U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended September 30, 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 October 26, 1999 there were 4,054,522 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 September 30, 1999 and
December 31, 1998.. . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the Three
Months and Nine Months ended September 30, 1999 and 1998. . . . 5
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 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. . . . . . . . . . . . .14-19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . . . .20
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 6A. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 6B. REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . 20
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 804,163 $ 136,467
Accounts receivable, net of allowance for
doubtful accounts of $220,000 at
September 30, 1999 and $110,000 at
December 31, 1998 4,927,522 4,755,963
Inventories, net 5,088,451 3,863,371
Prepaid expenses and other current assets 186,138 307,413
----------- -----------
Total current assets 11,006,274 9,063,214
----------- -----------
Property and equipment, net 3,964,253 4,422,722
----------- -----------
Other assets 870,254 944,833
----------- -----------
Total assets $15,840,781 $14,430,769
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 4,977,422 $ 4,184,639
Current portion of capital lease obligations 324,671 315,605
Accounts payable 3,160,569 2,913,161
Accrued expenses and other current
liabilities 1,304,787 821,572
Deferred income 800,437 159,757
----------- -----------
Total current liabilities 10,567,886 8,394,734
----------- -----------
Long-term liabilities:
Long-term debt, net of current portion 1,285,978 2,870,887
Capital lease obligations, net of
current portion 343,488 546,401
----------- -----------
Total long-term liabilities 1,629,466 3,417,288
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value, 40,000,000
shares authorized, 4,054,522 and
3,478,139 issued and outstanding at
September 30, 1999 and December 31, 1998,
respectively. 4,056 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 September 30,
1999 and December 31, 1998. 100 100
Preferred Series B Convertible stock,
$.001 par value, 25,000 shares
authorized, 12,625 and 25,000 shares
issued and outstanding at September 30,
1999 and December 31, 1998. 13 25
Additional paid-in capital 16,624,672 16,443,371
Accumulated deficit (12,985,412) (13,828,229)
----------- -----------
Total shareholders' equity 3,643,429 2,618,747
----------- -----------
Total liabilities and shareholders' equity $15,840,781 $14,430,769
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $9,336,501 $6,396,714 $24,015,433 $19,433,247
Cost of goods sold 4,721,143 3,423,332 12,088,119 11,008,112
---------- ---------- ----------- -----------
Gross profit 4,615,358 2,973,382 11,927,314 8,425,135
---------- ---------- ----------- -----------
Operating expenses:
General and admin-
istrative 1,090,462 809,905 2,968,183 2,647,976
Sales and marketing 1,598,870 1,190,309 4,325,368 3,516,508
Research and development 1,003,084 822,470 2,794,162 2,178,347
---------- ---------- ----------- -----------
3,692,416 2,822,684 10,087,713 8,342,831
---------- ---------- ----------- -----------
Income from operations 922,942 150,698 1,839,601 82,304
---------- ---------- ----------- -----------
Other income (expense):
Interest (215,279) (206,585) (651,667) (627,607)
Financing (67,362) (52,447) (238,723) (153,548)
Litigation costs (29,043) (35,000) (77,220) (39,096)
Gain on dispositions 0 0 111,614 1,248,250
Other 12,924 149,260 48,613 225,333
---------- ---------- ----------- -----------
(298,760) (144,772) (807,383) 653,332
---------- ---------- ----------- -----------
Income before income taxes 624,182 5,926 1,032,218 735,636
Income tax expense 0 0 0 0
---------- ---------- ----------- -----------
Net income 624,182 5,926 1,032,218 735,636
Dividends on Preferred
Series B Convertible
Stock (55,015) (75,000) (189,890) (175,000)
---------- ---------- ----------- -----------
Income attributable to
Common Shareholders $ 569,167 $ (69,074) $ 842,328 $ 560,636
========== ========== =========== ===========
Income per share:
Basic $ .14 $ (.02) $ .22 $ .16
========== ========== =========== ===========
Diluted $ .13 $ (.02) $ .21 $ .16
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,032,218 $ 735,636
Adjustments to reconcile net income
to net cash flows provided by (used in)
operating activities:
Bad debt expense 110,000 55,082
Provision for obsolete inventory (296,603) 274,346
Depreciation and amortization 1,032,131 652,719
Gain on dispositions (111,614) (1,248,520)
Amortization of deferred financing costs 108,286 0
Amortization of goodwill 6,242 0
Changes in operating assets and liabilities,
net of dispositions:
Accounts receivable (281,559) (458,554)
Inventories (828,477) (477,338)
Prepaid expenses and other current assets 121,275 (397,461)
Accounts payable 247,408 520,948
Accrued expenses and other liabilities 483,215 235,405
Deferred income 640,680 (76,200)
----------- -----------
