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Previous: TELTONE CORP, 4, 2000-11-13 |
Next: TELTRONICS INC, 10-Q, EX-10, 2000-11-13 |
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, 2000.
[ ]
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 November 6, 2000 there were 4,761,291 shares of the Registrant's Common Stock outstanding.
1
INDEX
PAGE
PART I. FINANCIAL INFORMATION 3-15
ITEM 1.
FINANCIAL STATEMENTS
3-15Consolidated Balance Sheets at September 30, 2000 and December 31, 1999. 3-4 Consolidated Statements of Operations for the Three Months and Nine Months
ended September 30, 2000 and 1999.
5Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 2000 and 1999.
6-7Notes to Interim Consolidated Financial Statements 8-15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
15-19
PART II.
OTHER INFORMATION
19-20
ITEM 1.
LEGAL PROCEEDINGS
19ITEM 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 20 ITEM 6B. REPORTS ON FORM 8-K 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
2000December 31,
1999(Unaudited) Current Assets: Cash $ 345,143 $ 954,764 Accounts receivable, net of allowance for doubtful accounts
of $248,200 at September 30, 2000 and $210,000 at
December 31, 1999.
8,040,484
4,754,896Inventories, net 11,366,940 5,319,765 Prepaid expenses and other current assets 306,392 236,034 Total current assets
20,058,959 11,265,459
Property and equipment, net
5,380,493
3,872,018Goodwill and other intangible assets 1,356,877 106,914 Other assets 382,567 550,450
Total assets
$
27,178,896
$
15,794,841
The accompanying notes are an integral part of these consolidated financial statements.
3
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30,
2000December 31,
1999(Unaudited) Current Liabilities: Current portion of long-term debt $ 4,538,479 $ 5,266,159 Note payable 6,884,355 0 Current portion of capital lease obligations 313,563 326,663 Accounts payable 5,572,040 3,151,492 Accrued expenses and other current liabilities 3,329,711 981,030 Deferred income 1,721,472 734,856 Total current liabilities 22,359,620 10,460,200 Long-term liabilities: Long-term debt, net of current portion 1,000,000 1,250,000 Capital lease obligations, net of current portion 29,926 259,662 Total long-term liabilities 1,029,926 1,509,662 Shareholders' equity: Common stock, $.001 par value, 40,000,000 shares
authorized, 4,740,596 and 4,054,522 issued
and outstanding at September 30, 2000 and
December 31, 1999, respectively.
4,742
4,056Non-voting common stock, $.001 par value,
5,000,000 shares authorized, zero shares
issued and outstanding.
0
0Preferred Series A stock, $.001 par value, 100,000
shares authorized, 100,000 shares issued and out-
standing at September 30, 2000 and December 31, 1999.
100
100Preferred Series B Convertible stock, $.001 par value,
25,000 shares authorized, 12,625 shares issued
and outstanding at September 30, 2000 and
December 31, 1999.
13
13Additional paid-in capital 18,788,375 16,624,672 Accumulated deficit (15,003,880) (12,803,862) Total shareholders' equity 3,789,350 3,824,979 Total liabilities and shareholders' equity $ 27,178,896 $ 15,794,841
The accompanying notes are an integral part of these consolidated financial statements.
4
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended
September 30,Nine Months Ended
September 30,2000 1999 2000 1999 Net Sales $ 13,613,796 $ 9,336,501 $ 27,611,292 $ 24,015,433 Cost of goods sold 6,684,521 4,721,143 15,366,165 12,088,119 Gross profit 6,929,275 4,615,358 12,245,127 11,927,314 Operating expenses: General and administrative 1,431,825 1,090,462 3,549,581 2,968,183 Sales and marketing 2,425,311 1,598,870 5,553,885 4,325,368 Research and development 1,670,392 1,003,084 3,702,915 2,794,162 5,527,528 3,692,416 12,806,381 10,087,713 Income (loss) from operations 1,401,747 922,942 (561,254) 1,839,601 Other income (expense): Interest (436,931) (215,279) (865,493) (651,667) Financing (96,068) (67,362) (241,945) (238,723) Litigation costs (44,967) (29,043) (372,849) (77,220) Gain on dispositions 0 0 0 111,614 Other (20,534) 12,924 1,408 48,613 (598,500) (298,760) (1,478,879) (807,383) Income (loss) before income
taxes
803,247
624,182
(2,040,133)
1,032,218Income taxes (46,261) 0 (46,261) 0 Net income (loss) 756,986 624,182 (2,086,394) 1,032,218 Dividends on Preferred Series
B Convertible Stock
(37,875)
(55,015)
(113,625)
(189,890)Net income (loss) attributable
to Common Shareholders
$
719,111
$
569,167
$
(2,200,019)
$
842,328Net income (loss) per share: Basic $ .15 $ .14 $ (.50) $ .22 Diluted $ .14 $ .13 $ (.50) $ .21
The accompanying notes are an integral part of these consolidated financial statements.
