Item 1. BUSINESS
GENERAL
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") the Company has also engaged in the design and manufacturing of a portable hardware/software device which allows two-way communication between speaking/hearing impaired individuals and hearing individuals. See BUSINESS - ISI SEGMENT.
In October 1995, the Company formed a subsidiary, AT Supply, Inc. ("AT Supply"), to engage in sales and distribution of telecommunications hardware, software and related products. The Company, through its wholly-owned subsidiary TTG Acquisition Corp. owned a majority of the outstanding Common Stock of AT Supply. On March 6, 1998, the Company sold the assets and transferred the liabilities of AT Supply to a corporation owned by two former executive officers of AT Supply.
On April 18, 1996, ISI acquired certain assets and technology from Interactive Solutions, LLC, a Kentucky limited liability company ("Interactive") and its three members ("Members") pursuant to an Agreement of Sale dated March 27, 1996 as amended by an Amendment to Agreement of Sale dated April 18, 1996 ("Agreement"). Under the Agreement, ISI acquired all of Interactive's and its Members' rights to and in certain technology for a mobile, self-contained, voice activated, portable, Pentium® processor driven, multimedia computer ("Technology") and other Purchased Assets described in the Agreement. Subsequent to the acquisition, in 2000 ISI changed its business to providing software to the hearing impaired. See BUSINESS - MOBILE, MULTIMEDIA COMPUTER PRODUCTS.
On September 20, 1996, a wholly owned Delaware subsidiary of the Company acquired substantially all of the assets of Shared Resource Exchange, Inc., a Delaware corporation ("Seller") located in Dallas, Texas, under an Agreement of Sale among Seller, the subsidiary and the Company dated September 19, 1996 ("Agreement") approved by order of the United States Bankruptcy Court, Eastern District of Texas, Sherman Division. With these assets the Company manufactures and sells PBX systems, switches and related PBX telecommunication and peripheral devices it acquired from Seller under the Agreement. See BUSINESS - DIGITAL COMMUNICATIONS SYSTEMS.
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 other purchased assets described in the Agreement. The display is sold to Ford Visteon, Chrysler, General Motors, Kelsey Hayes and other companies. Cascade was purchased on behalf of ISI to serve as the flat screen technology for the Mentis® product. Although ISI has stopped the Mentis® project, the Company has continued to sell Cascade screens to the automotive industry.
On May 18, 2000, the Company acquired substantially all of the assets of Telident, Inc., a Minnesota corporation engaged in the design, manufacture and marketing of hardware and software systems utilizing enhanced 911 network technology to communicate with public safety 911 contact points. The Company markets these products to a wide variety of businesses, including colleges, universities, nursing homes, hospitals, government offices, primary and secondary educational institutions, and hospitality establishments. See BUSINESS - DIGITAL COMMUNICATIONS SYSTEMS - ENHANCED 911 TECHNOLOGY PRODUCTS.
On June 30, 2000, the Company acquired certain equipment, inventory and intellectual property rights relating to the 20-20® switching system and associated products of the Communications Products Division ("CPD") of Harris Corporation ("Harris"). The 20-20 product is a digital switch capable of supporting up to 9,600 ports/desktops. See BUSINESS - DIGITAL COMMUNICATIONS PRODUCTS - 20-20 Switching Systems.
FORWARD-LOOKING STATEMENTS
A number of statements contained in this Annual Report on Form 10-K 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.
TELTRONICS - SEGMENT
INTELLIGENT SYSTEMS MANAGEMENT / REMOTE MAINTENANCE PRODUCTS
Emphasis on service as a product (the maintenance and repair of systems) caused a market for automated fault/alarms management systems to emerge in the 1980's. The market is based on the need to monitor a population of remotely located, computer based systems from a Technical Assistance Center ("TAC"). This capability is extremely important in the telecommunications industry as well as in other service environments. To effectively address this market, service providers need state of the art technology to manage and maintain their equipment, and to project a pro-active service image to their customers.
Management believes that it has established a strong competitive position in the Intelligent Systems Management market through sales of the following products: Site Event Buffer-II®, SEBjr.™, and IRISnGEN™.
Site Event Buffer-II™ ("SEB-II"). The SEB-II™ monitoring system monitors remotely located Network elements.
The SEB-II™ product may simultaneously monitor up to four Network elements. In addition to fault/alarm reporting and security functionality the SEB-II™ also has data storage and retrieval capabilities. Its multi-port configuration allows the SEB-II™ to concurrently collect and store various forms of data, such as Station Message Detail Records ("SMDR"), Automatic Call Distribution ("ACD") data, and Private Automated Branch Exchange ("PABX") traffic information. By using IRISnGEN™, this data may be retrieved and processed into useful reports.
The SEB-II™ is a multi-application product whose architecture permits its operational characteristics to be completely changed by remotely downloading new software. Introduced in mid-1991, the SEB-II™ replaces the original Site Event Buffer-I® (SEB-I™) with a product that offers increased functionality, twice the data storage capacity, and support for additional Network elements.
In late 1993, the Company commenced development of certain sophisticated computer scripts, written in a high-level language, that may be used to create a dialogue between the SEB-II™ and the Network element. This dialogue allows the SEB-II™ to clear fault conditions present in the Network element and to perform more complex analysis of maintenance data. Included in these development activities is the design of high speed internal modems required for more demanding applications and for international markets. These developments were completed in 1994.
SEBjr.™ The SEBjr.™ remote monitor was introduced to penetrate a new segment of the market. SEBjr.™ is an affordable remote monitor for smaller, less expensive Network elements, yet provides virtually all of the features of the SEB-II™. SEBjr.™ is positioned to allow service providers to offer complete end-to-end monitoring of a wide variety of elements of networks. With the introduction of SEBjr.™, Teltronics' Remote Maintenance product line now offers one-stop capability of providing efficient, cost-effective monitoring to every link in the chain of Network elements, regardless of size or cost.
INTELLI.M@N®. The INTELLI.M@N® product, introduced in late 1997, moves the Intelligent Systems Management product line into exciting new areas. The monitoring of local area network ("LANs") and wide area network ("WANs") equipment is critical to the operation of enterprise data networks. The INTELLI.M@N® product works in conjunction with the SEB and allows telecom service companies to leverage their investment a new way. This device lets the SEB™ monitor data networks and report faults and other events through the same infrastructure that is used to monitor PABXs, and voice mail systems in traditional voice network applications. Since most service customers have both voice and data systems, this offering provides a new revenue opportunity for telecom service companies. A single SEB can monitor a PABX, a voice mail system, and through the INTELLI.M@N® device many network elements. The INTELLI.M@N® is fully simple network management protocol ("SNMP") compliant and can receive alarms from network elements and actively query many parameters (MIB objects) in the multiple network elements. In this role, the INTELLI.M@N® product serves as an SNMP manager responsible for a segment of the network and reports alarms out-of-band to the Service Provider. It can also serve as an SNMP Mid-Level-Manager reporting in-band to a Network Management System ("NMS") in the enterprise.
When configured with the LATIN (Legacy Adapter To InterNet) software option INTELLI.M@N® serves as a universal SNMP proxy agent for equipment that is not SNMP compliant. Customers may now monitor a wide variety of legacy telecom and data network devices with their enterprise SNMP based NMS. INTELLI.M@N® hardware will interface to any equipment that outputs fault and status information via an RS232C port. Received events are sent to the NMS as SNMP traps and the INTELLI.M@N® MIB may be queried and examined by the NMS. The INTELLI.M@N® product also has a WEB Server which allows the MIB to be viewed with a simple WEB browser.
In a third configuration, the INTELLI.M@N® combines the capabilities of both remote maintenance SNMP manager and proxy agent. This product is used when both proxy agent and out-of-band reporting is required at a single site.
IRISnGEN™. The IRISnGEN™ system is a comprehensive software package used by service providers in Technical Assistance Centers to monitor alarms and to process data collected from the Network elements.
SEB™ remote monitors associated with remote Network elements report events to the IRISnGEN™ software. These events may represent alarm conditions in the Network elements, or may simply be status information to indicate that everything is working properly. Using IRISnGEN™ software, the service provider often identifies and resolves problems before the customer is aware of them. IRISnGEN™ software is also used to collect data stored in SEBs™ and direct the data to the proper software application for processing. The software also provides the tools required to manage remotely located SEBs and to access Network elements for routine maintenance.
A database of Network element alarms is maintained in IRISnGEN™ so that the service provider may obtain reports on alarm status at any time. Comprehensive reports that provide statistical analysis of received alarms are also available. Service personnel use them to isolate faulty components, identify trends, and track the historical performance of Network elements.
Building on the success of the UNIX based IRIS™ product, the IRISnGEN™ product brings the next generation of alarms management to the marketplace. This new product incorporates all the features of the original IRIS™ product while introducing major new capabilities.
This advanced alarms management system is a client/server application and takes full advantage of the power and flexibility of Windows NT®. Any number of users with PCs running Windows 98™ or Windows NT® Workstation can access the system. The system has a relational database designed to support the organization of a typical telecom service company operating a Technical Assistance Center. It also supports the creation of an unlimited number of relationships that logically group customer sites and monitored systems. Geographical alarm display, alarm escalation, alarm correlation, alarm forwarding, help desk, and World Wide Web access are just a few of the new capabilities being introduced. Heavy emphasis is placed on graphics and ad-hoc reporting capabilities. A comprehensive Application Program Interface (API) has been introduced to assist customers in integrating IRISnGEN™ with legacy management systems and databases.
IRISnGEN™ is designed for growth. Customers can purchase as much as, or as little, as their business needs dictate by selecting capabilities that are grouped into feature packages. The basic package is a full-featured, highly capable alarms management system that will allow both large service providers and self-maintained end users to enter into the alarms management arena. Customers may add optional feature packages as the demands of their business change.
IRIS Traffic™. This optional IRISnGEN™ software module is a traffic analysis system that allows service providers to perform traffic studies on NORTEL SL-1® and Meridian-1 PABX® systems. The information created by this application assists the service provider in "fine tuning" their customer's PABX to operate more efficiently. The IRISnGEN Traffic™ system has proven to be a very effective revenue generator for service providers. The system allows the service provider to identify PABX enhancements that can be sold to the end-user to improve PABX performance.
