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EX-10.55 - EXHIBIT 10.55 WELLS FARGO FOOTHILL AMENDMENT #6 - TELTRONICS INCex10-5wff6.htm
EX-21 - SUBSIDIARIES - TELTRONICS INCex21subs2009.htm
EX-23 - KRMT - TELTRONICS INCex23krmt2009.htm
EX-32 - CEO & CFO SECTION 906 CERTIFICATION - TELTRONICS INCex32cert-2009.htm
EX-31.1 - CEO SECTION 302 CERTIFICATION - TELTRONICS INCex31-1ceo2009.htm
EX-31.2 - CFO SECTION 302 CERTIFICATION - TELTRONICS INCex31-2cfo2009.htm
EX-3.3 - EXHIBIT 3.3 BY-LAWS AS AMENDED - TELTRONICS INCex3-3amendedbylaws.htm

 
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

S
ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
   
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
   
£
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

For the transition period from _______________________ to ___________________________________

Commission File Number:                                                      0-17893                                


TELTRONICS, INC.
(Name of small business issuer in its charter)
 
Delaware
59-2937938
(State or other jurisdiction of Incorporation or organization)
(IRS Employer Identification Number)
 
2511 Corporate Way, Palmetto, Florida     34221
          (Address of principal executive offices)                             (Zip Code)
 
Issuer's telephone number, including area code:                                                                                                (941) 753-5000
 
Securities registered pursuant to Section 12(g) of the Exchange Act:

Common stock, $.001 par value
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   £   No   T

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   £   No   T

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   T   No   £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   N/A T

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:  (Check one):

Large accelerated filer £
Accelerated filer £
Non-accelerated filer  £
Small reporting company T
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   £   No   T

 
 

 


The aggregate market value on the OTC Bulletin Board of the Registrant's common stock held by non-affiliates, computed by reference to the average bid and asked price of the common stock on the OTC Bulletin Board as of the last business day of Teltronics' most recently completed second fiscal quarter (June 30, 2009), was approximately $985,884.  For purposes of computing such market value, the Registrant has assumed that affiliates include only its executive officers, directors and 5% stockholders. This determination of affiliate status has been made solely for the purpose of this Report, and the Registrant reserves the right to disclaim that any such individual is an affiliate of the Registrant for any other purposes.

As of March 22, 2010, 8,708,539 shares of the Registrant's common stock, par value $.001, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE














































Exhibit index appears on pages 55.



 
ii 

 


TABLE OF CONTENTS
 

 
PAGE NUMBER
 
PART I
 
 
ITEM 1.
BUSINESS
1
 
ITEM 2.
PROPERTIES
7
 
ITEM 3.
LEGAL PROCEEDINGS
7
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
7
PART II
 
 
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
8
 
ITEM 6.
SELECTED FINANCIAL DATA
10
 
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
11
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
18
 
ITEM 8.
FINANCIAL STATEMENTS
19
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
AND FINANCIAL DISCLOSURE
40
 
ITEM 9A(T).
CONTROLS AND PROCEDURES
40
PART III
 
 
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
41
 
ITEM 11.
EXECUTIVE COMPENSATION
43
 
ITEM 12.
SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
48
 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
50
 
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
51
PART IV
 
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
52
SIGNATURES
54
CERTIFICATIONS
 





 
iii 

 

PART  1


ITEM  1.    BUSINESS

    References in this report to the "Company," "Teltronics," "we," "our," or "us" mean Teltronics, Inc. together with its subsidiaries, except where the context otherwise requires.  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 can generally be identified as such because the context of the statement will include words such as we "believe," "anticipate," "expect," or words of similar import.  Similarly, statements that describe our future plans, objectives, strategies or goals are also forward-looking statements.  These forward-looking statements involve a number of risks and uncertainties that may materially adversely affect the anticipated results.  Such risks and uncertainties include, but are not limited to, 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 and other factors described in the Company's filings with the Securities and Exchange Commission.  Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements.  The forward-looking statements made herein are only made as of the date of this Form 10-K and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.  All dollar amounts are in thousands.

General

    Teltronics, Inc., a Delaware corporation, designs, installs, develops, manufactures and markets electronic hardware and application software products, and engages in electronic manufacturing services primarily in the telecommunication industry.

    Management utilizes criteria provided in Accounting Standards Codification 280 “Segment Reporting” (“ASC280”) to define its operating segments.  This standard defines an operating segment as a component of an enterprise (1) which engages in business activities from which it earns sales and incurs expenses, (2) whose operating results are regularly reviewed by the enterprises chief operating decision maker and (3) for which discrete financial information is available.

    The Company's operations are classified into two reportable segments, Teltronics, Inc. and Teltronics Limited (“UK”).  During 2008 the Company closed the Mexico segment.  This segment’s closing does not indicate a discontinuation of the Mexico business.  Existing business and new business within Mexico is being handled by United States personnel.  Operating segment data for 2009, 2008 and 2007 are summarized in Note 13 in the notes to the Consolidated Financial Statements in Part II and are incorporated herein by reference.