5
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 2000 1999 Cash Flows from Operating Activities: Net income (loss) $ (2,086,394) $ 1,032,218 Adjustments to reconcile net income (loss) to net cash
flows provided by operating activities:Provision for doubtful accounts 38,200 110,000 Provision for obsolete inventories 357,046 (296,603) Depreciation and amortization 1,263,290 1,032,131 Amortization of deferred financing costs 77,835 108,286 Amortization of goodwill and intangibles 40,173 6,242 Gain on dispositions 0 (111,614) Changes in operating assets and liabilities, net of
acquisitions and dispositions:Accounts receivable (2,712,790) (281,559) Inventories (691,322) (828,477) Prepaid expenses and other current assets (89,190) 121,275 Accounts payable 2,336,756 247,408 Accrued expenses and other liabilities 794,642 483,215 Deferred income 958,470 640,680 Net cash flows provided by operating activities 286,716 2,263,202 Cash Flows from Investing Activities: Acquisition of property and equipment (404,853) (429,102) Increase in goodwill and other intangible assets (27,333) 0 Decrease in other assets 96,330 76,328 Proceeds from dispositions 0 111,614 Acquisition of Cascade Technology Corporation 0 (57,500) Cash received in acquisition of Telident, Inc. net assets 762,321 0 Net cash flows provided by (used in) investing activities 426,465 (298,660) Cash Flows from Financing Activities: Net (repayment) proceeds from line of credit (147,423) (689,778) Loan proceeds 0 3,853 Principal repayments of loans, notes and leases (1,072,254) (421,031) Net proceeds from sale of common stock 10,500 0 Dividends on Preferred Series B Convertible Stock (113,625) (189,890) Net cash flows used in financing activities (1,322,802) (1,296,846) Net increase (decrease) in cash (609,621) 667,696 Cash - beginning of period 954,764 136,467 Cash - end of period $ 345,143 $ 804,163
The accompanying notes are an integral part of these consolidated financial statements.
6
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - Continued
Nine Months Ended September 30, 2000 1999
Supplemental Non-cash Financing and
Investing Activities:Acquisition of assets of Harris 20-20 for a note payable $ 6,884,355 $ 0 Acquisition of assets of Telident, Inc. for common stock $ 2,073,626 $ 0 Employer Stock match 401(k) $ 80,264 $ 0 Conversion of Preferred Stock to Common Stock $ 0 $ 1,237,500 Acquisition of assets of Cascade Technology Corporation
for common stock
$
0
$
181,865Lease of fixed assets $ 0 $ 73,560 Issuance of non-interest bearing note $ 0 $ 47,913
The accompanying notes are an integral part of these consolidated financial statements.
7
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 produces systems for the hearing impaired.
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 85% owned subsidiary Interactive Solutions, Inc. ("ISI"). 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 and nine month periods ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. These consolidated financial statements should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended December 31, 1999, as presented in the Company's annual report on Form 10-K and other reports filed with the Securities and Exchange Commission.
NOTE 2 - ACQUISITIONS
Telident, Inc.
On May 18, 2000, the Company acquired substantially all of the assets and assumed certain liabilities of Telident, Inc., a Minnesota corporation ("Seller") located in Minneapolis, Minnesota. The Company acquired all of the Seller's rights to and in certain technology for the identification or location of emergency 911 telephone calls.
The Company delivered 662,500 shares of its $.001 par value voting common stock for substantially all of the assets of the Seller. Ten percent of the shares were placed in escrow for ninety days to cover any indemnity claims of the Company. Registration of the shares on Form S-4 was declared effective by the Securities and Exchange Commission April 20, 2000.