DIGITAL COMMUNICATIONS SYSTEMS
VisionLS®/VisionMS®/VisionSi. The Vision® systems are multi-function Key/Hybrid/PBX and CENTREX CPE telecommunications systems. They are used to process calls by general business and professional organizations, health care, financial, government, technology, transportation, and education, call centers, service centers, and other organizations that need flexible, value added telecommunications capabilities. These systems are also used to pass data to and receive commands from computers via a Computer Telephone Interface ("CTI"). Inherent in the software of these telecommunications platforms are automatic call distribution (ACD), automated attendant (AIR), intelligent call handling and dynamic call routing based on ANI, DNIS, and Caller ID. Some features of the Company's Vision® systems, such as automatic telephone relocation, copy, and replace are unmatched in the telecommunications industry.
QueVision®. QueVision® is a call center management product, using CTI techniques, that accepts call events from Vision® systems and uses that data to deliver real-time information enabling supervisors to effectively manage either formal or informal call center activity. The system provides on-demand and scheduled reports and supports the use of a wall mounted display screen to let all agents see the performance of the call center.
CENTRALINK911/PALLADIUM IPC. This Vision® switching platform provides both the telecommunications link and automatic location identification to over seven-hundred Public Safety Answering Points (911 emergency call centers). The system is comprised of two parts: The ANI Controller, which is a Vision® telecommunications platform with specialized features and the ALI controller, a computer running Teltronics' software that allows it to retrieve and display information about the location of a 911 caller based on the caller's telephone number.
VisionWorks®. VisionWorks® is a Windows® -based voice mail system providing a full- featured voice mail plus unified messaging. Through integration with MAPI compliant applications, every email, every voice mail, every fax can be handled on the client desktop. Options include local area paging, fax on demand, AMIS standard networking, and on screen call control. Using VisionPath® CTI to connect to any Vision® system, users can view the name and number of incoming callers, record calls as messages, and divert calls to other extensions or mailboxes. Outgoing calls can be launched from the desktop using the VisionWorks, or other contact manager.
VisionVM®. A mature voice mail system that provides up to eight ports of voice mail for small to mid-sized organizations. VisionVM® takes advantage of the advanced voice mail integration capabilities inherent in every Vision® system to deliver customized features. VisionVM® installs quickly and can be customized by users. VisionVM® provides up to 6,000 mailboxes, fax detection, and networks to any AMIS compliant voice mail system.
20-20® Switching Systems. The 20-20® family of switching products was acquired on June 30, 2000, from Harris Corp. The 20-20® is a digital switching system that has been deployed in mission critical applications throughout the world. 20-20® may be expanded up to 9600 ports for very large applications and is generally cost effective down to about 300 ports, where the Vision MS® switch stops, thus effectively giving Teltronics™ a product offering from the smallest applications up to the largest. The 20-20® may be configured for fully redundant common control when system availability is critical, such as in large call centers or critical government applications. A variant of the 20-20® is used in FAA ground-to-air and ground-to-ground applications where down time must be in the order of less than 5 seconds in a year. Known for its robust computer-telephony interface (CTI) the 20-20® has been used by systems integrators throughout the world for large custom applications as well as "local dial tone" in small central office applications.
20-20® has been certified and homologated in over 60 countries world wide. International signaling and transmission protocols have been developed, including international flavors of ISDN and SS7, to permit its use virtually anywhere in the world. The company will continue to invest in engineering development to maintain and expand these areas. Product strategies are being developed which will permit the use of the Vision® switching family as a satellite or remote switch attached to the larger 20-20® serving as a tandem switch. This application is in great demand by enterprise operations with large, geographically dispersed facilities.
Key to its product strategies is that of "technology convergence" - that is, to share across both platforms (Vision® and 20-20®) the strengths of each. For example, Vision® employs custom large scale integrated circuits and a modular telephone both of which will be beneficial to 20-20® users. On the other hand, the 20-20® comprehends all the international signaling protocols and fiber optic remote shelf distribution which the Vision® platform does not have. The convergence of the "best of both" will receive primary engineering focus in the early part of 2001.
Clearview™. This product was also a part of the 20-20® acquisition of June 30, 2000. Clearview is a WindowsNT® client-server based, sophisticated multi-media customer contact and management system, or a "call center", for use by enterprise operations whose mission includes receiving or launching large numbers of telephone calls, and with the release of new versions in 2001 it will also have
the capability of receiving or launching large quantities of emails, or accommodating real time web-based responses to product/services queries through "chat" sessions. The system detects information about callers, organizes the calls according to predetermined priorities, places the calls in "queues" to be serviced by employees, and may even route the calls based on the "skills" of the call handlers ("skills-based routing"). The database of the current product is Sequel® and may be fully redundant on separate servers. Clearview™ is a relatively new product with most of its deployments over the past two years. Originally designed to work with the 20-20® as its "switching fabric", the company's goal is to migrate Clearview™ towards switch-independence, and ultimately it should be able to be deployed behind virtually any switch type in the industry.
Clearview™ may be deployed in small call centers with only a few agents or call handlers, or it may be used in large, complex applications with hundreds of agents. The Company also will offer a broad range of "professional services" in the form of employees who are experts in systems integration with legacy systems and third party applications. While Clearview™ will be available to any of the company's distribution partners with support from its professional services group, it is anticipated that most of the Clearview™ sales will come directly from larger users with sophisticated IT requirements and infrastructures.
Enhanced 911 Technology Products. The assets of Telident, Inc. were acquired by Teltronics in May of 2000. These products, including Tel-A-Lert®, TRAX OSN™, SiteAlert® and 911 Solution's® identify callers who have placed calls from behind a switching system to emergency service providers (ambulance, police, fire) . For example, generally dialing "9-1-1" results in an emergency call being to a PSAP (public safety answering point) and the call being automatically identified from the telephone company's main billing database as the main billing number for the trunk that it comes in on. If however, the call originates in a high rise, or a campus environment behind a PBX, the emergency service personnel have no idea which floor or campus building the call is coming from, so they dispatch emergency personnel to the lobby or main building. If the caller does not know or is otherwise unable to describe where he/she is calling from, life-threatening situations may occur.
These Enhanced 911 technology products identify the caller and the location through its local database by utilizing enhanced 911 technology and augmenting the original call with precise information on location or other identity and the emergency service personnel are able to proceed directly to the caller. Enhanced 911 technology products also have the ability to alert local security forces or general management that an emergency call has been placed from their premises, which gives them an opportunity to respond more quickly. Help is coordinated.
Several states have passed legislation which mandates that PBX systems be fitted or contain this type of technology inherently. The Company's enhanced 911 technology products are designed to retrofit switching systems which do not have it. Legislation is pending in many other states as well. Other services include updating of telephone company records with specific information on calling locations.
ELECTRONIC MANUFACTURING SERVICES
Teltronics provides contract electronic manufacturing services for companies in the telecommunications, industrial control, and other computer-related industries. Services include product design, turnkey material procurement and management, automated through-hole or surface mount circuit board assembly, in-circuit and functional test, and final mechanical integration. Teltronics' manufacturing operations are certified by BABT 340, ISO9002 and UL. During the fourth quarter of 2000, the Company received ISO 9002 re-certification. Through this important quality certification, Teltronics has established and demonstrated effective procedures and processes that ensure that all products are manufactured,
installed and serviced under a quality system, which carries an internationally recognized and certified level of excellence.
Teltronics' current manufacturing capacity should allow for increased growth of the Company's existing product lines and accommodate an increase in electronic manufacturing services business. Teltronics' electronic manufacturing services business enables the Company to profit from increased parts and components purchasing discounts, and utilization of excess plant capacity. This reduces direct materials and overhead costs associated with manufacturing the Company's products. These cost savings should help make Teltronics' products more profitable and competitive in their respective markets.
ISI - SEGMENT
Over the last year ISI has moved away from the Wearable computer market. Continuing market experience has established that the market is not ready for a wearable computer. Further, the continual need to invest in the ever changing hardware upgrades without proportionate increases in revenue does not make sense. However, in arriving at that conclusion, the Company has been able to utilize its software knowledge to develop a new product. The iCommunicator™ system is a software product running on certain industry standard hardware, that provides a solution to the hearing impaired. The iCommunicator™ system makes a verbal communication possible between a hearing/speaking person and a person who is profoundly deaf, hard-of-hearing, or an individual with learning disabilities. This multi-sensory device improves comprehension of spoken language and teaches reading, speech skills, and sign language. The Company has applied for a patent covering the Company's proprietary process.
TRADEMARKS, PATENTS AND COPYRIGHTS
Teltronics™ has the following trademarks and copyrights: (a) Trademarks: Ideas That Communicate®, Site Event Buffer®, SuperVizor®, CallQuest®, Net-Path®, SEB InterAct®, INTELLIM@N®, Dispatcher®, Vision®, Vision and design®, VisionOS®, VisionVM®, VisionACD®, VisionMS®, VisionLS®, VisionPhone®, VisionXPhone®, VisionPath®, VisionWorks®, QueVision®, Shared Resource Exchange®, SRX®, SRX and design®, SRX OmniWorks and design®, OmniWorks and design®, DiscoveryMATE®, SITEALERT®, 911 SOLUTIONS®, TEL-A-LERT®, 20-20®, Optic®, IRIS™, IRISnGEN™, Digital Telephone System™, DTS™, Site Event Buffer II™, SEBjr.™, Teltronics™, Teltronics and design™, Telident™, Status Recognition Unit System 1™, Station Translation System™, STS™, Trax OSN™, On-Site Notification™, Data Base Management Software™, ClearView™, VisionView™, Vision SeeScape™, VisionPhonePC™, VisionTAS™, and VisionSi™; and (b) Copyrights: SRX Call processing, CENTRALINK release 1.0 software; SRX E911 software, CENTRALINK ALI release 1.2 software (co-owned with Pro-Tel, Inc.); SRX Call Processing, VisionMS (System Two) release 2.2 software; and SRX call processing, System One release 4.6 software.
Teltronics has many patents and pending patent applications in both the U.S. and foreign countries. While Teltronics believes these are valuable assets, it does not believe that its Business would be impaired by the loss of any one patent.