Our Strategy

    We are committed to the design, development and support of innovative communications solutions that enable our customers to increase revenues, decrease costs and improve productivity.  This includes: pure IP and hybrid based Switching Systems supporting converged voice and data communications for businesses of all sizes including government and education verticals; Contact Center solutions to effectively and efficiently manage voice, e-mail and web based customer interactions with support staff; and a comprehensive Alarm Management and Service Level Management solution through our Intelligent Systems Management product line.

    Our products are manufactured in our ISO 9001:2008 certified factory.  This enables us to be more responsive to our customers, as well as providing an additional source of revenue through our ability to provide contract manufacturing services.  We have invested in facilities that will allow us to
 
 
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expand our manufacturing for our existing product lines and accommodate an increase in our contract manufacturing services business.

TELTRONICS, INC. SEGMENT

Intelligent Systems Management

    As companies adopt technologies to improve communication and collaboration, preventing network and system downtime is essential to the success of a business.  The Teltronics Intelligent Systems Management (“ISM”) product line is designed to help service providers and enterprises reduce downtime for converged voice and data networks in today’s multi-vendor, multi-technology environments.

    With an increased focus on service level agreements in support of reduced downtime and improved end user productivity, Service Level Management has significantly grown in importance. Service providers and enterprises must be able to predict and prevent problems in order to ensure service quality and delivery.  With this objective in mind, Teltronics has expanded its ISM product line to include monitoring and management for critical resources such as VoIP, servers, databases and applications.  The expanded suite of ISM products is named Intelligent Service Level Management (“iSLM”).  iSLM enables service providers and enterprises to proactively manage a wider variety of environments than ever before, including traditional PBXs, IP telephony, IT infrastructure and application performance.  The iSLM product line consists of a centralized management system, IRISnGEN®, and three intelligent remote agents offering unique monitoring capabilities, NET-PATH®, VQProbe™ and NimBUS to provide a comprehensive Alarm Management and Service Level Management solution.

    iSLM IRISnGEN®.  IRISnGEN is a best-in-class Windows based alarms management system which provides centralized visibility and control of all monitored systems.  Critical data received by IRISnGEN from its Remote Agents (NET-PATH, VQProbe and NimBUS Agents) is displayed instantly through the Alarm Viewer which identifies problem severity, specific trouble areas and faulty equipment.  IRISnGEN facilitates remote access to a customer site for correction of service affecting problems, thereby avoiding costly site visits and reducing downtime.

    Usability, customized reporting, geographical alarm display, alarm escalation, alarm correlation, and alarm forwarding are just a few of the key features of IRISnGEN.   In addition a comprehensive Application Program Interface (API) is available to assist customers in integrating IRISnGEN with legacy management systems and databases.

    iSLM NET-PATH®.  The NET-PATH suite of intelligent remote agents are host-independent devices designed to monitor and report alarms for nearly any electronic device equipped with a serial interface, alarm contact or network connection.  NET-PATH utilizes an architecture specifically engineered for unattended operation.  It incorporates a built-in UPS to provide the highest possible reliability for monitoring mission-critical devices.

    Tremendous extensibility in data screening allows NET-PATH to detect and react to changing host conditions with customized responses.  NET-PATH monitors legacy PBX equipment or IP Telephony communications systems and provides all of the data needed to effectively report and correct service-affecting problems.

    iSLM VQProbe.  VQProbe is a high performance, standards-based, non-intrusive call quality monitoring and diagnostic agent that integrates directly into the ISM/iSLM suite of products.  It provides real-time visibility of network performance, detection of transient problems and comprehensive diagnostic data.  VQProbe collects voice quality data transmitted in an RTCP-XR stream or measures key characteristics of the packet voice stream (RTP packets) and calculates real-time performance data used to detect, characterize and report transient problems.  It provides detailed information on the severity and distribution of packet loss and discards due to jitter and other essential diagnostic data. Most importantly, VQProbe is able to detect the transient IP problems and assess their effects on call quality.

 
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    iSLM NimBUS.  For data collection, service automation and service level management, NimBUS offers a comprehensive suite of infrastructure monitoring agents.  NimBUS agents enable full coverage of heterogeneous IT infrastructures.  Monitoring probes include support for networks, databases, servers, middleware, email, applications, web-based services, directory services, and much more. NimBUS open APIs, flexible architecture, and out-of-the-box third-party integrations and gateways, ensure that adapting to other management tools and monitoring processes is easily achieved.

    NimBUS is a Service Level Management platform that provides scalable, resilient, and reliable monitoring capabilities for Service Providers that wish to proactively manage their clients’ IT infrastructures and critical business services.

Customer Contact Management Systems

    OmniWorks.  OmniWorks is a Windows client-server based, sophisticated multi-media customer contact and management system for use by enterprise operations whose mission includes receiving or launching large numbers of telephone calls.  The product also has 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").

