a) The definition of "Debentures" provided in Section 1.1 of the
Debenture Purchase Agreement shall be, and hereby is, amended to mean the
Amended and Restated 12% Subordinated Secured Debenture due on February 13,
2002 in the principal amount of $1,750,000 in the form attached hereto as
EXHIBIT B to be executed in connection with this Global Amendment.
(b) Issuer acknowledges and agrees that the indebtedness evidenced by
the Amended and Restated Debenture, and the obligations of Issuer thereunder,
shall be secured by the Collateral (as defined in Section 1.1(b) of
the Debenture Purchase Agreement).
Section 3. PROCESSING FEE. In connection with the transactions
contemplated by the Amendments, Teltronics shall pay to Sirrom a processing
fee in the amount of $10,000, which amount, together with the reasonable
expenses of Sirrom in connection with the Amendments and this Global
Amendment, shall be paid by Teltronics in immediately available funds on the
date hereof in accordance with instructions received by it from Sirrom.
Section 4. NO NOVATION. This Global Amendment, the Amended and
Restated Note and the Amended and Restated Debenture are not intended to be,
nor shall they be construed to create, a novation or accord and satisfaction,
and the Loan Agreement, Debenture Purchase Agreement, Amended and Restated Note
and Amended and Restated Debenture, as herein modified, shall continue in full
force and effect.
Section 5. RATIFICATION. The Issuer and each of the Borrowers hereby
ratifies and confirms all of the representations and warranties set forth in
each of the Loan Agreement and the Debenture Purchase Agreement, and hereby
restates and confirms the covenants set forth therein.
Section 6. OTHER PROVISIONS. Except as modified or amended in this
Global Amendment, all terms and conditions of the Loan Agreement and the
Debenture Purchase Agreement shall remain in full force and effect.
Section 7. ENTIRE AGREEMENT. This Global Amendment and the other
written agreements between Borrowers and Lender executed contemporaneously
herewith represent the entire agreement between the parties concerning the
subject matter hereof, and all oral discussions and prior agreements are merged
herein.
Section 8. COUNTERPARTS. This Global Amendment may be executed in
multiple originals or counterparts, each of which shall be deemed an original
and all or which when taken together shall constitute but one and the same
instrument.
Section 9. GOVERNING LAW. This Global Amendment shall be construed
and enforced under the internal laws of the State of Tennessee, without
reference to the conflict of laws principles thereof.
Section 10. WAIVER OF JURY TRIAL. ISSUER AND EACH BORROWER HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE (TO THE EXTENT PERMITTED BY
APPLICABLE LAW) ANY RIGHT TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER,
RELATING TO, OR CONNECTED WITH THIS GLOBAL AMENDMENT, THE COLLATERAL OR ANY
OTHER AGREEMENT, INSTRUMENT OR DOCUMENT CONTEMPLATED HEREBY OR DELIVERED
IN CONNECTION HEREWITH AND AGREE THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE
A JUDGE SITTING WITHOUT A JURY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR
THE PARTIES TO ENTER INTO THIS GLOBAL AMENDMENT.
[Remainder of page intentionally left blank.]
[SIGNATURE PAGE TO GLOBAL AMENDMENT]
IN WITNESS WHEREOF, the parties hereto have executed this Global Amendment,
or have caused this Agreement to be executed by their duly authorized officers,
as of the day and year first above written.
BORROWERS/ISSUER:
TELTRONICS, INC.
By: Mark E. Scott
Name: Mark E. Scott
Its: VP Finance
Attest: William L. Hutchison
Name: William L. Hutchison
Its: Exec. VP
[CORPORATE SEAL]
TTG ACQUISITION CORP.
By: Mark E. Scott
Name: Mark E. Scott
Its: VP Finance
Attest: William L. Hutchison
Name: William L. Hutchison
Its: Asst. Secretary
[CORPORATE SEAL]
AT SUPPLY, INC.
By: Mark E. Scott
Name: Mark E. Scott
Its: VP Finance
Attest: William L. Hutchison
Name: William L. Hutchison
Its: Asst. Secretary
[CORPORATE SEAL]
INTERACTIVE SOLUTIONS, INC.
By: Mark E. Scott
Name: Mark E. Scott
Its: VP Finance
Attest: William L. Hutchison
Name: William L. Hutchison
Its: Asst. Secretary
[CORPORATE SEAL]
TELTRONICS/SRX, INC.