The acquisition has been accounted for using the purchase method of accounting and operations of the acquired business are included in the Company's results of operations and financial position subsequent to the date of acquisition. The pro forma operating results for 2000 assuming this acquisition had been consummated as of January 1, 2000, would not be materially different from reported operating results. 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:
8
Cash $ 762,321 Accounts receivable, net 610,998 Inventory, net 260,757 Prepaid expenses and other current assets 26,168 Property and equipment, net 240,234 Other assets 6,282 Goodwill and identifiable intangible assets 474,937 Accounts payable (76,792) Accrued expenses and other current liabilities (200,143) Deferred Income (28,146) Long-Term debt (2,990) Net assets acquired $ 2,073,626
The excess cost over fair value of the net assets acquired (goodwill) and identifiable intangible assets are being amortized on a straight-line basis as follows:
Amount Life Customer List $ 142,481 5 years Patent 142,481 14 years, 4 months Goodwill 189,975 15 years
Harris Corporation 20-20 Switching Product Line
On June 30, 2000, the Company acquired certain equipment, inventory and intellectual property rights related to the 20-20 switching technology and associated products of Harris Corporation Communications Products Division located in Melbourne, Florida ("Harris"), under an Asset Sale Agreement dated June 30, 2000 ("Agreement").
Under the Agreement, the Company acquired the assets and assumed on-going support obligations for certain of Harris' Communications Products Division customers in consideration for $6,884,355 paid for with a promissory note in the principal amount and paying interest at ten and one-half percent (10.5%) per annum ("Note"). The Note provided for interest at twelve and one-half percent (12.5%) per annum effective August 14, 2000. The Note is secured by a first lien on the Assets and a lien on the Company's other assets.
The Note was amended August 17, 2000 to extend the maturity to September 29, 2000 and was further amended October 30, 2000. Under this amendment, the principal and capitalized interest total was stated at $7,096,623 and the due date was changed to December 31, 2000. Interest accrues at 10.5% effective October 4, 2000 and is paid monthly starting November 1, 2000. The Company has received shareholder approval to offer and sell common stock and warrants through a private placement and is negotiating equity and debt financing to refinance payment of the Note and fund working capital requirements. There can be no assurance that these negotiations will be successful.
The acquisition has been accounted for using the purchase method of accounting and results of operations of the acquired net assets are included in the Company's results of operations and financial position subsequent to the date of acquisition. 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:
9
Inventory, net $ 5,452,142 Property and equipment, net 2,130,507 Goodwill and identifiable intangible assets 787,867 Note payable (6,884,355) Accounts payable (1,434,161) Accrued expenses and other current liabilities (52,000) Net assets acquired $ 0
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.
The excess cost over fair value of the net assets acquired (goodwill) and identifiable intangible assets are being amortized on a straight-line basis as follows:
Amount Life Customer List $ 236,360 5 years Patent and trade secrets on Cumulus call center software
and 20-20 switching product line
236,360
10 yearsGoodwill 315,147 15 years
The following selected pro forma consolidated financial data are unaudited. The pro forma data for the nine months ended September 30, 2000 and 1999 are based upon the historical statement of operations of the Company and reflects the pro forma effects of the acquisition of the Harris 20-20 Switching Technology as if the acquisition had occurred at the beginning of the periods presented.
The pro forma consolidated financial data are based upon certain assumptions and estimates and are not necessarily indicative of the results which would actually have been attained if the transaction had been consummated at the beginning of the indicated periods, or which may be attained in the future.
In the opinion of Teltronics' management, all adjustments necessary to present fairly such pro forma consolidated financial data, as set forth in the accompanying explanatory notes, have been made.
The pro forma consolidated financial data should be read in conjunction with the consolidated financial statements and related notes thereto as presented in the Company's annual report on Form 10-K for the year ended December 31, 1999, its quarterly report on Form 10-Q for the period ended June 30, 2000, its Form 8-K filed on September 13, 2000 and its other filings with the Securities and Exchange Commission.