    OmniWorks 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.  OmniWorks integrates with the Cerato® product line and is available to any of the Company's distribution partners with support from its professional services group; however, the target market is larger users with sophisticated IT requirements and infrastructures.

Switching Systems

    Building on decades of enterprise telephony leadership and experience, Teltronics switching systems offer 99.999% quality of service, mission critical reliability and scalability.  With more than 15,000 systems in operation world wide, Teltronics is the solution of choice for a wide variety of industries including service providers, utilities, manufacturing, retail, government, education, healthcare and financial institutions.  Scaling from 8 to 9,216 ports, the Cerato® family of products provides hybrid and pure IP solutions supporting small, medium and large enterprises with one or multiple locations.

    CERATO® ME and LE.   Expanding on the success of the 20-20™, Teltronics launched a whole new range of products under the Cerato name.  The Cerato ME and LE offers the same unsurpassed reliability and feature rich services customers have previously enjoyed but with a reduced footprint so less space is required for implementation.  The Cerato ME and LE are full-featured, redundant, high-density communication systems with a complete set of calling features and multi-media applications supporting, analog, digital, VoIP and softphone subscribers.

    The ME consists of one high density common control shelf and any combination of high density expansion shelf, mid density expansion shelf and low density expansion shelf that can extend up to 2,048 ports.

    The LE consists of a common control shelf that is housed in one cabinet with redundant common equipment.  As with the ME, the interface units are located in the high density expansion shelf, mid density expansion shelves and low density expansion shelves.  Any combination of expansion shelves can extend up to 9,216 ports.

    As with the 20-20, these switching products may be configured for fully redundant common control when system availability is critical, such as in large call centers or critical government applications.  As an example, 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-
 
 
3

 
telephony interface, the Teltronics Switching Systems have been used by systems integrators throughout the world for large custom applications as well as "local dial tone" in small central office applications.

    CERATO Vision® IP (“VIP”). The Cerato VIP is a highly reliable, cost effective option for businesses requiring basic calling features but want the cost savings associated with a converged voice and data network.  It operates as a stand alone phone system as well as a remote phone system which integrates with the Cerato ME or LE.  The Cerato VIP family of products supports terminations to traditional Digital and Analog Public Switched Telephone Network (“PSTN”) as well as VoIP networks.  It is available in a number of platforms that support 128 Direct VoIP terminations, T1/E1 Digital trunks, 8, 24 or 32 Analog Subscribers, 4 or 8 Analog LS trunks and includes an embedded SIP server.

    CERATO IP. Cerato IP is a pure VoIP PBX.  Cerato IP uses Session Initiation Protocol (“SIP”) and is specifically designed to meet the needs of small to medium sized enterprises (both single-site and multi-location).  The system combines the high speed access of broadband, the reliability of modern telecommunications, and the power of full-featured network servers to provide high quality voice and data communications to employees whether they work at the office, at home, or around the globe.

    Cerato IP can sit behind an existing legacy private branch exchange (“PBX”) to provide VoIP functionality, or connect directly to the PSTN and IP networks.  It supports standard analog and digital trunk connections to the PSTN plus WAN gateway connections to corporate WANs or the Internet for VoIP calls irrespective of location.  The system supports portal-to-portal VoIP internetworking to reduce inter-site call costs.  Simplicity of installation, programming, and administration/use are some of Cerato IP’s most appealing benefits. Intuitive, easy to use graphical administration tools take the complexity out of system installation and administration, and Cerato IP's Fingertip Toolset™ enables employees to manage their own workstation settings and launch powerful integrated application suites at the touch of a button.  Cerato IP supports a range of SIP phones including a touch-screen phone.

    Linux-based Cerato IP supports over 700 ports, including up to 500 IP phones, portal-to-portal VoIP internetworking, plus PSTN Gateways to support up to 96 analog trunks and/or analog phones and up to 192 T1 PRI/240 E1 PRI trunks.  The target Cerato IP market is customers with single or multi-site campus environments; a multi-site campus supporting over 4,000 phones.
 
    The Company continues to invest in engineering development to maintain and expand capabilities to include IP Telephony convergence.

Emergency Response Systems

    The Company decided that the 911 Emergency business sector was not strategic to the overall future of the Company.  The Company had already exited the PSAP business.  The Telident product line was sold to Amcom Software, Inc. in January of 2008.

Electronic Manufacturing Services

    Teltronics provides electronic manufacturing services for companies in the telecommunications, industrial control, test and measurement and other computer-related industries.  Services include design and test ability reviews, 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 to ISO 9001:2008.  The manufacturing facility is also UL registered. Through our quality certifications, 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.