Net cash flows provided by (used in)
operating activities 2,263,202 (183,937)
----------- -----------
Cash Flows from Investing Activities:
Acquisition of property and equipment (429,102) (704,147)
Decrease in other assets 76,328 5,503
Proceeds from dispositions 111,614 150,000
Proceeds from sale of assets 0 1,000
Acquisition of assets of Cascade
Technology Corporation (57,500) 0
----------- -----------
Net cash flows used in investing activities (298,660) (547,644)
----------- -----------
Cash Flows from Financing Activities:
Net proceeds (payment) from line of credit (689,778) 699,861
Loan proceeds 3,853 1,363,768
Principal repayments of loans, notes
and leases (421,031) (1,472,026)
Dividends on Preferred Series B
Convertible Stock (189,890) (175,000)
----------- -----------
Net cash flows provided by (used in)
financing activities (1,296,846) 416,603
----------- -----------
Net increase (decrease) in cash 667,696 (314,978)
Cash - beginning of period 136,467 435,538
----------- -----------
Cash - end of period $ 804,163 $ 120,560
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - Continued
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Supplemental Non-cash Financing and
Investing Activities:
Conversion of Preferred Stock to
Common Stock $ 1,237,500 $ 0
=========== ===========
Acquisition of assets of Cascade
Technology Corporation $ 181,865 $ 0
=========== ===========
Lease of assets $ 73,560 $ 857,562
=========== ===========
Issuance of non-interest bearing note $ 47,913 $ 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(Registered TM)
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
nine month period ended September 30, 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, 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 was paid in
June, 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 and identifiable intangible assets 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 are being amortized on a straight-line
basis as follows:
$ Life
-------- --------
Customer List $ 35,000 5 years
Patent 35,000 14 years, 7 months
Goodwill 46,278 15 years
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 nine months ended September 30, 1998. The
remaining balance of the $200,000 note receivable was paid in October,
1999.
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 $112,000
during the quarter ended March 31, 1999. Revenues for these product
lines were $82,000 for the nine months ending September 30, 1998.
NOTE 4 - NET INCOME PER SHARE
Basic net income per share is computed by dividing net income, adjusted
for preferred stock dividends, by the weighted average number of issued
common shares outstanding during the applicable period. Diluted net
income 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. Common equivalent shares for 1999 and 1998 relating to
Preferred Series B Convertible Stock were anti-dilutive and were not
included in the calculation of diluted net income per share.
9
<PAGE>
The following unaudited table sets forth the computation of basic
and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC
Net income $ 624,182 $ 5,926 $1,032,218 $ 735,636
Preferred dividends (55,015) (75,000) (189,890) (175,000)
---------- ---------- ---------- ----------
Income attributable to
common shareholders $ 569,167 $ (69,074) $ 842,328 $ 560,636
========== ========== ========== ==========
Weighted average shares
outstanding 4,054,522 3,415,513 3,773,683 3,415,513
========== ========== ========== ==========
Net income per share $ .14 $ (.02) $ .22 $ .16
========== ========== ========== ==========
DILUTED
Net income $ 624,182 $ 5,926 $1,032,218 $ 735,636
Preferred dividends (55,015) (75,000) (189,890) (175,000)
---------- ---------- ---------- ----------
Income attributable to
common shareholders $ 569,167 $ (69,074) $ 842,328 $ 560,636
========== ========== ========== ==========
Weighted average shares
outstanding 4,054,522 3,415,513 3,773,683 3,415,513
Net effect of dilutive
stock options 160,152 82,159 134,541 86,849
Net effect of dilutive
warrants 81,770 6,008 119,993 42,520
---------- ---------- ---------- ----------
Dilutive potential common
shares 4,296,444 3,503,680 4,028,217 3,544,882
========== ========== ========== ==========
Net Income per share $ .13 $ (.02) $ .21 $ .16
========== ========== ========== ==========
NOTE 5 - INVENTORIES
The major classes of inventories are as follows:
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Raw materials $ 3,355,597 $ 2,909,470
Work-in-process 1,892,040 825,631
Finished goods 653,519 1,204,018
Allowance for obsolete inventory (812,705) (1,075,748)
----------- -----------
$ 5,088,451 $ 3,863,371
=========== ===========
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
10
<PAGE>
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.
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. The $500,000
has been classified as long term debt at December 31, 1998 and current
portion of long term debt at September 30, 1999.
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 was 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 and current
portion of long term debt at September 30, 1999.