The Company employed approximately 70 of the 300 personnel employed by Harris Corporation Communications Product Division. The Company expects to improve margins by manufacturing the products instead of outsourcing the manufacturing. The Company will utilize its existing infrastructure to support the product line. In addition, the Company does not expect to incur such 2000 expenses as capitalized software amortization of $21,873,000, loss on disposal of plant and equipment of $6,886,000, loss on disposal of investments of $2,502,000 and allowances for bad debt of $2,655,000. As a result, the Company does not believe the pro forma data are representative of the operating results that will be achieved in the future.
10
Nine Months Ended
September 30,2000 1999 Net sales $ 50,722,292 $ 81,058,433 Net income (loss) (45,122,394) (12,160,782) Net loss per share - Basic $ (10.30) $ (3.27) Diluted $ (10.30) $ (3.07)
Cascade Technology Corporation
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 DiscoveryMATE panel link display, open sales orders and certain other assets. 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 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 repaid in June, 1999.
The acquisition has been accounted for using the purchase method of accounting and results of operations of Cascade are included from the date of acquisition. 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 Property and equipment 71,000 Goodwill and identifiable intangible assets 116,278 Notes payable (47,913) Net assets acquired $ 239,365
The pro forma operating results for 1999 assuming this acquisition had been consummated as of January 1, 1999, would not be materially different from reported operating results. The excess cost over fair value of the net assets acquired (goodwill) and identifiable intangible assets are being amortized on a straight-line basis as follows:
Amount Life Customer List $ 35,000 5 years Patent 35,000 14 years, 7 months Goodwill 46,278 15 years
11
NOTE 3 - DISPOSITIONS
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, and a contingent consideration payable in one year of $112,000. The Company recognized a gain of $100,000 during the quarter ended June 30, 1998 and $111,614 during the quarter ended March 31, 1999.
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 (loss), 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. Potential common shares for the nine months ended September 30, 2000 were anti-dilutive and were not included in the calculation of diluted net loss per share. Potential common shares for 2000 and 1999 relating to Preferred Series B Convertible Stock were anti-dilutive and were not included in the calculation of diluted net income (loss) per share.
The following unaudited table sets forth the computation of basic and diluted net income (loss) per share:
Three Months Ended
September 30,Nine Months Ended
September 30,2000 1999 2000 1999 Basic Net income (loss) $ 756,986 $ 624,182 $ (2,086,394) $ 1,032,218 Dividends on Preferred Series B
Convertible Stock
(37,875)
(55,015)
(113,625)
(189,890)Net income (loss) attributable
to Common Shareholders
$ 719,111
$ 569,167
$ (2,200,019)
$ 842,328Weighted average shares
outstanding
4,730,090
4,054,522
4,393,444
3,773,683Net income (loss) per share $ .15 $ .14 $ (.50) $ .22 Diluted Net income (loss) $ 756,986 $ 624,182 $ (2,086,394) $ 1,032,218 Dividends on Preferred Series B
Convertible Stock
(37,875)
(55,015)
(113,625)
(189,890)Net income (loss) attributable
to Common Shareholders
$ 719,111
$ 569,167
$ (2,200,019)
$ 842,328Weighted average shares
outstanding
4,730,090
4,054,522
4,393,444
3,773,683Net effect of dilutive stock
options using the treasury
stock method
178,677
160,152
0
134,541Net effect of dilutive warrants
using the treasury stock
method
70,712
81,770
0
119,993Dilutive potential common
shares
4,979,479
4,296,444
4,393,444
4,028,217Net income (loss) per share $ .14 $ .13 $ (.50) $ .21
12
NOTE 5 - INVENTORIES
The major classes of inventories are as follows:
September 30,
2000December 31,
1999(Unaudited) Raw materials $ 9,355,663 $ 3,307,549 Work-in-process 1,781,125 1,931,809 Finished goods 1,290,268 783,478 Provision for obsolete inventories (1,060,116) (703,071) $ 11,366,940 $ 5,319,765
NOTE 6 - LONG TERM DEBT
On February 25, 1998, the Company issued $1,750,000 of Subordinated Secured Debentures (the "Debentures"). The Debentures are due February 13, 2002. 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.
On May 12, 2000 and June 30, 2000, the Company amended and restated the $1,750,000 of Subordinated Secured Debentures Agreement. The Company repaid $750,000 of the Debentures on September 29, 2000 and $250,000 on October 31, 2000 and the remaining $750,000 has a revised maturity of December 30, 2000.