By: Mark E. Scott
Name: Mark E. Scott
Its: VP Finance
Attest: William L. Hutchison
Name: William L. Hutchison
Its: President
[CORPORATE SEAL]
LENDER:
SIRROM CAPITAL CORPORATION
d/b/a TANDEM CAPITAL
By: John S. Scott
Name: John S. Scott
Its: VP
Index of Attachments
EXHIBIT A Form of Amended and Restated Senior Secured Promissory Note
EXHIBIT B Form of Amended and Restated Debenture
$1,000,000.00 Nashville, Tennessee
March 29, 1999
AMENDED AND RESTATED
SENIOR SECURED PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, TELTRONICS, INC., a Delaware
corporation, TTG ACQUISITION CORP., a Delaware corporation, TELTRONICS/SRX,
Inc., a Delaware corporation, AT SUPPLY, INC., a Texas corporation, and
INTERACTIVE SOLUTIONS, INC., a Delaware corporation (the foregoing entities
collectively referred to herein as the "Maker"), jointly and severally
promise to pay to the order of SIRROM CAPITAL CORPORATION d/b/a TANDEM
CAPITAL, INC., a Tennessee corporation ("Payee" and, together with any
subsequent holder(s) hereof, "Holder"), to Payee's account number
2020000089216 at First Union National Bank, Nashville, Tennessee, ABA
routing number 064000059, or at such other place as Holder may designate to
Maker in writing from time to time, on April 30, 2000 (the "Maturity Date"),
the principal sum of ONE MILLION and NO/100 DOLLARS ($1,000,000.00),
together with interest on the outstanding principal balance hereof from the
date of each advance at the rate of twelve percent (12%) per annum computed
on the basis of a 360-day year; provided that if the principal balance
and all related accrued interest thereon shall not be paid in full by September
30, 1999, the interest rate on the outstanding principal balance hereof
shall increase from and after such date to the rate of thirteen and one-half
percent (13.5%) per annum computed on the basis of a 360-day year.
Interest on the outstanding principal balance hereof shall be due and
payable quarterly, in arrears, with the first installment being payable on
May 15, 1999 and subsequent installments being payable on August 15, 1999,
November 15, 2000, February 15, 2000 and thereafter on the Maturity Date, at
which time the entire outstanding principal balance, together with all
accrued and unpaid interest, shall be immediately due and payable in full.
The indebtedness evidenced hereby may be prepaid in whole or in part at
any time and from time to time, without penalty. Any such prepayments shall be
credited first to any accrued and unpaid interest and then to the outstanding
principal balance hereof.
Time is of the essence of this Amended and Restated Note (the "Note").
This is the Note referenced in, and issued pursuant to, the Loan and
Security Agreement of dated February 25, 1998 between the Maker and the
Payee (as amended, supplemented or otherwise modified from time to time, the
"Loan Agreement"). The indebtedness evidenced by this Note was incurred
pursuant to, and is governed and secured by the Loan Agreement and the
other "Loan Documents" defined and referenced therein. Reference is made to
the Loan Agreement for a description of the terms and conditions governing this
Note and the indebtedness evidenced hereby, including but not limited to the
circumstances under which the indebtedness evidenced by this Note may be
declared, or may automatically become, immediately due and payable prior to the
Maturity Date.
To the extent permitted by applicable law, upon the occurrence of any Event
of Default (as such term is defined in the Loan Agreement), at the option of
Holder and without notice to Maker, all overdue interest, if any, shall be added
to the outstanding principal balance hereof, and the entire outstanding
principal balance, as so adjusted, shall bear interest thereafter until paid
at an annual rate equal to the otherwise then-applicable interest rate plus an
additional two percent (2%) per annum (computed on the basis of a 360-day year).
If this Note is placed in the hands of an attorney for collection or for
enforcement or protection of the security, or if Holder incurs any costs
incident to the collection of the indebtedness evidenced hereby or the
enforcement or protection of the security, Maker and any endorsers hereof agree
to pay to Holder an amount equal to all such costs, including, without
limitation, all reasonable attorney's fees and all court costs.