 
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Trademarks, Patents and Copyrights

    We rely on patent, trademark, trade secret and copyright laws both to protect our intellectual property, including our proprietary technology, and to protect us against claims from others.  We believe that we have direct intellectual property rights covering substantially all our material technologies.  We currently hold a world-wide, non-exclusive, fully paid-up license to make, use and sell the inventions under approximately 40 U.S patents and numerous international patents and patent applications relating to the 20-20 digital switching product line.  We consider the patents relating to our digital switching products to be the most important to our business.  The U.S. patents relating to the 20-20 digital switching systems expire on various dates between 2010 and 2020.  We have approximately 22 registered trademarks in the United States, of which we consider the 20-20 and the SEBea to be our most valuable.  We license some technology from third parties that we use in providing manufacturing services to our customers.  We believe that such licenses are generally available on commercial terms from a number of licensors.  Generally, the agreements governing such technology grant us non-exclusive licenses regarding the subject technology and terminate upon a material breach by us.

    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.

Component Procurement

    The Company assembles a majority of its products at its manufacturing 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, 2009 was approximately $9,547, as compared to $17,181 at December 31, 2008.  The Company's backlog is for orders that have scheduled deliveries or maintenance over the next twelve months, and is not an indication that the Company is unable to fulfill these requirements.  Given the nature of our relationships with our customers, we allow our customers to reschedule deliveries, and therefore, backlog is not necessarily indicative of our future financial results.

Seasonality

    The Company has experienced seasonality 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 typically not as strong as results during the other quarters.  The sales of the Company continued to be impacted by the general slowdown of telecommunications expenditures.

 
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Customers

    Our core strategy is to establish and maintain long-term relationships with leading telecommunications customers.  A small number of customers have historically represented a major portion of our net sales.  The table below sets forth the respective portion of net sales for the applicable period attributable to our customers who individually accounted for more than 10% of our net sales in any respective period:

   
 
Years Ended December 31,
   
 
2009
 
2008
 
2007
   
   
  
     
   
New York City Department of Education
 50%
  
 30%
 
 24%
   
Nielsen Media Research
 ---%
  
 7%
 
 11%


    We expect to continue to depend upon a relatively small number of customers for a significant percentage of our net revenue.  The historic percentages in the table above are not necessarily indicative of the percentage of net sales that we may receive from any customer in the future.

Competition

    The telecommunications network industry is highly competitive.  For the Switching Systems and Contact Center product lines the dominate competitors are Cisco and Avaya, which acquired the business of NORTEL.  For the iSLM product line our primary competitors are HP, IBM, BMC and NET IQ.  We compete very favorably with all of our competitors based on price/total cost of ownership, reliability, scalability, technology, ease of administration, installation and use, customer service and technical support.

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, 2009, 2008 and 2007 were $2,826, $3,928 and $4,671, respectively.

Regulatory

    Federal Communications Commission.  The Company must comply with certain regulatory guidelines. 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.


 
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    Environmental.   We are subject to a variety of federal, state, local and foreign environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process.  Although we believe that we are currently in substantial compliance with all material environmental regulations, any failure to comply with present and future regulations could subject us to future liabilities or the suspension of production.  In addition, such regulations could restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expense to comply with environmental regulations.

Employees

    As of December 31, 2009, the Company had 186 employees.

Available Information

    Copies of Teltronics' Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through Teltronics' website (www.teltronics.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission.  The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the Securities and Exchange Commission.

ITEM  2.    PROPERTIES

    Teltronics, Inc. recently signed a new lease agreement for a state of the art facility located in Palmetto, Florida.  The new facility is comprised of 21,520 square feet office space and 30,000 square feet manufacturing space.  The new lease agreement expires in 2025.

    Our old facility where our manufacturing continues to operate at December 31, 2009 is in Sarasota, Florida.  The leased facility consists of approximately 72,000 square feet, approximately 36,000 square feet of which are used for laboratories and offices.  The lease expires in February 2011.

    To date, Teltronics operates the business from both the new facility and the old facility in order to continue manufacturing processes.  The move of the manufacturing plant to the Palmetto facility is anticipated for sometime during 2010.

    We lease a facility in Whitestone, New York that is the base of our technical support group.  This lease expires in August 2010.

    The Company also leases offices in several locations under leases expiring at various dates.  We believe that our existing facilities are suitable and adequate for our current needs.

ITEM  3.    LEGAL PROCEEDINGS

    The Company from time to time is involved in legal actions arising in the ordinary course of business.  With respect to these matters, management believes that it has adequate legal defenses or has provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on the Company's future financial position or results of operations.

ITEM  4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


 
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PART  II


ITEM  5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
       STOCKHOLDER MATTERS

    Our common stock currently trades on the OTC Bulletin Board under the symbol "TELT."  The following table sets forth, for the fiscal quarters indicated the high and low bid quotations for the Company's common stock as reported on the OTC Bulletin Board.  OTC Bulletin Board quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not necessarily represent actual transactions.

   
COMMON STOCK
 
   
2009
   
2008
 
   
High
   
Low
   
High
   
Low
 
PERIOD
                       
                         
1st Quarter
  $ 0.04     $ 0.01     $ 0.34     $ 0.30  
2nd Quarter
    0.25       0.03       0.33       0.17  
3rd Quarter
    0.74       0.12       0.21       0.10  
4th Quarter
    1.95       0.59       0.12       0.03  

On March 22, 2010, the last reported sales price for the Company's common stock as reported on the OTC Bulletin Board was $1.63 per share.  As of March 22, 2010, there were approximately 408 shareholders of record of the Company's common stock.