On February 25, 1998, the Company entered into senior Secured Loans ("Loans") for $1,000,000 and $280,000. Interest is paid quarterly starting May 15, 1998. On May 12, 2000, the Company 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 February 13, 2002. The interest rate is 12%. 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 holding period beginning on the date of issuance. The Loans contain certain financial covenants, including restrictions which could effect future funding of ISI by the Company.
NOTE 7 - SHAREHOLDERS' EQUITY
(A) 1995 Incentive Stock Option Plan - On October 23, 2000, the Shareholders ratified an increase in the number of common shares available for issuance for the Incentive Stock Option Plan from 1,250,000 to 2,500,000 shares. The shares were registered on Form S-8 on September 8, 2000.
(B) Employee Stock Purchase Plan - On October 23, 2000, the Shareholders ratified adoption of an Employee Stock Purchase Plan, under which the employees of the Company are provided the opportunity to acquire common shares of the Company at 85% of fair market value. The Shareholders authorized 500,000 common shares to be available for issuance under the Employee Stock Purchase Plan. The shares were registered on Form S-8 on September 18, 2000.
13
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. Company management evaluates performance based on segment profit, which is net income (loss) before taxes, excluding nonrecurring gains or losses.
The following table presents information about reportable segment operations and assets.
Three Months Ended
September 30,Nine Months Ended
September 30,2000 1999 2000 1999 Net Sales Teltronics $ 13,393,000 $ 9,340,000 $ 27,105,000 $ 24,066,000 ISI 221,000 (3,000) 507,000 22,000 Elimination of Intersegment sales 0 0 0 (73,000) Total sales $ 13,614,000 $ 9,337,000 $ 27,612,000 $ 24,015,000
Depreciation and AmortizationTeltronics $ 379,000 $ 232,000 $ 871,000 $ 643,000 ISI 131,000 130,000 392,000 389,000 Total depreciation and
amortization
$ 510,000
$ 362,000
$ 1,263,000
$ 1,032,000
Interest and Financing CostsTeltronics $ 533,000 $ 158,000 $ 1,107,000 $ 515,000 ISI 0 125,000 0 375,000 Total interest and financing costs 533,000 283,000 1,107,000 890,000 Segment Profits (Losses) Teltronics $ 1,205,000 $ 1,457,000 $ (602,000) $ 3,120,000 ISI (402,000) (833,000) (1,438,000) (2,200,000) Total 803,000 624,000 (2,040,000) 920,000 Gain on dispositions 0 0 0 112,000 Net income (loss) before taxes $ 803,000 $ 624,000 $ (2,040,000) $ 1,032,000 Segment Assets Teltronics $ 26,455,000 $ 14,783,000 $ 26,455,000 $ 14,783,000 ISI 724,000 1,058,000 724,000 1,058,000 Total segment assets $ 27,179,000 $ 15,841,000 $ 27,179,000 $ 15,841,000 Acquisition of Property and
EquipmentTeltronics $ 219,000 $ 59,000 $ 382,000 $ 325,000 ISI 4,000 15,000 23,000 104,000 Total acquisition of property
and equipment
$ 223,000
$ 74,000
$ 405,000
$ 429,000
NOTE 9 - SUBSEQUENT EVENTS
On October 23, 2000, at a special Meeting of Stockholders, the following was approved by the Shareholders:
1. The offering and sale of $8,000,000 - $10,000,000 of common stock and common stock warrants through a private placement. The private placement is expected to be completed in ninety days at a
14
discount to the common stock price. The Company expects to use the proceeds for working capital and general corporate purposes, including payment of the note payable to Harris Corporation of $7,096,623.
2. The number of common shares available for issuance for the 1995 Incentive Stock Option Plan was increased from 1,250,000 to 2,500,000 shares.
3. The Employee Stock Purchase Plan covering 500,000 shares was ratified.
On October 28, 2000, the Company renewed its bank line of credit with The CIT Group/Business Credit, Inc. until October 28, 2002. Terms of the bank line of credit are being renegotiated.