Presentment for payment, demand, protest and notice of demand, protest and
nonpayment are hereby waived by Maker and all other parties hereto. No failure
to accelerate the indebtedness evidenced hereby by reason of default
hereunder, acceptance of a past-due installment or other indulgences granted
from time to time, shall be construed as a novation of this Note or as a
waiver of such right of acceleration or of the right of Holder thereafter to
insist upon strict compliance with the terms of this Note or to prevent the
exercise of such right of acceleration or any other right granted
hereunder or by applicable laws. No extension of the time for payment of
the indebtedness evidenced hereby or any installment due hereunder, made
by agreement with any person now or hereafter liable for payment of the
indebtedness evidenced hereby, shall operate to release, discharge, modify,
change or affect the original liability of Maker hereunder or that of any
other person now or hereafter liable for payment of the indebtedness evidenced
hereby, either in whole or in part, unless Holder agrees otherwise in writing.
This Note may not be changed orally, but only by an agreement in writing
signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought.
All interest accruing under this Note is subject to the terms of Section
8.7 of the Loan Agreement. Without limitation to the foregoing, all
agreements herein made are expressly limited so that in no event whatsoever,
whether by reason of advancement of proceeds hereof, acceleration of maturity
of the unpaid balance hereof or otherwise, shall the amount paid or agreed
to be paid to Holder for the use of the money advanced or to be advanced
hereunder exceed the maximum amounts collectible under applicable laws in
effect from time to time (the "Maximum Rate"). If, from any circumstances
whatsoever, the fulfillment of any provision of this Note or any other
agreement or instrument now or hereafter evidencing, securing or in any
way relating to the indebtedness evidenced hereby shall involve the payment
of interest in excess of said Maximum Rate, then, ipso facto, the obligation
to pay interest hereunder shall be reduced to said Maximum Rate; and if from
any circumstance whatsoever, Holder shall ever receive interest, the amount of
which would exceed the amount collectible at said Maximum Rate, such amount
as would be excessive interest shall be applied to the reduction of the
principal balance remaining unpaid hereunder and not to the payment of interest.
This provision shall control every other provision in any and all other
agreements and instruments existing or hereafter arising between Maker
and Holder with respect to the indebtedness evidenced hereby.
This Note shall be construed and enforced under the internal laws of
the State of Tennessee, without reference to the conflict of laws principles
thereof.
As used herein, the terms "Maker" and "Holder" shall be deemed to include
their respective successors, legal representatives and assigns, whether by
voluntary action of the parties or by operation of law.
[SIGNATURE PAGE TO SENIOR SECURED PROMISSORY NOTE ($1,000,000)]
MAKER:
TELTRONICS, INC.
By: Mark E. Scott
Name: Mark E. Scott
Its: VP Finance
Attest: William L. Hutchison
Name: William L. Hutchison
Its: Exec. VP
[CORPORATE SEAL]
TTG ACQUSITION CORP.
By: Mark E. Scott
Name: Mark E. Scott
Its: VP Finance
Attest: William L. Hutchison
Name: William L. Hutchison
Its: Asst. Secretary
[CORPORATE SEAL]
AT SUPPLY, INC.
By: Mark E. Scott
Name: Mark E. Scott
Its: VP Finance
Attest: William L. Hutchison
Name: William L. Hutchison
Its: Asst. Secretary
[CORPORATE SEAL]
INTERACTIVE SOLUTIONS, INC.
By: Mark E. Scott
Name: Mark E. Scott
Its: VP Finance
Attest: William L. Hutchison
Name: William L. Hutchison
Its: Asst. Secretary
[CORPORATE SEAL]
TELTRONICS/SRX, INC.
By: Mark E. Scott
Name: Mark E. Scott
Its: VP Finance
Attest: William L. Hutchison
Name: William L. Hutchison
Its: President
[CORPORATE SEAL]
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR ANY APPLICABLE STATE SECURITIES LAW AND MAY
NOT BE TRANSFERRED UNLESS (i) THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS, OR (ii)
IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY REGISTRATION
UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED IN CONNECTION WITH SUCH TRANSFER.
Teltronics, Inc.
Amended and Restated
12% Subordinated Secured Debenture Due February 13, 2002
No. R-1 March 29, 1999
$1,750,000
For value received, Teltronics, Inc., a Delaware corporation (the
"Company"), hereby promises to pay to Sirrom Capital Corporation at Tandem
Capital, Inc., 500 Church Street, Suite 200, Nashville, Tennessee 37219, or
registered assigns, as follows: on the thirtieth day of April, 2000, the
principal amount of Five Hundred Thousand Dollars ($500,000) and on the
thirteenth day of February, 2002, the principal amount of One Million Two
Hundred Fifty Thousand Dollars ($1,250,000). The Company also hereby
promises to pay interest (computed on the basis of a 360-day year of twelve
30-day months) on the principal amount from time to time remaining unpaid
hereon at the rate of 12% per annum from the date hereof until maturity,
payable quarterly on the fifteenth day of each February, May, August,
and November in each year, commencing May 15, 1999, and at maturity.