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 Preferred Series A Stock from 250,000
to 100,000 such shares.
On February 16, 1998, the Company authorized 25,000 shares of Preferred
Series B Convertible Stock at a par value of $.001 per share.
On February 25, 1998, the Company issued $2,500,000 of Preferred Series
B Convertible 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 Preferred Series B Convertible 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 Preferred Series B
Convertible Stock has the right at its option to convert to the
Company's Common Stock at $2.75 per share. The Preferred Series B
Convertible 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
11
<PAGE>
redeem the Preferred Series B Convertible Stock in full at 100% of
the face value plus accrued and unpaid dividends. The Preferred Series
B Convertible Stock contains certain financial covenants.
During the quarter ended June 30, 1999, 12,375 shares of the Company's
Preferred Series B Convertible Preferred Stock were converted into
450,000 shares of common stock at a conversion price of $2.75 per
share.
(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>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES
Teltronics:
Telecommunications $ 9,340,000 $ 6,389,000 $24,066,000 $17,631,000
AT Supply (distribution)(1) 0 0 0 1,278,000
ISI (3,000) 56,000 22,000 702,000
Elimination of Inter-
segment sales 0 (48,000) (73,000) (178,000)
----------- ----------- ----------- -----------
Total sales $ 9,337,000 $ 6,397,000 $24,015,000 $19,433,000
=========== =========== =========== ===========
DEPRECIATION AND AMORTIZATION
Teltronics:
Telecommunications $ 232,000 $ 192,000 $ 643,000 $ 598,000
AT Supply (distribution)(1) 0 0 0 1,000
ISI 130,000 14,000 389,000 54,000
----------- ----------- ----------- -----------
Total depreciation and
amortization $ 362,000 $ 206,000 $ 1,032,000 $ 653,000
=========== =========== =========== ===========
INTEREST AND FINANCING COSTS
Teltronics:
Telecommunications $ 158,000 $ 134,000 $ 515,000 $ 375,000
AT Supply (distribution)(1) 0 0 0 32,000
ISI 125,000 125,000 375,000 375,000
----------- ----------- ----------- -----------
Total interest and
financing costs $ 283,000 $ 259,000 $ 890,000 $ 782,000
=========== =========== =========== ===========
SEGMENT PROFITS
Teltronics:
Telecommunications $ 1,457,000 $ 643,000 $ 3,120,000 $ 639,000
AT Supply (distribution)(1) 0 0 0 6,000
ISI (833,000) (637,000) (2,200,000) (1,157,000)
----------- ----------- ----------- -----------
Total $ 624,000 $ 6,000 $ 920,000 $ (512,000)
Gain on dispositions 0 0 112,000 1,248,000
----------- ----------- ----------- -----------
Income before income taxes $ 624,000 $ 6,000 $ 1,032,000 $ 736,000
=========== =========== =========== ===========
SEGMENT ASSETS
Teltronics:
Telecommunications $14,783,000 $12,729,000 $14,783,000 $12,729,000
AT Supply (distribution)(1) 0 0 0 0
ISI 1,058,000 1,569,000 1,058,000 1,569,000
----------- ----------- ----------- -----------
Total segment assets $15,841,000 $14,298,000 $15,841,000 $14,298,000
=========== =========== =========== ===========
ACQUISITION OF PROPERTY
AND EQUIPMENT
Teltronics:
Telecommunications $ 59,000 $ 211,000 $ 325,000 $ 309,000
AT Supply (distribution)(1) 0 0 0 0
ISI 15,000 10,000 104,000 395,000
----------- ----------- ----------- -----------
Total acquisition of
property and equipment $ 74,000 $ 221,000 $ 429,000 $ 704,000
=========== =========== =========== ===========
</TABLE>
(1) AT Supply was sold on March 6, 1998.
13
<PAGE>
NOTE 9 - SUBSEQUENT EVENT
The remaining balance of the $200,000 note receivable from the sale of
AT Supply was paid in October, 1999.