On October 30, 2000 the Note payable to Harris Corporation was amended. The principal and capitalized interest total was $7,096,623 and the due date was changed to December 31, 2000. Interest accrues at 10.5% effective October 4, 2000 and is paid monthly starting November 1, 2000. The Company has received shareholder approval to offer and sell common stock and warrants through a private placement and is negotiating equity and debt financing to refinance payment of the Note and fund working capital requirements. There can be no assurance that these negotiations will be successful.
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 maintain adequate liquidity, 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 Company continues the integration of the acquisition of the 20-20 switching technology from the Harris Corporation Communications Product Division. The inventory has been transferred to the Company's facility in Sarasota. The Company is now in a position to manufacture the 20-20 switch.
The increase in sales during the last quarter was primarily due to the acquisition of the 20-20 switching technology. The Company was able to ship upgrades to customers from the inventory it acquired and achieved sales of $6,010,000 since the acquisition.
The Company has performed work under contracts from Harris for the New York Board of Education and Department of Corrections. The Company is in the process of having these contracts assigned.
Due to the large installed base of 20-20 switches in Mexico, the Company has taken the decision to create a subsidiary in Mexico City. The Company intends to maintain and support the installed base, which includes major installations with the government. It is also the Company's intention to continue to sell and install new systems.
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The acquisition of Telident has also been successful with this product line achieving sales of $1,158,000 since the acquisition.
The other product lines of Teltronics continue to experience slow sales, with the exception of the electronic manufacturing business, which continues to increase sales. However the margins in electronic manufacturing are lower than the margin the Company achieves with its other product lines.
The Company continues to focus on its established customer base for its Intelligent Systems Management products. The Company will also offer its Vision switch to the 20-20 switch distribution channel, which is complimentary.
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, 2000 and 1999.
Three Months Ended
September 30,Nine Months Ended
September 30,2000 1999 2000 1999 Net sales 100.0%
100.0% 100.0% 100.0% Cost of goods sold 49.1% 50.6% 55.7% 50.3% Gross profit 50.9% 49.4% 44.3% 49.7% Operating expenses: General and administrative 10.5% 11.7% 12.9% 12.4% Sales and marketing 17.8% 17.1% 20.1% 18.0% Research and development 12.3% 10.7% 13.4% 11.6% 40.6% 39.5% 46.4% 42.0% Income (loss) from operations 10.3% 9.9% (2.1%) 7.7% Other income (expense): Interest (3.2%) (2.3%) (3.1%) (2.8%) Financing (0.7%) (0.7%) (0.9%) (1.0%) Litigation costs (0.3%) (0.3%) (1.3%) (0.3%) Gain on dispositions 0.0% 0.0% 0.0% 0.5% Other (0.2%) 0.1% 0.0% 0.2% (4.4%) (3.2%) (5.3%) (3.4%) Income (loss) before income taxes 5.9% 6.7% (7.4%) 4.3% Income taxes (0.3%) 0.0% (0.2%) 0.0% Net income (loss) 5.6% 6.7% (7.6%) 4.3%
Three Months Ended September 30, 2000 and 1999.
Sales were $13,614,000 for 2000 as compared to $9,337,000 for 1999. The increase was due to strong sales from the Harris and Telident acquisitions and electronic manufacturing.
Gross profit was $6,929,000 or 50.9% for 2000 as compared to $4,615,000 or 49.4% for 1999. The increase in gross profit dollars was due to increased sales from the Harris and Telident acquisitions.
General and administrative expenses were $1,432,000 for 2000 as compared to $1,090,000 for 1999. The increase was due to increased payroll, benefit plan and bad debt expenses.
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Sales and marketing expenses were $2,425,000 for 2000 as compared to $1,599,000 for 1999. The increase is due to increased payroll, travel and marketing expenses, including the acquisitions of Telident and Harris.
Research and development expenses were $1,670,000 for 2000 as compared to $1,003,000 for 1999. This increase related to the acquisition of Telident and Harris and increased expenses for Intelligent Systems Management and Vision products.
Income from operations was $1,402,000 for 2000 as compared to $923,000 for 1999. This increase relates to increased sales and gross profit, offset by increased expenses and one time acquisition costs.
Other expense was $598,000 for 2000 as compared to $299,000 for 1999. Interest and financing was $533,000 for 2000 as compared to $283,000 for 1999. This increase relates to borrowings for the Harris acquisition.