The Company agrees to pay interest (computed on the same basis) on overdue
principal and premium, if any, and (to the extent legally enforceable) on any
overdue installment of interest, at the stated rate plus 3% per annum (or, in
each case, at the highest rate permitted by applicable law, whichever is
less) until paid.
Both the principal hereof and interest hereon are payable to the order of
the holder hereof at its address registered on the books of the Company or
by federal funds wire transfer to a bank account designated in writing by the
holder to the Company in coin or currency of the United States of America
which at the time of payment shall be legal tender for the payment of public
and private debts. If any amount of principal, premium, if any, or interest on
or in respect of this Debenture becomes due and payable on any date which
is not a Business Day, such amount shall be payable on the next preceding
Business Day. "Business Day" means any day other than a Saturday, Sunday,
statutory holiday or other day on which banks in Tennessee are required by
law to close or are customarily closed.
This Debenture is one of the 12% Subordinated Secured Debentures due
February 13, 2002 of the Company in the aggregate principal amount of
$1,750,000, issued under and pursuant to the terms and provisions of the
Debenture Purchase Agreement, dated February 25, 1998 (the "Debenture
Agreement"), entered into by the Company with the original purchaser
referred to therein, and this Debenture and the holder hereof are entitled,
equally and ratably with the holders of all other Debentures outstanding
under the Debenture Agreement, to all the benefits provided for thereby or
referred to therein, and to which Debenture Agreement reference is hereby
made for all such terms and provisions.
This Debenture is subordinated to certain other indebtedness of the
Company to the extent and with the effect set forth in the Debenture
Agreement.
This Debenture may be redeemed, repaid or repurchased by the Company, at
the option of the Company, in whole at any time or in part from time to
time, without additional charge or penalty; provided that in the case of any
redemption, repayment or repurchase in part of this Debenture, it shall be
effected pro rata among all the holders of any part hereof.
The indebtedness and other obligations evidenced by this Debenture are
further evidenced and/or secured by (i) the Debenture Agreement and (ii)
certain other instruments and documents as may be required to protect and
preserve the rights of the Company and the holder hereof as more specifically
described in the Debenture Agreement.
If an Event of Default, as defined in the Debenture Agreement, occurs and
is continuing, the principal of this Debenture and the other Debentures
outstanding under the Debenture Agreement may be declared due and payable in
the manner and with the effect provided in the Debenture Agreement.
This Debenture is registered on the books of the Company and is
transferable only by surrender thereof at the principal office of the
Company at 2150 Whitfield Industrial Way, Sarasota, Florida 34243-4046, or
such other address as the Company shall have advised the holders of the
Debenture in writing, duly endorsed or accompanied by a written
instrument of transfer duly executed by the registered holder of this
Debenture or its attorney duly authorized in writing and in accordance with
the provisions of Section 7.2 of the Debenture Agreement. Payment of or on
account of principal, premium, if any, and interest on this Debenture shall
be made only to or upon the order in writing of the registered holder.
If the indebtedness represented by this Debenture or any part thereof is
placed in the hands of attorneys for collection after an Event of Default, or
the enforcement of any rights under the Debenture Agreement, the Company
agrees to pay the principal, premium if any, and interest due and payable
hereon, and an amount equal to all costs of collecting this Debenture,
including reasonable attorneys' fees and expenses.
This Debenture and said Debenture Agreement are governed by and construed
in accordance with the laws of Tennessee.
[Remainder of page intentionally left blank.]
[SIGNATURE PAGE TO DEBENTURE]
[Corporate Seal] Teltronics, Inc.
ATTEST:
By: William L. Hutchison By: Mark E. Scott
Name: William L. Hutchison Name: Mark E. Scott
Its: Exec. VP Its: VP Finance
Date: March 25, 1999
Page 1 of 1
LEASE RIDER
Rider 990325 To Master Lease Agreement No. 960221, dated February 21, 1996,
(Master Lease), between TELTRONICS, INC., as Lessee, and SUNSHORE LEASING
CORP., as Lessor (Lease Rider).