ISI™ has the following trademarks and copyrights: (a) Trademarks: MENTIS®, rtmEditor®, rtmNavigator®, MentiSoft®, RTM®, VoiceZoom®, Interactive Solutions™, ISI and design™, iCommunicator and design™ and iCommunicator™; (b) Copyright: MentiSoft Real Time Mentoring; MentiSoft Version 1.0 consisting of two modules, rtmEditor Version 1.01 and rtmNavigator Version 1.0.
The Company also seeks to protect its confidential and proprietary information through the enforcement of confidentiality and non-compete agreements presently executed by key employees.
WARRANTY AND SERVICE
The Company provides a limited warranty on most of its products, for a period of 3 to 18 months (depending on the product), under which the Company agrees to repair or replace, at the Company's sole discretion, units defective in material or workmanship, provided the equipment has not been subjected to alteration or abuse. The Company's technical service and engineering staff provide support services over the telephone to customers with installation or operational questions. Warranty and other repair services are provided by the Company at its facility in Sarasota, Florida. To date, warranty expenses have been insignificant in relation to the Company's gross sales.
COMPONENT PROCUREMENT
The Company assembles all of its products at its facility in Sarasota, Florida. All components used in the assembly of the Company's products are purchased from distributors and manufacturers.
Purchase orders for components are placed from one month to six months in advance, depending on the supply sensitivity of a particular component. Most components are available from several sources, based upon current price quotations. If these suppliers should stop carrying or manufacturing components for the Company, the Company's operations could be adversely affected until alternative sources are located and increased operating costs could result from product re-engineering required to use such substitute components. Certain electronic components used in the Company's products are purchased through American distributors from sources outside of the United States. The costs of such components increase as the value of the United States dollar decreases in relation to foreign currencies. In addition, the availability of such components may be affected by factors external to the United States, including war, civil strife, embargo and export or import restrictions. Although there can be no assurance for the future, the Company has not experienced and does not anticipate experiencing any significant difficulty in purchasing components.
BACKLOG
The Company's backlog at December 31, 2000, 1999 and 1998 was $36,974,000, $10,581,000 and $3,489,000 respectively. At March 14, 2001, February 29, 2000 and February 26, 1999, the Company's backlog was $22,002,945, $9,339,000 and $4,860,000 respectively.
The Company's backlog is for orders that have scheduled deliveries or maintenance over the next twelve months, and are not an indication that the Company is unable to fulfill.
CUSTOMERS
Sales to major customers were as follows:
No other customers exceeded 10% of total sales in any year.
COMPETITION
The Company has two significant competitors in the Intelligent Systems Management marketplace, Ion Networks, Inc. and Telco Research. The Company has many competitors in the PBX market with the dominant players being Lucent and NORTEL. The Vision® and 20-20® PBX are active in the ACD and small PBX market while the 20-20® PBX is active in the large PBX market. Management of the Company believes the Company's products are competitive in price, product performance, warranty, technology and service. The Company continues to spend significant funds to enhance already technologically complex equipment and develop or acquire new products.
RESEARCH AND PRODUCT DEVELOPMENT
The Company maintains continuing research and development efforts directed toward enhancement of its existing product lines and development of new products. The Company's research and development expenditures during the fiscal years ended December 31, 2000, 1999 and 1998 were $5,585,000, $3,693,000 and $3,057,000, respectively.
REGULATION
Part 68 of the Federal Communications Commission ("FCC") Rules ("Part 68") contains the majority of the technical requirements with which telephone systems must comply to qualify for FCC registration for interconnection to the public telephone network. Part 68 registration represents a determination by the FCC that telecommunication equipment interfacing with the public telephone network complies with certain interference parameters and other technical specifications. FCC registration for the Company's products has been granted and the Company intends to apply for FCC registration for all of its new products.
Certain of the Company's products are also subject to and comply with regulation under Part 15 of the FCC Rules ("Part 15") which requires equipment classified as containing a Class A computing device to meet certain radio and television signal interference requirements. Notwithstanding this minimum compliance, however, Part 15 provides that operators of equipment containing Class A computing devices may be required to take whatever steps are necessary to correct radio and television interference caused by operation of such equipment in a residential area.
EMPLOYEES
As of December 31, 2000, the Company employed 331 personnel.
Item 2.
Item 2. PROPERTIES
TELTRONICS - Headquarters and Plant
The Company's headquarters and principal facility consists of approximately 72,000 square feet, located in a two story concrete and steel building leased from ARE Sarasota Limited Partnership, a limited partnership ("ARE Lease"). Approximately 36,000 square feet are used for laboratories and offices. The plant is located at 2150 Whitfield Industrial Way, Sarasota, Florida.
The monthly ARE Lease payment is $52,910. The ARE Lease expires in August, 2005, and may be extended by the Company for two five year periods. Included in the ARE Lease is a single story building located at 2240 Whitfield Industrial Way. This building consists of approximately 7,500 square feet.
The Company leases approximately 10,655 square feet of office space for a research and development facility in Dallas, Texas. The monthly lease payment is $7,733 per month during 2000-2001. The lease expires in December, 2001.
The Company also leases offices in several locations under leases expiring at various dates.
Item 3.
Item 3. 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 is being 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.
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 the time of resale. The Settlement payments are conditioned upon closing of a private equity placement by Intelliworxx which has not occurred. If the private placement is not consummated, it could result in a new trial in May, 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, Teltronics 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 Teltronics' 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 Teltronics under its purchase of certain rights and technology from one of the former shareholders of Cascade. Teltronics served an Answer with affirmative defenses and a counterclaim seeking delivery of the Escrow Stock to Teltronics.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On October 23, 2000 stockholders of the Company: (1) authorized the Company to raise up to $10,000,000 in a private placement at a price to be determined, (2) ratified an amendment adding 1,250,000 shares of the Company's common stock to its 1995 Incentive Stock Option Plan, and (3) approved an Employee Stock Purchase Plan covering up to 500,000 shares of the Company's common stock. The Private Placement was approved with 42,348,200 votes in favor, 23,733 opposed and 1,234 abstentions. The amendment to the Company's 1995 Incentive Stock Option Plan was ratified with 42,189,986 in favor, 50,001 against and 133,180 abstentions. The Employee Stock Purchase Plan was adopted with 42,350,009 votes in favor, 22,950 votes opposed and 208 abstentions.
PART II Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of August 1, 1989, the Company listed its Common Stock for trading on The National Association of Securities Dealers, Inc. Automated Quotation System ("Nasdaq"). The Company's Common Stock trades on The Nasdaq SmallCap Market tier of The Nasdaq Stock Market® under the symbol: TELT. The following table sets forth for the fiscal periods indicated the high and low trade prices in the over-the-counter market for the Company's Common Stock as reported on Nasdaq.
On March 16, 2001, the closing bid quotation for the Company's Common Stock as reported on Nasdaq was $2.03. As of March 16, 2001, there were approximately 4,080 shareholders of the Company's Common Stock. The Company historically has not paid cash dividends on common shares. The Company intends to retain all of its earnings for the future operation and growth of its business and does not intend to pay cash dividends in the foreseeable future.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data should be read in conjunction with the consolidated financial statements and the related notes thereto in Item 8 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Overview
The year 2000 has been a difficult and challenging year. The first six months were extremely difficult with a major slow down in sales. The Company believes that slow down was due to an overhang in the market from the purchases during 1999 in which many end users invested in new hardware and software to combat the perceived Y2K bug. This led to our major customers purchasing less from us, resulting in a loss for the first six months. Although sales for the traditional products of the Company have not returned to 1999 levels they are above 1998. The Company believes that both 1999 and 2000 were anomalies, with 1999 being higher than expected and 2000 being lower, both attributed to Y2K. Overall, however, sales have grown from 1998 to 2000.
The acquisition of Telident™ products and the CPD 20-20® switching systems of Harris provided the Company with new markets and products for the second six months. The Company was able to consolidate the installation, support and manufacture of the Telident product rapidly, allowing the group in Minneapolis to concentrate on sales, and an increase in sales was established over prior periods.
The 20-20® acquisition provided the Company both with a whole new product line and, through several U.S. distributors, access to new international channels. As it purchased inventory and finished goods, it was able to immediately fulfill back orders from customers. The Company has now moved all of the assets to Sarasota and is able to manufacture the 20-20® IXP systems. It also established a design center in Salt Lake City to continue the enhancement of the software and hardware with an emphasis on providing LAN/Wan/IP gateways, together with a new strategy to fulfill the requirement of Voice over Internet Protocol ("VoIP").
The Company focuses on two major telecommunications markets. The first is the monitoring of alarms from PBXs, voice mail systems and data networks. This market is referred to as the Intelligent Systems Management market for which the product is sold directly to Service Providers to enable them to be pro-active in maintaining their systems. Typical Service Providers are companies such as Verizon, Williams Communications, Sprint, MCIWorldcom and BellSouth. The Company maintains a sales force nationwide to service these major customers. The Company has been successful in not only increasing the number of products sold to these customers, but also finding new Service Provider customers. Typically the sales cycle would be six months to eighteen months while the customer tests the product before installation. A new customer would then purchase an IRISnGEN™, which is a centralized piece of software that monitors the alarms at the remote sites. At the remote sites, the Company provides one of its SEB-II's or an INTELLIM@N®, which is an alarms management, monitoring, pro-active computerized device. The Company expects to continue to invest in R & D to develop, not only later versions of the centralized Windows® NT based software (IRISnGEN™), but also the SEB™ hardware with an anticipated SEB Enterprise Agent which should be available in the fall of year 2001, and would enable sophisticated monitoring of voice networks and data networks in one box.
The second telecommunications market is in the Digital Communications Systems arena which involves providing telephone switches to small and medium size businesses as well as advanced ACD (Automatic Call Distribution). The Vision® switching product has a sophisticated CTI (Computer Telephony Interface) and is an extremely robust digital switch. This product is sold through distribution, not directly to the end-user customers.
During 2000 the Company acquired the CPD switching division of Harris. The 20-20® switch is complimentary to the Vision switch, offering a price competitive solution from 300 lines to just under 10,000. Previously the 20-20® products had been sold both directly and through distribution, particularly outside the USA. There is a very large installed base in Mexico, with many government installations as well as
major hotels. Although the Company anticipates selling through distribution channels, it recognizes that it needs to have a presence in the country to provide maintenance and support to some major direct customers. To this end the Company has set up a subsidiary in Mexico City, Teltronics, S.A. de C.V.