The Company historically has not paid cash dividends on its common stock.  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.  Additionally, certain covenants in our financing agreements restrict the payment of cash dividends.

The Preferred Series A stock are restricted securities owned by the Company's Director and Senior Vice President of Business Development and are subject to resale restrictions including the right of the Company to approve or disapprove any sale, transfer or disposition to any third party not controlled by the Director.  Each share is entitled to 400 votes and is not entitled to any dividends.  Accordingly, this would give the Senior Vice President voting control of the Company.

The Company has 12,625 shares of Preferred Series B Convertible stock outstanding at December 31, 2009 and 2008.  The Preferred Series B Convertible stock provides for a $20 per share annual dividend, payable quarterly.  The holder of the Preferred Series B Convertible stock has the right, at its option, to convert the 12,625 preferred shares to 721,429 common shares.  The Company has the right, but not the obligation, to redeem the Preferred Series B Convertible stock in full at 100% of the face value plus accrued and unpaid dividends. Unpaid dividends accrue interest at 10% per annum.  The Preferred Series B Convertible stock contains certain covenants, including the right to appoint a director which has been exercised by the holder.

The Company has 40,000 shares of Preferred Series C Convertible stock outstanding at December 31, 2009 and 2008.  The Preferred Series C Convertible stock, which is owned by an entity controlled by the Company’s Director and Executive Vice President of Business Development, provides for a $20 per share annual dividend, payable quarterly.  The holder of the Preferred Series C Convertible stock has the right, but not the obligation, at its option, to convert the 40,000 preferred shares to 1,454,545 common shares, subject to adjustment.  The Company has the right, but not the obligation, to redeem all or a portion of the then outstanding Preferred Series C Convertible stock at any time for 100% of the face value plus accrued and unpaid dividends.  Unpaid dividends accrue interest at 10% per annum.  As of December 31, 2009 and 2008, accrued interest on these Preferred Series C shares totaled $1,064 and $724, respectively.

 
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The information relating to our equity compensation plans required by this item is included in Item 12 under the heading "Equity Compensation Plans" and incorporated by reference herein.


STOCK PERFORMANCE GRAPH

The following graph compares the cumulative total return on the Company’s Common Stock as compared to the cumulative total return for the Nasdaq Stock Market Total Return Index – US Companies, and the Nasdaq Stock Market – Telecommunications Stock Index.  The Stock Performance Graph assumes $100 was invested in the stock or the index on December 31, 2004 and assumes that no dividends were paid.

Five Year Cumulative Total Return Chart
(Per $100 Invested)

 
2004
2005
2006
2007
2008
2009
 
Teltronics, Inc.
100
81
63
56
6
285
 
NASDAQ Stock Market – US Companies
100
101
111
122
71
105
 
NASDAQ Stock Market – Telecommunications Stock
100
93
119
129
74
109


Five Year Cumulative Total Return Graph
(Per $100 Invested at Fiscal Year Ending December 31,)


 
9

 

ITEM 6.    SELECTED FINANCIAL DATA

The following selected historical consolidated financial data was derived from the Company's audited financial statements and 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.


   
2009
   
2008
   
2007
   
2006
   
2005
 
 
Statement of Operations Data:
                             
                               
Net sales
  $ 43,092     $ 34,638     $ 40,631     $ 46,891     $ 46,111  
Gross profit
    17,650       11,442       15,448       19,311       18,178  
Recurring operating expense
    10,712       14,550       15,441       16,198       16,182  
Impairment of fixed assets
    ---       ---       ---       ---       1,583  
Impairment of goodwill and
intangible assets
    ---       169       ---       ---       ---  
Total operating expenses
    10,712       14,719       15,441       16,198       17,765  
Income (loss) from operations
    6,938       (3,277 )     7       3,113       413  
 
Other income (expense):
                                       
Interest
    (1,441 )     (1,402 )     (1,948 )     (1,449 )     (1,283 )
Non-operating gain (loss)
    49       1,407       (136 )     (19 )     4,728  
Total other income (expense)
    (1,392 )     5       (2,084 )     (1,468 )     3,445  
                                         
Net income (loss)
    5,427     $ (3,281 )   $ (2,070 )   $ 1,607     $ 3,816  
Net income (loss) available to
common shareholders
    4,374     $ (4,376 )   $ (3,022 )   $ 954     $ 3,168  
                                         
Net income (loss) per share:
                                       
Basic
  $ 0.51     $ (0.51 )   $ (0.35   $ 0.11     $ 0.39  
Diluted
  $ 0.48     $ (0.51 )   $ (0.35   $ 0.10     $ 0.36  
                                         
Shares used to compute amount:
                                       