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 and nine month periods ended September 30,
1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 50.6% 53.5% 50.3% 56.6%
------ ------ ------ ------
Gross profit 49.4% 46.5% 49.7% 43.4%
------ ------ ------ ------
Operating expenses:
General and administrative 11.7% 12.7% 12.4% 13.7%
Sales and marketing 17.1% 18.6% 18.0% 18.1%
Research and development 10.7% 12.8% 11.6% 11.2%
------ ------ ------ ------
39.5% 44.1% 42.0% 43.0%
------ ------ ------ ------
Income (loss) from operations 9.9% 2.4% 7.7% 0.4%
------ ------ ------ ------
Other income (expense):
Interest (2.3%) (3.2%) (2.8%) (3.2%)
Financing (0.7%) (0.8%) (1.0%) (0.8%)
Litigation costs (0.3%) (0.6%) (0.3%) (0.2%)
Gain on dispositions 0.0% 0.0% 0.5% 6.4%
Other 0.1% 2.3% 0.2% 1.2%
------ ------ ------ ------
(3.2%) (2.3%) (3.4%) 3.4%
------ ------ ------ ------
Income before income taxes 6.7% 0.1% 4.3% 3.8%
Income tax expense 0.0% 0.0% 0.0% 0.0%
------ ------ ------ ------
Net income 6.7% 0.1% 4.3% 3.8%
====== ====== ====== ======
</TABLE>
14
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998.
Sales were $9,337,000 for 1999 as compared to $6,397,000 for 1998.
This increase was due to improved Remote Maintenance and Vision sales.
Gross profit was $4,615,000 or 49.4% for 1999 as compared to $2,973,000
or 46.5% for 1998. The increase was due to a change in product mix,
with increased Remote Maintenance and Vision sales and reduced low
margin electronic manufacturing sales.
General and administrative expenses were $1,090,000 for 1999 as
compared to $810,000 for 1998. The increase was due to increased bad
debt expense and depreciation on tools and dies for the
Mentis(Registered TM) computer.
Sales and marketing expenses were $1,599,000 for 1999 as compared to
$1,190,000 for 1998. The increase is due to increased payroll,
commission, travel and marketing expenses.
Research and development expenses were $1,003,000 for 1999 as compared
to $822,000 for 1998. The increase was due to continued funding for
ISI and Teltronics' enhancements to Remote Maintenance and Vision
products.
Income from operations was $923,000 for 1999 as compared to $151,000
for 1998. This increase relates to increased sales and margins, offset
by increased expenses.
Other expense was $299,000 for 1999 as compared to expense of $145,000
for 1998. Interest and financing was $283,000 for 1999 as compared to
$259,000 for 1998.
Income tax expense was offset by a corresponding reduction in the
deferred tax asset valuation allowance.
The net income was $624,000 for 1999 as compared to a net income of
$6,000 for 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998.
Sales were $24,015,000 for 1999 as compared to $19,433,000 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 $11,927,000 or 49.7% for 1999 as compared to
$8,425,000 or 43.4% 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 $2,968,000 for 1999 as
compared to $2,648,000 for 1998. The increase was due to increased bad
debt expense and depreciation on tools and dies for the Mentis
(Registered TM) computer.
Sales and marketing expenses were $4,326,000 for 1999 as compared to
$3,517,000 for 1998. The increase is due to increased payroll,
commission, travel and marketing expenses.
Research and development expenses were $2,794,000 for 1999 as compared
to $2,178,000 for 1998. The increase was due to continued funding for
ISI and Teltronics' enhancements to Remote Maintenance and Vision
products.
15
<PAGE>
Income from operations was $1,840,000 for 1999 as compared to $82,000
for 1998. This increase relates to increased sales and margins, offset
by increased expenses and the sale of AT Supply in the first quarter of
1998.
Other expense was $807,000 for 1999 as compared to income of $653,000
for 1998. Interest and financing was $890,000 for 1999 as compared to
$782,000 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 recorded in the second quarter of 1998 and $112,000 recorded
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 $1,032,000 for 1999 as compared to a net income of
$736,000 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 by the Company reducing the maximum
availability to $5,500,000 due to the sale of AT Supply.
The Company's working capital ratio was 1.04:1 at September 30, 1999 as
compared to 1.08:1 at December 31, 1998. Net working capital was
$438,000 at September 30, 1999 as compared to $668,000 at December 31,
1998. Included in current liabilities was $3,308,000 and $3,998,000 of
borrowings under the Company's line of credit at September 30, 1999 and
December 31, 1998, respectively. During the second quarter of 1999,
$1,500,000 of Debentures and loans with due dates of April 30, 2000
were reclassified from long-term debt to current portion of long-term
debt.
Net cash increased by $668,000 for the nine months ended September 30,
1999 as compared to a net cash decrease of $315,000 for the nine months
ended September 30, 1998. Net cash flows from operating activities
totaled $2,263,000 for the nine months ended September 30, 1999 as
compared to cash flows used in operating activities of $184,000 for the
nine months ended September 30, 1998.
Accounts receivable increased by $282,000 for the nine months ended
September 30, 1999 as compared to an increase of $459,000 for the nine
months ended September 30, 1998. Inventories increased by $828,000 for
the nine months ended September 30, 1999 as compared to an increase of
$477,000 for the nine months ended September 30, 1998. This increase
relates to inventory purchases made for production scheduled for the
fourth quarter of 1999.