The 20-20® switch is technically approved by, and has been installed in, over 60 countries. Teltronics intends to continue to support the international channel. Harris invested in these markets for over 15 years. The distributors are used to selling, installing and supporting their customers. Teltronics, therefore doesn't anticipate setting up additional overseas companies, only supply and support the existing distributors. For example, the Company in the last six months of 2000 shipped over $1 Million to Russia through its distributor.
Teltronics also has some direct customers in particular the New York City Board of Education, and the Federal Bureau of Prisons. These installations are supported by our organization in Whitestone, New York and Manhattan.
The Company also acquired ClearView™, a Contact Center product, from Harris. There are currently over 30 ClearView™ installations. However, the product continues to be enhanced and the Company plans to provide, web chat, e-mail, and multimedia to the Contact Center. This market continues to grow much faster than the PBX market, and therefore gives the Company additional possibilities.
The Company believes that the purchase price paid for the acquisition, does not reflect the huge potential that the 20-20® and ClearView™ products, together with the distribution channels, provide t o Teltronics. For example, once the Vision® switch has been modified for international approvals, it will fulfill the new distributors' demand for a smaller switch.
The acquisition of assets of Telident, earlier in the year has provided the Company with an end to end solution for the 911 market. The product provides the PSAP ( Public Safety Answering Point ) with the identification number of the caller, when they are calling from a multistory or distributed campus. There are many States that are now making it mandatory to provide this solution with new installations. The Company is looking at other products, like mapping, inventory, etc. in order to provide "one stop shopping" to its distributors and end users.
Over the last year ISI has moved away from the wearable market. Continuing market experience has established that the market is not ready for a wearable computer. Further, the continual need to invest in ever changing hardware upgrades without proportionate increases in revenue does not make sense. However, in arriving at that conclusion, the Company has been able to utilize its software knowledge to develop a new product. The iCommunicator™ system is a software product running on certain industry standard hardware, that provides a solution to the hearing impaired. The iCommunicator™ system makes verbal communication possible between a hearing/speaking person and a person who is profoundly deaf, hard-of-hearing, or an individual with learning disabilities. This multi-sensory device improves comprehension of spoken language and teaches reading, speech skills, and sign language.
The Company has been successful in manufacturing its own products, reducing costs and increasing gross margins. To supplement its own business, the Company also sells electronic manufacturing services to companies that require high quality but have low volume. This enables the Company to maximize its production facility and reduce overhead costs.
The Company has continued to grow each year, both internally and through acquisitions. However, it is clear that the business has experienced seasonality despite its growth due in part to purchasing tendencies of our customers during the fourth and first quarters of each year. Consequently, results for the fourth and first quarters of each year are not as strong as results during the other quarters, but year to year growth has been maintained. The Company is endeavoring to spread its sales across more product lines such as Vision® and 20-20® to reduce the seasonal impact.
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 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 paid in June, 1999.
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 Telident. Registration of the shares on Form S-4 was declared effective by the Securities and Exchange Commission April 20, 2000.
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 was to be paid monthly starting November 1, 2000.
In March, 2001, Harris and the Company agreed to further amend the Note owed by the Company to Harris which contemplates partial payment of the existing principal of the Note and payment of the balance under the amended Note with interest only at a rate of 10.5% per annum during an initial period of six months and amortization of the adjusted principal balance in eighteen monthly installments commencing seven months after execution of the amended Note. It is expected that the amended Note will be executed and the partial payment made to Harris simultaneously with the closing of an equity private placement by the Company at which closing Harris is expected to simultaneously convert a portion of the principal of the Note to convertible preferred stock of the Company and be issued warrants to acquire shares of the common stock of the Company. The Company expects the simultaneous closing of the equity private placement, Harris amended Note, and issuance of convertible preferred stock and warrants
of the Company to Harris to occur during the second quarter of 2001. There can be no assurance that the closing will occur or that it will close on the terms contemplated. Pending closing of the contemplated transaction, Harris and the Company have agreed that the principal of the Note has been increased by an additional amount of $2,642,941 to reflect the aggregate payables owed by the Company to Harris at December 31, 2000 for additional inventory and services provided and that interest only payments at a rate of 10.5% will commence on May 1, 2001.
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 was payable at 12% and principal and interest were due monthly over three years starting April 1, 1998. The note receivable was secured by a second lien on assets and was 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 on the disposition of AT Supply of $1,148,250 during the year ended December 31, 1998. Revenues and net income for AT Supply were $1,278,000 and $6,000 respectively for the year ended December 31, 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, and a contingent consideration payable in one year of $112,000. The Company recognized a gain of $100,000 and $112,000 during 1998 and 1999, respectively. Revenues for these product lines were $82,000 for the year ending December 31, 1998.
Results of Operations
The following tables set forth certain data, expressed as a percentage of revenue, from consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.
Year ended December 31, 2000 compared to year ended December 31, 1999.
Sales were $43,204,000 for 2000 as compared to $32,645,000 for 1999. The increase was due to strong sales from the Harris acquisition which totaled $14,249,000.
Gross profit was $20,313,000 or 47.0% for 2000 as compared to $15,991,000 or 49.0% 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 $5,382,000 for 2000 as compared to $3,959,000 for 1999. This increase was due to increased payroll, benefit plan and bad debt expenses. Headcount increased by 100 from 231 at December 31, 1999 to 331 at December 31, 2000.
Sales and marketing expenses were $8,288,000 for 2000 as compared to $6,010,000 for 1999. The increase was due to increased payroll and benefit plan expenses, including the acquisitions of the Telident and Harris product lines. Headcount increased by 100 from 231 at December 31, 1999 to 331 at December 31, 2000.
Research and development expenses were $5,585,000 for 2000 as compared to $3,693,000 for 1999. The increase related to the acquisitions of the Telident and Harris product lines and increased expenses for ISM and Vision products.
Income from operations was $1,058,000 for 2000 as compared to $2,329,000 for 1999. This decrease relates to lower gross profits and increased expenses.
Other expense was $2,497,000 for 2000 as compared to $1,085,000 for 1999. The increase relates to litigation costs for the ISI lawsuit discussed in legal proceedings, a one time charge for the write-off of molds and dies as well as excess inventory of wearable computers, and $110,000 relating to a five year sales tax audit. Interest and financing was $1,624,000 for 2000 as compared to $1,187,000 for 1999. The increase relates to borrowings for the Harris product line acquisition.
Income taxes paid in 2000 of $46,000 related to alternative minimum taxes of $32,000 and state taxes of $14,000.
The net loss was $1,485,000 for 2000 as compared to a net income of $1,244,000 for 1999.
Year ended December 31, 1999 compared to year ended December 31, 1998.
Sales were $32,645,000 for 1999 as compared to $26,795,000 for 1998. This increase was due to improved Intelligent Systems Management and Vision sales, offset by a $704,000 decrease in ISI sales. The prior year included $1,278,000 of AT Supply sales.
Gross profit was $15,991,000 or 49.0% for 1999 as compared to $11,449,000 or 42.7% for 1998. The increase was due to a change in product mix, with increased Intelligent Systems Management and Vision sales, the sale of AT Supply and raw material cost reductions.
General and administrative expenses were $3,959,000 for 1999 as compared to $3,398,000 for 1998. The increase was due to increased payroll, relocation and bad debt expense and depreciation on tools and dies for the Mentis® computer system.
Sales and marketing expenses were $6,010,000 for 1999 as compared to $4,702,000 for 1998. The increase is due to increased payroll, commission, travel and marketing expenses.
Research and development expenses were $3,693,000 for 1999 as compared to $3,057,000 for 1998. The increase was due to continued funding for ISI and Teltronics for Intelligent Systems Management and Vision products.
Income from operations was $2,329,000 for 1999 as compared to $292,000 for 1998. This increase relates to increased sales and margins, offset by increased expenses.
Other expense was $1,085,000 for 1999 as compared to other income of $89,000 for 1998. Interest and financing was $1,187,000 for 1999 as compared to $1,348,000 for 1998. The customer list and maintenance and support agreements for the ORBi-TEL for Windows contract maintenance business were sold to MDR Telemanagement Limited in April, 1998 for a gain of $100,000 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 $1,244,000 for 1999 as compared to $381,000 for 1998.
Liquidity and Capital Resources
Cash requirements were provided by operations, borrowings from The CIT Group/Business Credit ("CIT") and the acquisition of the Telident product line.
The Company's working capital ratio was 1.26:1 at December 31, 2000 as compared to 1.08:1 at December 31, 1999. Net working capital was $4,699,000 at December 31, 2000 as compared to $805,000 at December 31, 1999. The increase in working capital relates primarily to the Harris product line acquisition completed on June 30, 2000.
Net cash decreased by $919,000 for the twelve months ended December 31, 2000 as compared to an increase of $818,000 for the twelve months ended December 31, 1999. Net cash flows used in operating activities were $87,000 for the twelve months ended December 31, 2000 as compared to cash flows provided by operating activities of $2,313,000 for the twelve months ended December 31, 1999.
Accounts receivable increased by $5,318,000 as of December 31, 2000. The increase was due to strong sales from the Harris 20-20 acquisition and Electronic Manufacturing. Inventories increased by $1,099,000 as of December 31, 2000. This increase was primarily due to the acquisition of the Harris 20-20 switching product lines. Accounts payable increased by $4,574,000 as of December 31, 2000. The increase was due to the Telident and Harris product line acquisitions. Accrued expenses and other current liabilities decreased $91,000 as of December 31, 2000.
Net cash flows provided by investing activities totaled $129,000 for the twelve months as compared to net cash used in investing activities of $339,000 for the twelve months ended December 31, 1999. Acquisition of property and equipment totaled $778,000 for the twelve months ended December 31, 2000 as compared to $653,000 for the twelve months ended December 31, 1999.
Cash flows used in financing activities totaled $962,000 for the twelve months ended December 31, 2000 as compared to $1,156,000 for the twelve months ended December 31, 1999. The Company repaid debt of $1,462,976 during the twelve months ended December 31, 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 was paid during the first quarter 2001.