Basic
    8,653,090       8,647,539       8,646,706       8,637,246       8,041,323  
Diluted
    9,730,310       8,647,539       8,646,706       9,280,289       10,540,391  
 
Balance Sheet Data:
                                       
Working capital (deficiency)
  $ (962 )   $ (4,935 )   $ 116     $ 798     $ (326 )
Total assets
    11,543       12,644       18,033       16,692       16,980  
Line of credit, current portion of
long-term debt and capital
lease obligations
    4,344       5,731       5,788       6,228       5,967  
Long-term debt and capital lease
obligations, less current portion
    1,029       2,214       4,125       2,366       3,081  
Total shareholders' deficiency
  $ (4,672 )   $ (9,126 )   $ (4,487 )   $ (1,452 )   $ (2,586 )


 
10

 

ITEM  7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS

This management’s discussion and analysis should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report on Form 10-K.

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 can generally be identified as such because the context of the statement will include words such as we "believe," "anticipate," "expect," or words of similar
import.  Similarly, statements that describe our future plans, objectives, strategies or goals are also forward-looking statements. These forward-looking statements involve a number of risks and uncertainties that may materially adversely affect the anticipated results. Such risks and uncertainties include, but are not limited to, 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, and other factors described in the Company's filings with the Securities and Exchange Commission.  Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements.  The forward-looking statements made herein are only made as of the date of this Form 10-K and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

General Overview

The Company focuses on three 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 companies to enable them to be pro-active in maintaining their systems.  Typical service companies are companies such as Verizon, Black Box, Southwestern Bell (new AT&T), Telus and Bell Canada. 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 company 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 SEBea, which is an alarms management, monitoring, pro-active computerized device.  The Company expects to continue to invest in research and development to develop, not only next generation versions of the centralized Windows® NT based software (IRISnGEN), but also the SEB hardware including NET-PATH®.

The second telecommunications market is in the Digital Switching Systems arena which involves providing telephone switches to Small and Medium Business Markets (“SMB”) as well as advanced Automatic Call Distribution.  The Company's premier product in this market is the 20-20™ switching system.
 
The 20-20 switching system offers a price competitive solution from 300 ports to just under 10,000.  The 20-20 products are being sold both directly and through distributors, particularly outside the USA.
 
The 20-20 switching system is technically approved by, and has been installed in, over 60 countries.  Teltronics continues to support the international channels and the distributors of the 20-20 switching system sell to and provide installation and support for their customers.
 
Teltronics also has some significant direct customers, in particular the New York City Department of Education, the City of New York Department of Corrections and the Federal Bureau of Prisons.  These installations are supported by our organization in Whitestone, New York.

 
11

 

    Although the Company continues to offer the 20-20 system in its Digital form, it also offers the ability to IP enable the 20-20, both to the desk top as well as to the PSTN/SIP trunks, etc.

    The latest iteration of the 20-20 is the re-engineered CERATO ME/LE which is a fully redundant high density hybrid IP PBX.

    The Company also offers a Contact Center product, OmniWorks.  The product continues to be enhanced and the product now provides, web chat, e-mail, and multimedia to the Contact Center.

    The third telecommunications market is VoIP.  The Company entered this market in the fourth quarter of 2003 with the introduction of Cypreon.  Cerato IP (formerly Cypreon) combines the power of voice, data and video into a single, robust and feature rich solution.  The market focus of this product is the SMB.  Cerato IP allows these businesses to embrace cost and time saving advances previously reserved for only the largest of corporations.

    The system supports all the telephony features expected from a business communication private computer exchange (“PCX”) platform designed to address the requirements of small to medium enterprises, plus a variety of applications to enhance, streamline, and personalize business communications.  Feature support includes most standard telephony functions, such as multi-party conference at the desktop, rules based call forwarding, message indication, hot desking, night service, attendant console support, and call park/page/pickup.  A few of Cerato IP’s initial applications include unified messaging, voicemail, speech enabled automated attendant, contact center and contact management applications.

    Cerato IP’s ability to provide fully featured telephony functions, complimented and enhanced by intelligent call control applications, make it an attractive overall solution for improving, streamlining, and personalizing both internal and external business communications. One of the key features of the system is the simplified administration.  Its browser based administrative interface makes programming and maintaining the system very user friendly.

    Cerato IP is designed to operate as both a single site and enterprise solution.  The ability to interconnect multiple systems over an IP WAN allows hundreds of users independent of physical location to be seamlessly interconnected.

    The Company continues to invest in engineering development to maintain and expand its 20-20 switching systems capabilities to include IP Telephony convergence.  With the introduction of IP Telephony gateways, the more than 15,000 20-20 end users can upgrade their systems, allowing them to retain the existing 20-20 system investments.

    Additionally, the Company has been successful in manufacturing its own products.  To supplement its own business, the Company also sells electronic manufacturing services to companies that require high quality, but have low volume manufacturing demand.  This enables the Company to maximize its production facility and more effectively absorb overhead costs.