DESCRIPTION OF EQUIPMENT
(1) Model AR-5720ZVL Amistar Corporation Chip Mounter, s/n# 12542 and (1)
DEK USA, Inc. Model DEK260PT Screen Printer, s/n# 171237, more fully
described on the attached Schedule "A", including all parts, accessories
and attachments.
Total Equipment Cost: $128,839.14
(Any applicable state and local sales/use taxes will be billed separately.
Shipping and/or installation charges, if applicable, will be invoiced
separately.)
EQUIPMENT LOCATION: 2150 Whitfield Industrial Way, Sarasota, FL 34243
INITIAL LEASE RIDER TERM
Three (3) years, from and after the date the Equipment is installed by the
manufacturer and accepted by Lessee. (Such date is the Commencement Date
under the Master Lease, for purposes of Equipment covered by this Lease
Rider.)
PAYMENT OF RENT
$4,157.25 per month for Thirty-Six (36) consecutive months, commencing on
the Commencement Date.
ADDITIONAL PROVISIONS AND OPTIONS RELATING TO RETURN, RENEWAL AND PURCHASE
All other terms and conditions of Section 8, Return of Equipment of the
Master Lease notwithstanding, Lessee shall have additional options at the
expiration of the initial Lease Rider Term. For the purpose of these
additional options, Equipment is defined as the equipment hereunder and any
additional equipment added to this Lease Rider by Means of Addenda or
Supplements hereto. These options are to:
(1) Renew the Lease Rider at $1,145.00 per month for twelve (12)
months: or
(2) Purchase all of the equipment at its then Fair market value, not
to exceed ten percent (10%) of the original equipment cost.
LESSEE: LESSOR:
TELTRONICS, INC. SUNSHORE LEASING CORP.
2150 Whitfield Industrial Way 240 N. Washington Blvd., Suite 420
Sarasota, FL 34243 Sarasota, FL 34236
Mark E. Scott, VP Finance Norman J. de Lapouyade, President
- ----------------------------- ----------------------------------
Name of Authorized Signer and Title Name of Authorized Signer and Title
Mark E. Scott Norman J. de Lapouyade, President
<PAGE>
SCHEDULE "A"
DEK USA, INC.:
(1) DEK 260PT SCREEN PRINTER, S/N# 171237
AMISTAR CORPORATION:
(1) AR-5720ZVL CHIP MOUNTER S/N# 12542
(1) AR-530106 INPUT BUFFER STOP
(34) AR-PF-T84C SLIM LANE TAPE F.4MM PITCH
(4) AR-PF-N12 12 MM TAPE FEEDER
(1) AR-300-1 SOIC/, SKI SLOPE, 8 LANES
(1) AR-300-5 SOLIC/SKI SLOPE, 5 LANES
(3) AR-413854 BIT (B13)
(2) AR-409483 QUILL, B3
(2) AR-409505 QUILL, B7
(3) AR-407996 POSITIONER, (NS)
(2) AR-407581 POSITIONER, MEDIUM
(2) AR-407582 OBSOLETE R/B R40208
(2) AR-412185 NOZZLE G5
(2) AR-412186 NOZZLE G6
(2) AR- NOZZLE
(2) AR- NOZZLE G70
(2) AR-142197 NOZZLE G71
(3) AR-PF-T84C SLIM LANE TAPE F.4MM PITCH
(2) AR-PF-24E 24MM TAPE FEEDER
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 308,534
<SECURITIES> 0
<RECEIVABLES> 5,664,522
<ALLOWANCES> (110,000)
<INVENTORY> 4,007,851
<CURRENT-ASSETS> 10,126,069
<PP&E> 8,966,331
<DEPRECIATION> (4,600,358)
<TOTAL-ASSETS> 15,500,608
<CURRENT-LIABILITIES> 9,426,828
<BONDS> 3,335,655
0
125
<COMMON> 3,606
<OTHER-SE> 2,734,394
<TOTAL-LIABILITY-AND-EQUITY> 15,500,608
<SALES> 6,824,986
<TOTAL-REVENUES> 6,824,986
<CGS> 3,529,812
<TOTAL-COSTS> 3,085,018
<OTHER-EXPENSES> (114,275)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 311,618
<INCOME-PRETAX> 0
<INCOME-TAX> 300
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,513
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