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 and accrues interest at 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.
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 was to be paid monthly starting November 1, 2000.
In March, 2001, Harris and the Company agreed to further amend the Note owed by the Company to Harris which contemplates partial payment of the existing principal of the Note and payment of the balance under the amended Note with interest only at a rate of 10.5% per annum during an initial period of six months and amortization of the adjusted principal balance in eighteen monthly installments commencing seven months after execution of the amended Note. It is expected that the amended Note will be executed and the partial payment made to Harris simultaneously with the closing of an equity private placement by the Company at which closing Harris is expected to simultaneously convert a portion of the principal of the Note to convertible preferred stock of the Company and be issued warrants to acquire shares of the common stock of the Company. The Company expects the simultaneous closing of the equity private placement, Harris amended Note, and issuance of convertible preferred stock and warrants of the Company to Harris to occur during the second quarter of 2001. There can be no assurance that the closing will occur or that it will close on the terms contemplated. Pending closing of the contemplated transaction, Harris and the Company have agreed that the principal of the Note has been increased by an additional amount of $2,642,941 to reflect the aggregate payables owed by the Company to Harris at December 31, 2000 for additional inventory and services provided and that interest only payments at a rate of 10.5% will commence on May 1, 2001.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had no holdings of derivative financial or commodity instruments at December 31, 2000. The Company is exposed to financial market risks, including changes in interest rates. All borrowings under the Company's bank line of credit agreement bear interest at a variable rate based on the prime rate. An increase in interest rates of 100 basis points would not significantly impact the Company's net income. All of the Company's business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations should not have a significant impact on the Company. The sum of the quarters does not agree with the earnings per share schedule due to rounding and shares issued during the year.
Quarterly Results of Operations (Unaudited)
Item 8.
Item 8. FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
Teltronics, Inc.
We have audited the accompanying consolidated balance sheets of Teltronics, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Teltronics, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Tampa, Florida
February 16, 2001
except for the 11th paragraph of Note 3, as to which the date is April 16, 2001
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
The accompanying notes are an integral part of these consolidated financial statements.
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
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® 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., its 85% owned subsidiary Interactive Solutions, Inc. ("ISI") and its 80% formerly owned subsidiary AT Supply, Inc. ("AT Supply"). AT Supply was sold on March 6, 1998. All significant intercompany transactions and balances have been eliminated in consolidation.
For the years ended December 31, 2000, 1999 and 1998, losses applicable to the 15% minority interest of ISI exceeded the minority interest in the equity capital and the losses accordingly, are included in the determination of net income. However, to the extent of future earnings, if any, the Company shall be credited to the extent of such losses that were previously absorbed.
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.
On May 18, 2000, the Company acquired substantially all of the assets and technology of Telident, Inc., including Telident's rights to and in certain technology for enhanced 911 technology hardware and software systems that communicate with public safety 911 contact points. The Company sells these products to a wide variety of businesses, and health and educational institutions.
On June 30, 2000, the Company acquired certain equipment, inventory and intellectual property rights relating to the 20-20® switching system and associated products of Harris Corporation. The 20-20® product is a digital switch capable of supporting up to 9,600 ports/desktops that the Company sells to large businesses, and health and educational institutions.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk - The Company's largest customer was 20%, 26% and 13% of sales in 2000, 1999 and 1998, respectively. In 2000, only the Company's largest customer accounted for more than 10% of the Company's sales. In 1999, one additional customer was 16% of sales. In 1998 three additional customers were 12%, 11% and 10% of sales. The Company's principal customers include
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Regional Bell Operating Companies, independent telephone companies, alternative service providers and telecommunication companies located throughout the United States.
Inventories - Inventories are stated at the lower of cost or market. Costs are determined principally on the weighted average method.
Property and Equipment - Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives (three to ten years) of the respective assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes.
Goodwill and Other Intangible Assets - Goodwill, the excess of the purchase price of acquired businesses over the fair value of their respective net assets, and other intangible assets are amortized on the straight-line basis. The Company periodically reviews the value of its goodwill and other intangible assets if there are indicators of impairment. The Company assesses the potential impairment of recorded goodwill and other intangible assets by comparing the undiscounted value of expected future operating cash flows to their carrying costs. An impairment charge, if necessary, would be recorded based on the estimated fair value.
Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced to estimated amounts to be realized by use of a valuation allowance.
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 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 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 dilutive options and warrants totaled 398,591.
Revenue Recognition - Revenues from product sales are recognized when the product is shipped. The Company recognizes revenue from software product sales in accordance with the American Institute of Certified Public Accountants' Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2") as amended by Statement of Position 98-4, Deferral of the Effective Date of a Provision of SOP 97-2 and Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions ("SOP 98-9"). Revenue is recognized from licenses of the Company's software products when the contract has been executed, the product(s) have been shipped, collectibility is probable and the software license fees are fixed or determinable. In the event that the contract provides for multiple elements (i.e., software products, upgrades/enhancements, postcontract customer support, consulting services, etc.), the total fee is allocated to these elements based on "vendor-specific objective evidence" of fair value. If any portion of the software license fees is subject to forfeiture, refund, or other contractual contingencies, the Company postpones revenue recognition until the contingency has been removed. Revenue from support and maintenance activities is recognized ratably over the term of the maintenance period and the unrecognized portion is recorded as deferred revenue.
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivatives - In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (the "Statement"), Accounting of Derivative Instruments and Hedging Activities. The Company expects to adopt the new Statement effective January 1, 2001. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. The Company does not anticipate that the adoption of the Statement will have a significant effect on its results of operations or financial position.
Research and Development - Research and development costs are expensed as incurred.
Stock Based Compensation - The Company accounts for its stock based compensation under the provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"), Accounting for Stock Issued to Employees, and presents disclosures required by Statement of Financial Accounting Standards No. 123 ("SFAS No. 123") Accounting for Stock-Based Compensation.
Warranty - The Company provides currently for the estimated cost that may be incurred under product warranties. The Company provides a limited warranty on its products, for a period from 3 to 18 months (depending on the product), under which the Company agrees to repair or replace, in the Company's sole discretion, units defective in material or workmanship, provided the equipment has not been subjected to alteration or abuse.
Reclassifications - Certain prior year amounts have been reclassified to conform with the current year's presentation.
NOTE 3 - ACQUISITIONS
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 paid 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:
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.
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 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:
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 with interest at 10.5% per annum ("Note"). The Note provided for interest at 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, the due date was extended to December 31, 2000 and interest was changed to 10.5% effective October 4, 2000 and was to be paid monthly starting November 1, 2000.
In March, 2001, Harris and the Company verbally agreed to further amend the Note owed by the Company to Harris which contemplates partial payment of the existing principal of the Note and payment of the balance under the amended Note with interest only at a rate of 10.5% per annum during an initial period of six months and amortization of the adjusted principal balance in eighteen monthly installments
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
commencing seven months after execution of the amended Note. Management expects the amendment will be executed and the partial payment made to Harris simultaneously with the closing an equity private placement by the Company during the second quarter of 2001. There can be no assurance that the closing will occur or that it will close on the terms contemplated. Pending closing of the contemplated transaction, Harris and the Company have agreed that the principal of the Note has been increased by an additional amount of $2,642,941 to reflect the aggregate payables owed by the Company to Harris at December 31, 2000 for additional inventory and services provided and that interest only payments at a rate of 10.5% will commence on May 1, 2001.
The acquisition has been accounted for using the purchase method of accounting and results of operations of the acquired business are included in the Company's results of operations 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:
Purchase price allocation is open for inventory and fixed asset valuation.
The unaudited pro forma results presented below include the effects of the acquisitions as if they had been consummated at the beginning of the year prior to acquisition. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated at the beginning of the year prior to acquisitions of Telident and Harris.
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4 - 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 was payable at 12% and principal and interest were due monthly over three years starting April 1, 1998. The note receivable was secured by a second lien on assets and was 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 on the disposition of AT Supply of $1,148,250 during the year ended December 31, 1998. Revenues and net income for AT Supply were $1,278,000 and $6,000 respectively for the year ended December 31, 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, and a contingent consideration payable in one year of $112,000. The Company recognized a gain of $100,000 and $112,000 during 1998 and 1999, respectively. Revenues for these product lines were $82,000 and $299,000 for the years ended December 31, 1998 and 1997, respectively.
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's goodwill and identifiable intangible assets are as follows:
NOTE 6 - 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.
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the computation of basic and diluted earnings per share:
NOTE 7 - ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2000 and 1999 are as follows:
The provision for doubtful accounts was $89,199, $129,876 and $84,957 for the years ended December 31, 2000, 1999 and 1998, respectively.
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 - INVENTORIES
The major classes of inventories at December 31, 2000 and 1999 are as follows:
Provision for obsolete inventories were $462,246, $485,238 and $456,868 for the years ended December 31, 2000, 1999 and 1998, respectively.
NOTE 9 - PROPERTY AND EQUIPMENT
The major classifications of property and equipment at December 31, 2000 and 1999 are as follows:
Depreciation and amortization expense was $1,924,974, $1,348,258 and $1,015,963 for the years ended December 31, 2000, 1999 and 1998, respectively.
NOTE 10 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at December 31, 2000 and 1999 are as follows:
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11 - DEBT
Debt at December 31, 2000 and 1999 consists of the following:
On February 25, 1998, the Company issued $1,750,000 of Subordinated Secured Debentures (the "Debentures"). The Debentures were initially 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 was paid during the first quarter 2001.
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On February 25, 1998, the Company entered into senior Secured Loans ("Loans") for $1,000,000 and $280,000. Interest was initially 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.
Future maturities as of December 31, 2000 are as follows:
Total
Bank Line
of Credit
Other Debt
$	5,042,465
$	4,228,430
$ 	814,035
1,000,000
1,000,000
$	6,042,465
$	4,228,430
$	1,814,035
The covenants in the Loan and Security Agreement and the Senior Secured Loans restrict certain sales of assets; mergers and acquisitions; borrowings and guarantees; dividends and redemptions; creation of liens; investments; issuance of subsidiary shares; and transactions with affiliates. The Company is in compliance with the terms of the above covenants.