Income tax expense for 1999 was offset by a corresponding reduction in the deferred tax asset valuation allowance.
The net income was $757,000 for 2000 as compared to $624,000 for 1999.
Nine Months Ended September 30, 2000 and 1999.
Sales were $27,611,000 for 2000 as compared to $24,015,000 for 1999. The increase was due to strong sales from the Harris and Telident acquisitions and electronic manufacturing sales.
Gross profit was $12,245,000 or 44.3% for 2000 as compared to $11,927,000 or 49.7% for 1999. The decrease in gross profit percentage was due to product mix, with increased low margin electronic manufacturing sales and cost increases on selected components.
General and administrative expenses were $3,550,000 for 2000 as compared to $2,968,000 for 1999. This increase was due to increased payroll, benefit plan and bad debt expenses.
Sales and marketing expenses were $5,554,000 for 2000 as compared to $4,326,000 for 1999. The increase was due to increased payroll and benefit plan expenses, including the acquisitions of Telident and Harris.
Research and development expenses were $3,703,000 for 2000 as compared to $2,794,000 for 1999. The increase related to the acquisitions of Telident and Harris and increased expenses for ISM and Vision products.
Loss from operations was $561,000 for 2000 as compared to income from operations of $1,840,000 for 1999. This decrease relates to lower gross profits, increased expenses and one time acquisition costs.
Other expense was $1,479,000 for 2000 as compared to $807,000 for 1999. The increase relates to litigation costs for the ISI lawsuit discussed in legal proceedings. Interest and financing was $1,107,000 for 2000 as compared to $890,000 for 1999. The increase relates to borrowings for the Harris acquisition.
Income tax expense for 1999 was offset by a corresponding reduction in the deferred tax asset valuation allowance.
The net loss was $2,086,000 for 2000 as compared to a net income of $1,032,000 for 1999.
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LIQUIDITY AND CAPITAL RESOURCES
Cash requirements were provided by operations, borrowings from The CIT Group/Business Credit ("CIT") and the acquisition of Telident, Inc.
The Company's working capital ratio was .90:1 at September 30, 2000 as compared to 1.08:1 at December 31, 1999. Net working capital was a deficit of $2,301,000 at September 30, 2000 as compared to $805,000 at December 31, 1999. The reduction in working capital relates primarily to the Harris acquisition completed on June 30, 2000 and the net loss incurred in the first nine months of 2000.
Net cash decreased by $610,000 for the nine months ended September 30, 2000 as compared to an increase of $668,000 for the nine months ended September 30, 1999. Net cash flows provided by operating activities were $287,000 for the nine months ended September 30, 2000 as compared to $2,263,000 for the nine months ended September 30, 1999.
Accounts receivable increased by $3,286,000 as of September 30, 2000. The increase was due to strong sales. Inventories increased by $6,047,000 as of September 30, 2000. This increase was primarily due to the acquisition of Telident and the Harris 20-20 switching product line. Accounts payable increased by $2,421,000 as of September 30, 2000. The increase was due to the Telident and Harris acquisitions. Accrued expenses and other current liabilities increased $2,349,000 as of September 30, 2000. The increase is due to the acquisition of Telident and the Harris 20-20 switching product line.
Net cash flows provided by investing activities totaled $426,000 for the nine months as compared to net cash used in investing activities of $299,000 for the nine months ended September 30, 1999. Acquisition of property and equipment totaled $405,000 for the nine months ended September 30, 2000 as compared to $429,000 for the nine months ended September 30, 1999. This decrease related to a reduction in capital expenditures.
Cash flows used in financing activities totaled $1,323,000 for the nine months ended September 30, 2000 as compared to $1,297,000 for the nine months ended September 30, 1999. The Company repaid debt of $1,072,000 during the nine months ended September 30, 2000.
On May 12, 2000 and June 30, 2000, the Company amended and restated the $1,750,000 of Subordinated Secured Debentures Agreement. The Company repaid $750,000 of the Debentures on September 29, 2000 and $250,000 on October 31, 2000 and the remaining $750,000 has a revised maturity of December 30, 2000.
On May 12, 2000, the Company 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 February 13, 2002. The interest rate is 12%.