Critical Accounting Policies and Estimates

    The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements that have been prepared under accounting principles generally accepted in the United States of America.  The preparation of financial statements in conformity with accounting principles accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates because the estimates represent judgments made at specific dates for events that are ongoing.  Critical accounting policies have the potential to have the most significant impact on the consolidated financial statements. We have disclosed all significant accounting policies including our critical accounting policies in Note 2 to the consolidated financial statements included in this Form 10-K.

 
12

 

    Our most critical accounting policies revolve around the manner in which the Company recognizes revenues and are summarized as follows:

Revenue recognition

    Manufacturing.    Revenues from sales of product, including our electronic manufacturing services business are recognized when title and risk of loss passes, which is generally when the product is shipped.  Based on the Company's history of providing manufacturing services, we believe that collectibility is reasonably assured.

    Revenue Recognition – Multiple-Element Arrangements.  Certain of the Company's arrangements include multiple deliverables, which consist of product, installation, and training.  In the absence of higher-level specific authoritative guidance, the Company determines the units of accounting for multiple element arrangements in accordance with Accounting Standards Codification 605-25 “Revenue Recognition – Multiple-Element Arrangements” (“ASC 605-25”).  Specifically, the Company will consider a delivered item as a separate unit of accounting if it has value to the customer on a standalone basis, if there is objective and reliable evidence of the fair value of the undelivered elements, and, if the arrangement includes a general right of return relative to the delivered element, delivery or performance of the undelivered element is considered probable and is substantially within the Company's control.

    On those contracts in which the customer accepts ownership of the individual deliverables, a general right of return exists on the deliverable and it is both probable and substantially within the Company’s control to deliver the remaining elements, revenues will be recognized as the customer accepts the deliverables.

    For those customers that only accept multiple deliverable projects at the conclusion of the project, revenue is recognized under either the completed contract method or the percentage-of-completion method depending on the right to require the customer to make progress payments to support their ownership investment and to approve the services performed to date if they meet the contract requirements.  If the percentage-of-completion method is used, revenues and related costs are recognized as work on a contract progresses. The progress of a contract in terms of recognizing revenue and related costs is based on satisfying the milestones for the specific contract.  Provision is made for any anticipated contract losses in the period that the loss becomes evident.

    Maintenance and Service.    Revenues from support and maintenance activities are recognized ratably over the term of the maintenance period and the unrecognized portion is included in deferred revenue.  Costs from support and maintenance activities are recognized when the related revenues are recognized or when those costs are incurred, whichever occurs first.

Impairments

    If the carrying value of an asset exceeds the sum of estimated undiscounted future cash flows, an impairment loss is recognized for the difference between the estimated fair value and carrying value in accordance with Accounting Standards Codification 360-10 “Property, Plant and Equipment – Impairment of Long Lived Assets”.  (“ASC 360-10”)

    The Company assesses the recoverability of goodwill and intangible assets not subject to amortization under Accounting Standards Codification 350 “Intangibles – Goodwill and Other” (ASC350”).

Inventory obsolescence

    Inventories are stated at the lower of cost or market.  In the electronics and telecommunications industry technology changes rapidly and, accordingly, a considerable amount of judgment is used when evaluating inventories for the level of obsolescence.

 
13

 

Results of Operations

The following tables set forth certain data, expressed as a percentage of revenue, from the consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007.

   
2009
   
2008
   
2007
 
                   
Net sales
    100.0 %     100.0 %     100.0 %
Gross profit
    41.0       33.0       38.0  
Recurring operating expense
    25.0       42.0       38.0  
Impairment of fixed assets
    ---       0.5       ---  
Total operating expenses
    25.0       42.5       38.0  
Income (loss) from operations
    16.0       (9.5 )     0.0  
                         
Other income (expense):
                       
Interest
    (3.3 )     (4.0 )     (4.8 )
Non-operating gain (loss)
    0.1       4.0       (0.3 )
                         
Total other income (expense)
    (3.2 )     0.0       (5.1 )
                         
Income (loss) before income taxes
    12.8       (9.5 )     (5.1 )
                         
Provision for income taxes
    0.2       0.0       0.0  
Net income (loss)
    12.6 %     (9.5 )%     (5.1 )%

    The following is a discussion of results of operations for each of the three years ended December 31, 2009, 2008 and 2007.  The discussion should be read in conjunction with our Consolidated Financial Statements and notes thereto included elsewhere herein. The statements regarding the telecommunications industry, our expectations regarding our future performance and other non-historical statements in this discussion are forward-looking statements.

Net Sales and Gross Profit Margin (in thousands)

    Net sales increased $8,454 or 24.4% for the year ended December 31, 2009 as compared to the same period in 2008.  Net sales decreased $5,993 or 14.7% for the year ended December 31, 2008 compared to the same period in 2007.

    The increase in net sales for the year ended December 31, 2009 was primarily a result of an increase of $9,047 in net sales from the US and a decrease of $593 in net sales from the UK subsidiary.