NOTE 12 - CAPITAL LEASE OBLIGATIONS
Leased assets include machinery and equipment. The present value of future minimum lease payments pursuant to the leases and the corresponding liability have been recorded in the financial statements as property and equipment under capital lease obligations. Interest on these obligations ranges from approximately 8% to 12%.
Leased property under capital leases at December 31, 2000 and 1999 consists of the following:
The future minimum lease payments under capital leases together with the present value of the net minimum lease payments at December 31, 2000 are as follows:
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the financial statements at their carrying amount which approximates fair value because of the short-term maturity of those instruments. The carrying amount of long-term debt approximates fair value because these instruments bear interest at floating rates which reflect current market conditions.
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Company sponsors a savings plan ("401(k) plan") which covers substantially all employees of the Company. Prior to 2000, the 401(k) plan did not require the Company to match participant contributions and no contributions were made duirng 1999 and 1998. Beginning in 2000, the 401(k) plan requires the Company to make matching contributions by issuance of shares of the common stock of the Company. During 2000, the Company issued an aggregate of 38,269 shares with a fair value of $130,707 in connection with the plan.
The Company also sponsors an employee stock purchase plan ("Purchase Plan") under which employees of the Company and its subsidiaries are given an opportunity to purchase Company Common Stock at a price equal to approximately 85% of fair market value. The Purchase Plan is intended to qualify under the Internal Revenue Code of 1986, as amended and the 500,000 shares of common stock funding the Plan have been registered on Form S-8. No shares of Common Stock had been purchased by employees at December 31, 2000.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
(A) Employment Agreements - The Company is party to employment agreements with several of its officers that provide for annual base salaries, target bonus levels, severance pay under certain conditions, and certain other benefits.
(B) Operating Leases - The Company leases its manufacturing facilities, including land and building, under a 15 year operating lease expiring August 31, 2005.
The terms of the lease provide the Company with an option at any time during the lease term to purchase the property at the greater of its fair market value or $4,320,000. The Company has the option to renew the lease for up to two additional five-year periods. The Company is responsible for paying all taxes, insurance and maintenance cost relating to the leased property. The lease provides for an adjustment in the annual rent based on changes in the Consumer Price Index, limited to a minimum of the prior year's rent and a maximum of 6%. The Company also leases offices in several locations under leases expiring at various dates.
The Company also leases various equipment under operating leases expiring in one to two years.
Future minimum lease payments for all noncancellable operating leases at December 31, 2000 are as follows:
$2,086,287
1,886,340
1,798,113
1,492,651
1,194,05
Thereafter 11,718
$8,469,814
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Rental expense for operating leases totaled approximately $1,250,000, $763,000 and $744,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
(C) 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 is being 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.
In 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 the time of resale. The Settlement payments are conditioned upon closing of a private equity placement by Intelliworxx which has not occurred. If the private placement is not consummated, it could result in a new trial in May, 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, Teltronics 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 Teltronics' 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 Teltronics under its purchase of certain rights and technology from one of the former shareholders of Cascade. Teltronics served an Answer with affirmative defenses and a counterclaim seeking delivery of the Escrow Stock to Teltronics.
NOTE 16 - 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.
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(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 25,000 shares of Preferred Series B Convertible Stock for $2,500,000. 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 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.
(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) Incentive Stock Option Plan - The Company adopted an Incentive Stock Option Plan ("Plan") to enhance the Company's ability to retain the services of outstanding personnel and encourage such employees to have a greater financial investment in the Company. The Plan will terminate August 8, 2005 unless terminated earlier by the Board of Directors or extended by the Board with approval of the stockholders. The Plan authorizes the Board to grant stock options intended to qualify as incentive stock options under the Internal Revenue Code of 1986, as amended, to key employees of the Company or its subsidiaries, and is limited to 2,500,000 shares of the Company's common stock. The term of an option shall be fixed by the Board. The option price shall not be less than the fair market value of the Company's Common Stock on the date of grant, unless the grantee is the holder of more than 10% of the voting power of all classes of stock of the Company, in which case the option price shall not be less than 110% of the fair market value of the stock on the date of grant.
The following table summarizes certain weighted average data for options outstanding and currently exercisable as of December 31, 2000:
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The per share weighted average fair value of options granted during the years ended December 31, 2000, 1999 and 1998 were $2.29, $1.21 and $1.99, respectively. All options were granted at not less than the fair market value at date of grant. All options are exercisable over periods ranging from five to ten years from the date of grant unless employment is terminated. Options totaling 1,139,000 shares were available for grant at December 31, 2000. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for the Plan. Had compensation costs for the Plan been determined based on the fair value at the grant dates for the awards consistent with the provisions of SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts indicated below.
For purposes of pro forma disclosures, the fair value for options was estimated at the date of grant using the Black-Scholes option pricing model. Information regarding the Company's Stock Option Plan is summarized below:
Weighted Average Assumptions:
Weighted average exercise prices for option activity:
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The pro forma information is based on options granted which varies from year-to-year and is not necessarily indicative of pro forma information for future periods.
NOTE 17 - RELATED PARTY TRANSACTIONS
The following is a summary of transactions with related parties:
(A) Prepaid Lease Guarantee - A Director personally guaranteed a portion of the Company's obligations to the lessor over the term of the lease. The Company agreed to pay 6% of the total future value of the lease payments, excluding executory costs, as consideration for this guarantee. This amount was paid during 1991. The cost of the guarantee to the Company, 6% of $7,000,000 or $420,000 has been deferred as a financing cost (prepaid lease guarantee) in the accompanying financial statements and is amortized on a straight line basis over the term of the lease. Accumulated amortization of this amount at December 31, 2000 and 1999 was $291,708 and $262,908, respectively.
(B) Office Sublease - A company owned by a Director and principal shareholder of the Company rents offices from the Company and was billed $37,200, $39,200 and $51,721 in 2000, 1999 and 1998, respectively.
NOTE 18 - INCOME TAXES
The components of the income tax provision are as follows:
The following is a reconciliation of income tax expense recognized to that computed by applying the federal statutory rate of 34% in 2000, 1999 and 1998 to income before income taxes:
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant components of the Company's deferred tax assets and liabilities are as follows:
During the years ended December 31, 2000 and 1999, the Company recorded a valuation allowance on its deferred tax assets to reduce the total to an amount that management believes will be realized. Realization of deferred tax assets is dependent upon sufficient taxable income during the period that temporary differences and carryforwards are expected to be available to reduce taxable income.
At December 31, 2000, for federal income tax purposes, the Company had a net operating loss carryforward of approximately $6,900,000 and a Florida state net operating loss carryforward of approximately $8,000,000, which will expire in the years 2009 through 2020. Such net operating losses are available to offset future taxable income.
NOTE 19 - 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 and are described in the Summary of Significant Accounting Policies. 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 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.
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents information about reportable segment operations and assets.
Information on major customers is discussed in the Summary of Significant Accounting Policies. Sales to foreign countries were insignificant. All assets are located in the United States.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	Not applicable.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The following table sets forth the names, ages and positions of all directors and executive officers of the Company.
Name (1) Age Position
Ewen R. Cameron Director, President, Chief Executive Officer and Assistant Secretary
William L. Hutchison Executive Vice President, Chief Operating Officer and Assistant Secretary
Peter G. Tuckerman Vice President Product Management
Robert B. Ramey Vice President Electronic Manufacturing
Jeffrey L. Box Vice President Development, Chief Technical Officer
Alan R. Place Vice President Sales
Norman R. Dobiesz Director and Senior Vice President Business Development
Carl S. Levine Director
Gregory G. Barr Director
________________
(1) Mark E. Scott served as Vice President Finance, Secretary and Treasurer of the Company until February 9, 2001.
The Company's Directors will serve until the annual meeting of stockholders or until their successors are elected and qualified.
Ewen R. Cameron has served as President and Chief Executive Officer since July 1993 and a Director since June 1994. Prior to that, Mr. Cameron served as Managing Director of SRH plc, a European telecommunications and computer maintenance company from 1989 to 1992. From January 1978 to December 1989, Mr. Cameron served as Managing Director of Systems Reliability Europe SA/NV, a wholly owned subsidiary of SRH plc based in Brussels, Belgium. Mr. Cameron has spent the last 29 years in the computer and telecommunications industry.
William L. Hutchison, Executive Vice President of the Company has been involved in the telecommunications industry for 30 years having held various outside plant and engineering positions with the Bell System and United Telephone Company. He was a Product Manager for Pulsecom Division of Harvey Hubbell, Inc., from 1970 to 1974 before leaving to form his own company, ComDev, Inc., where he worked from 1974 through 1985, which in 1990 was acquired by the Company. He served as President and CEO and was a founder of Voice Computer Technology from April 1984 through July 1990. He also served as Vice President of Marketing for Shared Resource Exchange from July 1989 through July 1992, Vice President of Marketing for Melita International July 1992 through December 1994, and Vice President for Computer Communications Systems from December 1994 through October 1996, both leaders in emerging computer-telephony integrated technology industries. Mr. Hutchison received an undergraduate degree from Texas Tech and holds an MBA from Emory University.
Peter G. Tuckerman, Vice President Product Management, joined the Company in September of 1977. Since that time he has served in various R & D, Marketing and Product Management roles. Prior to joining the Company he was a principal in MicroWare, Inc., a developer of custom microcomputer software for telecommunications applications.
Robert B. Ramey joined the Company as Vice President, Manufacturing Operations in January 1995. Prior to joining the Company Mr. Ramey served twelve years with Loral Data Systems, a Defense
and Commercial electronic equipment manufacturer. Mr. Ramey has held diverse management positions including, Manufacturing Engineering, Industrial Engineering, Program Management, Telecommunications Production, Surface Mount Assembly and Total Quality Management. Mr. Ramey has been in the electronics industry over 16 years.
Jeffrey L. Box, Vice President of Development and Chief Technical Officer, joined the Company in November of 1996. In 1983, Mr. Box was one of the founders of Shared Resource Exchange, Inc.
(SRX), where he served as vice president until the acquisition by Teltronics in 1996. At SRX, he was the original architect of the switching platforms that have evolved into the present Teltronics Vision® product line. Prior to 1983, he held various engineering & management positions with Vought Corp., Arthur A. Collins, Inc., Rockwell International, and United Technologies. Mr. Box hold B.S.E.E. and M.S.E.E. degrees from Southern Methodist University and is a registered professional engineer in Texas.