The Company delivered a $6,884,355 Note with interest accruing at 10.5% to acquire the Harris 20-20 switching product line. The repayment schedule was $3,442,178 of principal due August 14, 2000 and $3,442,177 of principal and accrued interest due on September 29, 2000. The Note is secured by a first lien on the assets acquired and a lien on the Company's other assets subject to liens previously granted by the Company to its other lenders. After August 14, 2000, the interest rate increased to 12.5%.
The Note was amended August 17, 2000 to extend the maturity to September 29, 2000 and was further amended on October 30, 2000, under this amendment, the principal and capitalized interest total was stated at $7,096,623 and the due date was changed to December 31, 2000. Interest accrues at 10.5% effective October 4, 2000 and is paid monthly starting November 1, 2000. The Company has received shareholder approval to offer and sell common stock and warrants through a private placement and is
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negotiating equity and debt financing to refinance payment of the Note and fund working capital requirements. There can be no assurance that these negotiations will be successful.
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, or to the Company's knowledge, threatened that, if determined adversely, would have a material adverse effect upon the business or financial condition of the Company.
In August, 1999, a former employee commenced an action against Teltronics 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, Teltronics and its subsidiary, ISI, were served with a counterclaim in connection with litigation commenced in July, 1998, by Teltronics and ISI in the United States District Court for the Middle District of Florida against two former employees and entities they control. Teltronics' and ISI's complaint sought damages and equitable relief against the defendants for breach of fiduciary duties and contract obligations; fraud; conversion; theft of trade secrets; interference with contracts and business relations; and violations of federal and state anti-fraud statutes. During the trial in May, 2000, certain claims of Teltronics and ISI against the defendants and the counterclaims made by the defendants against Teltronics and ISI were withdrawn. After trial of the remaining claims of Teltronics and ISI against the defendants, the jury rendered a verdict that awarded Teltronics and ISI approximately $16 million from the defendants. In August, 2000, the Court ordered a new trial of the damages owed to Teltronics and ISI which was scheduled to commence in October, 2000.
In early November, 2000, Teltronics, ISI and the defendants entered into a Settlement Agreement under which the defendants agreed to pay Teltronics $700,000 in cash and deliver restricted shares of the voting common stock of Intelliworxx in escrow ("Intelliworxx Shares") which could result in Teltronics receiving an additional $4,550,000 over two years upon resale of the Intelliworxx Shares based upon the price of Intelliworxx Shares at time of resale. The Settlement payments are conditioned upon closing of a private equity placement by Intelliworxx in December, 2000 which if not consummated, could result in a new trial in February, 2001 of the damages owed to Teltronics and ISI by the defendants. There can be no assurance that the Intelliworxx private placement will occur or if it occurs that Teltronics will be successful in collecting the Settlement payments agreed to be paid by the defendants.
In May, 2000, the Company was named in an action commenced in the Circuit Court for the County of St. Clair, Michigan by two former shareholders of Cascade Technology Corporation ("Cascade") seeking release of 52,117 shares of the Company's common stock held in escrow ("Escrow Stock") and damages, interest and attorneys fees. The Escrow Stock was issued in February, 1999 and placed in escrow to secure indemnification rights of the Company under its purchase of certain rights and technology from one of the former shareholders of Cascade. The Company served an Answer with affirmative defenses and a counterclaim seeking delivery of the Escrow Stock to the Company.
ITEM 2.
CHANGES IN SECURITIES - NoneITEM 3. DEFAULTS UPON SENIOR SECURITIES - None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None ITEM 5. OTHER INFORMATION - None
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ITEM 6A.
EXHIBITS10 Amended Agreement Dated October 30, 2000
between Harris Corporation and Teltronics, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(a)27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a)
ITEM 6B.
REPORTS ON FORM 8-KThe Company filed a Form 8-K on July 12, 2000 and a Form 8/K-A on September 13, 2000. ____________________________ (a) Filed as an Exhibit to this Quarterly Report on Form 10-Q for the nine month period
ended September 30, 2000.
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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. November 9, 2000 /s/ Ewen R. Cameron Ewen R. Cameron
President & Chief Executive OfficerNovember 9, 2000 /s/ Mark E. Scott Mark E. Scott
Vice President Finance, Secretary, Treasurer
and Principal Accounting Officer
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