Net cash flows used in investing activities totaled $299,000 for the
nine months ended September 30, 1999 as compared to $547,000 for the
nine months ended September 30, 1998. Acquisition of property and
equipment totaled $429,000 for the nine months ended September 30, 1999
as compared to $704,000 for the nine months ended September 30, 1998.
The decrease was due to reduced expenditures for dies and molds for
ISI.
Cash flows used in financing activities totaled $1,297,000 for the nine
months ended September 30, 1999 as compared to cash flows provided by
financing activities of $416,000 for the nine months ended September
30, 1998. The Company repaid debt of $1,107,000 during the nine months
ended September 30, 1999 and borrowed $592,000 in the nine months ended
September 30, 1998.
16
<PAGE>
The Company entered into an agreement on February 25, 1998 with Sirrom
Capital. Pursuant to this agreement, the Company issued $2,500,000 of
Preferred Series B Convertible 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 $500,000 has been classified as long-term debt
at December 31, 1998 and current portion of long term debt at September
30, 1999.
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 and current
portion of long-term debt at September 30, 1999.
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.
17
<PAGE>
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.
The Company has leased a new computer system that is year 2000
compliant. This system cost $570,000 and was capitalized in 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 was completed
by April 30, 1999, which was 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 expensed as of
September 30, 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 additional testing scheduled
for the fourth quarter of 1999 suggests that there is a significant
risk that the computer system, products, customers 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
18
<PAGE>
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,
customer and vendors systems, 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.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June, 1999, litigation was commenced against the Company and its ISI
subsidiary in U.S. Federal District Court, District of Delaware, by
Xybernaut Corporation alleging patent infringement. The litigation was
dismissed with prejudice and without costs on the merits in July, 1999.
In August, 1999, a former employee commenced an action against the
Company in the Circuit Court, Twelfth Judicial Circuit, Sarasota
County, Florida seeking damages for alleged violations of the Florida
Worker's Compensation law and the Family and Medical leave Act. An
Answer with Affirmative Defenses was served and the action will be
vigorously defended.
In September, 1999, the Company and its majority owned subsidiary, ISI,
were served with a Counterclaim in connection with litigation commenced
in July, 1998 by the Company and ISI in the United States District
Court For the Middle District of Florida against two former employees
and entities they control ("Defendants"). The Company's and ISI's
Complaint seeks damages and equitable relief against the Defendants for
breach of fiduciary duties and contract obligations; fraud; conversion;
theft of trade secrets; interference with contract and business
relations; and violations of federal and state anti-fraud statutes.
The Counterclaim seeks damages in excess of $3,000,000 for alleged
interference with contracts, breach of employment contracts and trade
slander. A Reply was served to the Counterclaim. The Company has
meritorious defenses to the Counterclaim which will be vigorously
defended.
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
On July 15, 1999, the Company entered into an agreement with Teleco,
Inc. to distribute the Company's switching system.
ITEM 6A. EXHIBITS
27 Financial Data Schedule . . . . . . . . . . . . . . . . . .(a)
ITEM 6B. REPORTS ON FORM 8-K - None
- ----------------------
(a) Filed as an Exhibit to this Quarterly Report on Form 10-Q
for the Nine month period ended September 30, 1999.
20
<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.
October 26, 1999 Ewen R. Cameron
President & Chief Executive Officer
October 26, 1999 Mark E. Scott
Vice President Finance, Secretary, Treasurer
and Principal Accounting Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 804,163
<SECURITIES> 0
<RECEIVABLES> 5,147,522
<ALLOWANCES> 220,000
<INVENTORY> 5,088,451
<CURRENT-ASSETS> 11,006,274
<PP&E> 4,996,384
<DEPRECIATION> 1,032,131
<TOTAL-ASSETS> 15,840,781
<CURRENT-LIABILITIES> 10,567,886
<BONDS> 1,629,466
0
113
<COMMON> 4,056
<OTHER-SE> 3,639,260
<TOTAL-LIABILITY-AND-EQUITY> 15,840,781
<SALES> 24,015,433
<TOTAL-REVENUES> 24,015,433
<CGS> 12,088,119
<TOTAL-COSTS> 9,977,713
<OTHER-EXPENSES> (83,007)
<LOSS-PROVISION> 110,000
<INTEREST-EXPENSE> 890,390
<INCOME-PRETAX> 1,032,218
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,032,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,032,218
<EPS-BASIC> .22
<EPS-DILUTED> .21
</TABLE>