Alan R. Place, Vice President of Sales, joined the Company in April of 1999. Prior to this, Mr. Place was with Norstan Communications, Inc. for 12 years. Mr. Place served in various sales management and executive management positions including Area Vice President/General Manager from 1994 through 1997 and as Vice President/Central US geography until joining the company. Mr. Place was with the Dictaphone division of Pitney Bowes Corporation from 1982 to 1988 and served in various sales and management positions, including Branch Manager and District Manager. Mr. Place has spent the last 21 years in the computer and telecommunications industries. Mr. Place holds an A.S. degree from Corning College, Corning, NY and a B.A. degree from the Ohio State University.
Norman R. Dobiesz has served as a Director of the Company since October 25, 1991 and is the Company's Senior Vice President, Business Development. Mr. Dobiesz has developed substantial financial and general management experience as a principal stockholder and executive of a group of privately held companies controlled by Mr. Dobiesz. Mr. Dobiesz is a principal stockholder of the Company.
Carl S. Levine has served as a Director of the Company since July 27, 1988. Mr. Levine is an attorney who has been engaged in private practice in New York, New York from 1977 to 1981, and in Garden City, New York from 1981 to June 1985. Mr. Levine is presently the senior partner in the law firm of Carl S. Levine & Associates, Roslyn, New York. He specializes primarily in the practice of energy, environmental and tax law. Prior to entering private practice, Mr. Levine was employed as counsel for New York Regional Office of the United States Department of Energy.
Gregory G. Barr is currently Area President of Gulf Coast National Bank, Fort Myers, Florida. Prior to that, Mr. Barr was employed as Senior Vice President, Senior Lender for SouthTrust Bank. From 1987 to 1997 Mr. Barr was employed by Barnett Bank, Inc. as Senior Vice President and Commercial Banking Manager for Manatee County. Mr. Barr has experience in Commercial Banking, Finance, Accounting and Capital Markets transactions. He is a graduate of Salem State College, Salem, Massachusetts holding a Bachelor of Science in accounting. Mr. Barr has served as a Director of the Company since June 4, 1999.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth the annual and long-term compensation paid by the Company during the years indicated to the Chief Executive Officer and its five (5) other, most highly paid executive officers
whose total salary and bonus exceeded $100,000 for the year ended December 31, 2000 (collectively, the "Named Officers").
(1) Certain personal benefits that aggregate less than ten percent (10%) of the total cash compensation of any of the executive officers or which cannot be readily ascertained are not included.
(2) Salary for 1999 for Messrs. Cameron and Dobiesz includes $50,000 total accrued, but not paid during both 1998 and 1997.
(3) All other compensation consists of relocation expenses.
(4) Alan R. Place was hired April 12, 1999. All other compensation consists of relocation expenses.
(5) Mark E. Scott served as the Company's Vice President, Finance, Secretary and Treasurer until February 9, 2001. Mr. Scott's options to purchase Common Stock of the Company were cancelled on February 9, 2001.
Employment Agreements
The Company entered into five (5) year employment agreements with Ewen Cameron, President, Chief Executive Officer and Assistant Secretary, and Norman R. Dobiesz, Senior Vice President, Business Development commencing May 1, 1999. Both agreements were amendments and restatements of prior agreements which the employees entered into with the Company as of January 1, 1995. Each employment agreement is renewable for an additional five (5) year period at the employees' option and provides for a base annual salary of $325,000 subject to annual increases of $25,000 per year. Either of the Company or the employee may terminate the employment agreements upon the occurrence of certain events. If the
Company terminates the employment of Mr. Cameron or Mr. Dobiesz, the terminated employee will be entitled to severance equal to one year's base salary.
On October 14, 1996, the Company entered into a three (3) year employment agreement with William L. Hutchison, the Company's Executive Vice President, Chief Operating Officer and Assistant Secretary. The employment agreement provides for an annual salary of $207,000 and is terminable prior to expiration of its stated term upon the occurrence of certain events. If Mr. Hutchison's employment agreement is terminated prior to its scheduled expiration without cause or for failure to adequately perform, in the Company's judgment, the services, duties and responsibilities assigned by the Company, whether or not such failure is intentional, Mr. Hutchison will be entitled to severance equal to six (6) month's salary.
Employee Stock Purchase Plan
On October 23, 2000, the Shareholders ratified adoption of an Employee Stock Purchase Plan ("ESPP") under which employees of the Company and its subsidiaries are provided the opportunity to acquire common stock of the Company under the Internal Revenue Code of 1986, as amended, at 85% of fair market value. An aggregate of 500,000 common shares are available under the ESPP. The ESPP became effective on June 19, 2000 upon adoption by the Company's Board of Directors. As of the date of this Annual Report on Form 10-K, no employees have purchased common shares under the Plan.
1995 Incentive Stock Option Plan
The Company adopted an Incentive Stock Option Plan, as amended ("Plan") to enhance the Company's ability to retain the services of outstanding personnel and encourage such employees to have a greater financial investment in the Company. The Plan authorizes the Board of Directors to grant incentive stock options under the Internal Revenue Code of 1986, as amended, to key employees of the Company or its subsidiaries. At the date of this Form 10-K there are approximately ninety employees eligible to participate in the Plan. The Plan is administered by the Board of Directors which has full power and authority to designate Participants, to determine the terms and provisions of respective option agreements (which need not be identical) and to interpret the provisions of the Plan. The Plan became effective May 16, 1995, was amended July 30, 1996 and will terminate August 8, 2005 unless earlier terminated by the Board of Directors or extended by the Board with approval of the stockholders.
An aggregate of 2,490,000 shares of the Company's Common Stock may be issued or transferred to grantees under the Plan. If there is a stock split, stock dividend or other relevant change affecting the Company's shares, appropriate adjustments will be made in the number of shares that may be issued or transferred in the future and in the number of shares and price of all outstanding grants made before such event. The option price shall not be less than the fair market value of the Company's Common Stock on the date of grant, unless the grantee is the holder of more than 10% of the voting power of all classes of stock of the Company, in which case the option price shall not be less than 110% of the fair market value of the stock on the date of grant. The Company has registered all of shares issuable under this Plan on Form S-8.
Options may be exercised solely by the Participant or his or her legal representative during his or her employment with the Company, or any subsidiary, or after his or her death by the person or persons entitled thereto under his or her will or the laws of descent and distribution. In the event of termination of employment for any reason other than death, permanent disability as determined by the Board, or retirement with the consent of the Company, Options may not be exercised by the Participant or his or her legal representative and shall lapse effective upon the earlier to occur of (i) notice of employment termination or (ii) last day of employment with the Company or any Subsidiary.
During 2000, the Company issued options to purchase 318,000 shares to non-executive employees and 50,000 shares to executive employees. During 2000, the Company canceled options previously granted to non-executive employees to purchase 23,000 shares of common stock. In each case, unless
the recipient of a grant was the holder of more than 10% of the Company's issued and outstanding Common Stock, the fair market value of the Common Stock on the date of grant determined the exercise price.
Option/SAR Grants in Last Fiscal Year
Name Number of
Securities
Underlying
Options/SARs
Granted (#) (1) % of Total
Options/SARs
Granted to
Employees
in Fiscal Year (1)
Exercise
or Base
Price ($/Sh)
Expiration Date
William L. Hutchison 15,000 4.1% $1.00
Mark E. Scott (2) 10,000 2.7% $1.00
Jeffrey L. Box 5,000 1.4% $1.00
________________________________
(1) Represents options only. No SARs have been granted.
(2) Mark E. Scott served until February 9, 2001. Effective that date Mr. Scott's options were cancelled.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
(1) None of the options granted to Mr. Cameron in 1995 and 1996 to purchase an aggregate of 530,000 shares were in-the-money at December 31, 2000 because they are exercisable at prices greater than the fair market value of the Company's Common Stock on such date.
(2) None of the options granted to Mr. Dobiesz in 1995 to purchase an aggregate of 30,000 shares were in-the-money at December 31, 2000 because they are exercisable at prices greater than the fair market value of the Company's Common Stock on such date.
(3) None of these options granted to Mr. Hutchison in 1996, 1997 and 1999 to purchase an aggregate of 60,000 shares were in-the-money at December 31, 2000 because they are exercisable at prices greater than the fair market value of the Company's Common Stock on such date.
(4) None of these options granted to Mr. Box in 1996 and 1997 to purchase an aggregate of 25,000 shares were in-the-money at December 31, 2000 because they are exercisable at prices greater than the fair market value of the Company's Common Stock on such date.
(5) None of these options granted to Mr. Place in 1999 to purchase an aggregate of 20,000 shares were in-the-money at December 31, 2000 because they are exercisable at prices greater than the fair market value of the Company's Common Stock on such date.
(6) None of these options granted to Mr. Scott in 1997 to purchase an aggregate of 30,000 shares were in-the-money at December 31, 2000 because they are exercisable at prices greater than the fair market value of the Company's Common Stock at such date. Mr. Scott's options were cancelled February 9, 2001.
Director Compensation
On August 12, 1996, the Company adopted a policy to compensate members of its Board of Directors in the amount of $2,500 for each meeting and reimburse expenses for attending meetings of the Board of Directors.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial ownership of all of the Company's outstanding voting securities by each person owning five percent (5%) or more of such shares, by each director, by each executive officer listed in Item 10 of this Report on Form 10-K, and by all directors and officers as a group as of March 16, 2001. Unless otherwise indicated, it is assumed that all shares are directly owned and that the holders thereof have sole voting and investment power with respect thereto.
(1) Does not include (i) an aggregate of 2,490,000 shares of Common Stock which may be issued upon exercise of incentive stock options granted or which could be granted under the Company's 1995 Incentive Stock Option Plan; (ii) possible issuance of up to 1,349,091 shares of Common Stock subject to adjustment, which may be issued upon: (a) conversion of the Preferred Series B Stock, and (b) the exercise of 890,000 Warrants issued to Finova Mezzanine Capital exercisable at a price of $2.75 per share, subject to adjustment; and (iii) an aggregate of 500,000 shares of Common Stock which may be issued under the Company's 2000 Employee Stock Purchase Plan. See BUSINESS - GENERAL.
(2) Director of the Company.
(3) Includes 56,000 shares owned by virtue of 100% ownership of H & N Management Co., Inc. ("H&N"), 1,140,000 shares owned by virtue of 100% ownership of W&D Consultants, Inc., and 4,455 shares owned by virtue of 67% ownership of Whitfield Capital of Sarasota, Inc. Excludes: (i) 100,000 shares of Preferred Series A Stock owned by Mr. Dobiesz, each such share entitling the holders to cast 400 votes, in any matter submitted for vote of the holders of common stock, and (ii) 30,000 shares issuable under incentive stock options exercised by Mr. Dobiesz in May 2000.
(4) Executive Officer of the Company named in Item 11 of this Report on Form 10-K.
(5) Beneficially owns less than 1% of the Company's outstanding Common Stock.
(6) Includes: (i) 2,000 shares held by Mr. Levine's wife; and (ii) 950 shares held by Mr. Levine's wife, as custodian for Mr. Levine's children, respecting which shares Mr. Levine disclaims beneficial ownership. Does not include up to 100,000 shares which may be issued upon exercise of incentive stock options by Mr. Levine.
(7) Does not include up to 1,030,000 shares which may be issued upon exercise of incentive stock options by Mr. Cameron.
(8) Does not include up to 75,000 shares which may be issued upon exercise of incentive stock options by Mr. Hutchison. Includes 4,000 shares held by Mr. Hutchison's wife in her IRA respecting which shares Mr. Hutchison disclaims beneficial ownership.
(9) Does not include up to 40,000 shares formerly issuable under incentive stock options cancelled February 9, 2001.
(10) Does not include 5% minority ownership in ISI.
(11) Includes 2,000 shares owned jointly with Mr. Barr's wife. Does not include up to 10,000 shares which may be issued upon exercise of incentive stock options by Mr. Barr.
(12) Does not include up to 20,000 shares which may be issued upon exercise of incentive stock options by Mr. Place.
(13) Does not include up to 30,000 shares which may be issued upon exercise of incentive stock options by Mr. Box.
(14) The information concerning these 5% or greater stockholders is based solely on information contained in Schedule 13D filings each of them made with the SEC.
(15) Does not include possible issuance of up to 1,349,091 shares of Common Stock issuable upon Finova's (i) conversion of the Preferred Series B Stock, and (ii) the exercise of 890,000 Warrants exercisable at a price of $2.75 per share, subject to adjustment.
Change of Control. The holders of the Preferred Convertible Series B Stock have the right to elect a majority of the Board of Directors of the Company if and whenever four quarterly dividends (whether or not consecutive) payable on the Preferred Convertible Series B Stock shall be in arrears.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective May 1, 1999 the Company entered into five (5) year employment agreements with Ewen Cameron, President & CEO, and Norman R. Dobiesz, Senior Vice President Business Development. See EXECUTIVE COMPENSATION - Employment Agreements.
The Company has an outstanding note payable to an officer, which is payable on demand with interest accruing at 8% per annum. The balance at December 31, 2000 and 1999 was $64,035 and $59,128, respectively.
A Director personally guaranteed a portion of the Company's obligations to the lessor over the term of the lease. The Company agreed to pay 6% of the total future value of the lease payments, excluding executory costs, as consideration for this guarantee. This amount was paid during 1991. The cost of the guarantee to the Company, 6% of $7,000,000 or $420,000 has been deferred as a financing cost (prepaid
lease guarantee) in the accompanying financial statements and is amortized on a straight line basis over the term of the lease. Accumulated amortization of this amount at December 31, 2000 and 1999 was $291,708 and $262,908, respectively.
A company owned by a Director and principal shareholder of the Company rents offices from the Company and was billed $37,200, $39,200 and $51,721 in 2000, 1999 and 1998.
PART IV Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements:
The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements on Page 23.
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts is on page 56.
All other consolidated financial statement schedules have been omitted because the required information is shown in the consolidated financial statements or notes thereto or they are not applicable.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the fourth quarter of fiscal year ended December 31, 2000.
(c) Exhibits:
3.1 Restated Certificate of Incorporation of Registrant, as amended. Filed as Exhibit 3.1 to Teltronics' Definitive Proxy Statement filed June 24, 1996.
3.2 By-Laws of the Registrant, as amended. Filed as Exhibit 3.2 to Teltronics' Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996.
3.3 Certificate of Designations of Preference of Series A Preferred Stock of Teltronics, Inc. filed with the Delaware Secretary of State on August 19, 1996. Filed as Exhibit 3.3 to Teltronics' Form 8-K filed October 4, 1996.
3.4 Certificate of Designations Establishing Series of Shares and Articles of Amendment of Teltronics, Inc., filed with the Delaware Secretary of State on February 24, 1998. Filed as Exhibit 3.4 to Teltronics' Form 8-K filed March 9, 1998.
3.5 Amended Designation of Teltronics, Inc. filed with the Delaware Secretary of State on February 25, 1998. Filed as Exhibit 3.5 to Teltronics' Form 8-K filed March 9, 1998.
10.1 Loan and Security Agreement between Sirrom Capital Corporation and Teltronics, Inc. and its Subsidiaries dated February 25, 1998. Filed as Exhibit 10.164 to Teltronics' Form 8-K filed March 9, 1998.
10.2 Registration Rights Agreement dated February 25, 1998 between Teltronics, Inc. and Sirrom Capital Corporation. Filed as Exhibit 10.169 to Teltronics' Form 8-K filed March 9, 1998.
10.3 Secured Senior Promissory Note of Teltronics, Inc. in the principal amount of $280,000 dated February 26, 1998 delivered to Sirrom Capital Corporation. Filed as Exhibit 10.166 to Teltronics' Form 8-K filed March 9, 1998.
10.4 Common Stock Purchase Warrant covering 525,000 shares of Common Stock of Teltronics, Inc. issued to Sirrom Capital Corporation dated February 26, 1998. Filed as Exhibit 10.167 to Teltronics' Form 8-K filed March 9, 1998.
10.5 Common Stock Purchase Warrant covering 365,000 shares of Common Stock of Teltronics, Inc. issued to Sirrom Capital Corporation dated February 26, 1998. Filed as Exhibit 10.168 to Teltronics' Form 8-K filed March 9, 1998.
10.6 Secured Senior Subordinated Promissory Note of Teltronics, Inc. in the principal amount of $1,000,000 dated February 28, 1998 delivered to Sirrom Capital Corporation. Filed as Exhibit 10.165 to Teltronics' Form 8-K filed March 9, 1998.
10.7 Agreement of Sale dated March 5, 1998 between AT Supply, Inc. and AT2 Communications, Incorporated. Filed as Exhibit 10.170 to Teltronics' Form 8-K filed March 19, 1998.
10.8 Amendment dated December 22, 1998, to Ninth Amendment to Loan and Security Agreement and First Note Modification Agreement dated July 23, 1997 between The CIT Group/Credit Finance, Inc. and Teltronics, Inc., AT Supply, Inc. and Interactive Solutions, Inc. Filed as Exhibit 10.1 to Teltronics' Annual Report on Form 10-K filed March 31, 1999.
10.9 Lease Rider No. 990325 dated March 25, 1999, between Teltronics, Inc. and SunShore Leasing Corporation. Filed as Exhibit 10.4 to Teltronics' Form 10-Q filed May 14, 1999.
10.10 Global Amendment dated March 29, 1999 between Sirrom Capital Corporation and Teltronics, Inc. and its Subsidiaries. Filed as Exhibit 10.1 to Teltronics' Form 10-Q filed May 14, 1999.
10.11 Amended and Restated Senior Secured Promissory Note in the amount of $1,000,000.00 dated and delivered March 29, 1999 by Teltronics, Inc. to Sirrom Capital Corporation. Filed as Exhibit 10.2 to Teltronics' Form 10-Q filed May 14, 1999.
10.12 Amended and Restated 12% Subordinated Secured Debenture Due February 13, 2002 dated and delivered March 29, 1999 by Teltronics, Inc. to Sirrom Capital Corporation. Filed as Exhibit 10.3 to Teltronics' Form 10-Q filed May 14, 1999.
10.13 Amended and Restated Employment Agreement between Teltronics, Inc. and Ewen R. Cameron dated May 3, 1999. Filed as Exhibit 10.1 to Teltronics' Form 10-Q filed August 2, 1999.
10.14 Amended and Restated Employment Agreement between Teltronics, Inc. and Norman R. Dobiesz dated May 3, 1999. Filed as Exhibit 10.2 to Teltronics' Form 10-Q filed August 2, 1999.
10.15 Agreement of Sale dated December 31, 1999 between Teltronics, Inc. and Telident, Inc. Filed as Exhibit 10.1 to Teltronics' Form 8-K filed January 14, 2000.
10.16 Amendment to Agreement of Sale dated February 16, 2000 between Teltronics, Inc., and Telident, Inc. Filed as Exhibit 10.1 to Teltronics' Form 8-K/A filed February 24, 2000.
10.17 Asset Sale Agreement dated June 30, 2000 by and between Teltronics, Inc. and Harris Corporation. Filed as Exhibit 10.1 to Teltronics' Form 8-K filed July 12, 2000.
10.18 Amended Agreement dated October 30, 2000 between Harris Corporation and Teltronics, Inc. Filed as Exhibit 10 to Teltronics' Form 10-Q filed November 13, 2000.
21* List of Subsidiaries.
23* Consent of Certified Public Accountants, Ernst & Young, LLP.
____
(*)
Filed as an Exhibit to this Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(1)	Relates to the sale of AT Supply on March 6, 1998.
SIGNATURES
	Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 17, 2001
By: /s/ Ewen R. Cameron Ewen R. Cameron
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities on the dates indicated.
SIGNATURES
TITLE
DATE
/s/ Ewen R. CameronEwen R. Cameron
Director, President and
Chief Executive Officer
April 17, 2001
/s/ Norman R. DobieszNorman R. Dobiesz
Director
April 17, 2001
/s/ Carl S. LevineCarl S. Levine
Director
April 17, 2001
/s/ Gregory G. BarrGregory G. Barr
Director
April 17, 2001