    The decrease in net sales for the year ended December 31, 2008 was primarily a result of a decrease of $5,684 in net sales from the US, a decrease of $49 in net sales from UK subsidiary, and a $260 decrease in net sales from the Mexico subsidiary.

    Gross profit margin for the years ended December 31, 2009, 2008 and 2007 were 41.0%, 33.0% and 38.0%, respectively. Gross profit margin fluctuates based on current pricing volume and mix of sales.

Operating Expenses

    Recurring operating expenses were $10,712, $14,550 and $15,441 for the years ended December 31, 2009, 2008 and 2007, respectively.  Due to the economic downturn, the Company made two cuts during 2008. In June 2008 the Company closed down its Research and Development facility in Salt Lake City, Utah.  R&D for the 20-20/Cerato products are now consolidated in California and in Sarasota.  The Company also reduced its personnel in Sarasota in its ISM product line as well as decreased personnel in its manufacturing facility.  These cuts reduced the Company’s operating expenses by $3,838 and $891 in 2009 and 2008, respectively.

 
14

 

2009

    General and administrative expenses decreased $1,387 for the year ended December 31, 2009 as compared to the same period in 2008.  The net decrease for the year ended December 31, 2009 was primarily the result of the following items:  (a) a $794 decrease in compensation and fringe benefit expense, (b) a $309 decrease in severance, (c) a $38 decrease in business insurance, (d) a $86 decrease in professional fees, (e) a $181 decrease in audit and legal fees, (f) a $72 decrease in office supplies, (g) a $24 decrease in travel, M&E and, (h) a $32 decrease in software, licenses and support.  These decreases were offset with a $149 increase in bad debt reserve.

    Sales and marketing expenses decreased $1,041 for the year ended December 31, 2009 as compared to the same period in 2008.  The net decrease for the year ended December 31, 2009 was  primarily the result of the following items:  (a) a $730 decrease in compensation and fringe benefit expenses, (b) a $36 decrease in severance, (c) a $11 decrease in professional fees, (d) a $14 decrease in document fees, (e) a $92 decrease in telephone and office supplies, (f) a $146 decrease in travel, M&E and (h) a $32 decrease in sales promotions, training and software, license and support.  These decreases were offset with a $20 increase in bad debt reserve.

    Research and development expenses decreased $1,102 for the year ended December 31, 2009 as compared to the same period in 2008.  The net decrease for the year December 31, 2009 was primarily the result of (a) a $605 decrease in compensation and fringe benefits, (b) a $167 decrease in severance, (c) a $267 decrease in rents, (d) a $62 decrease in travel, M&E, (e) a $62 decrease in certifications and (f) a $9 decrease in telephone charges.  These decreases were offset by a $47 increase in outside consulting fees and a $23 increase in R&D material and equipment.

    Depreciation and amortization decreased by $308 for the year ended December 31, 2009 as compared to the same period in 2008.  The decrease for the year ended December 31, 2009 was primarily the result of (a) lower asset purchases and older assets becoming fully depreciated and (b) a $171 decrease due to the purchase of a customer list that was subsequently written off in 2008.

2008

    General and administrative expenses increased $398 for the year ended December 31, 2008 as compared to the same period in 2007.  The net increase for the year ended December 31, 2008 was primarily the result of the following items: (a) a $266 increase in compensation and fringe benefit expenses, (b) a $262 increase in severance, (c) a $120 increase in professional fees and (d) an $87 increase in software licenses and support.  These increases were partially offset with a $80 decrease in bad debt expense, a $168 decrease in audit and legal, a $55 decrease in business insurance and a $34 decrease in travel, M&E.

    Sales and marketing expenses decreased $798 for the year ended December 31, 2008 as compared to the same period 2007.  The net decrease for the year December 31, 2008 was primarily the result of the following items: (a) a $485 decrease in payroll, (b) a $324 decrease in commission and fringe benefit expenses, (c) a $44 decrease in travel related expense, and (d) a $75 decrease in bad debt expense from the UK operation.  These decreases were partially offset with a $45 increase in severance, $32 increase in professional fees, $24 increase in postage and office supplies, a $21 increase in shipping charges and a $8 increase in software licenses and support.

    Research and development expenses decreased $743 for the year ended December 31, 2008 as compared to the same period in 2007.  The net decrease for the year December 31, 2008 was primarily the result of (a) a $560 decrease in compensation and fringe benefits (b) a $78 decrease in professional fees, (c) a $349 decrease in R&D material and equipment, and (d) a $9 decrease in education and training.  These decreases were partially offset by a $178 increase in severance and a $75 increase in rents.

 
15

 

    Depreciation and amortization expense increased $252 for the year ended December 31, 2008 as compared to the same period in 2007.  The increase for the year ended December 31, 2008 was primarily the result of (a) $171 increase due to the purchase of customer list that was subsequently written off and (b) $81 increase in depreciation expense due to the purchase of assets that began depreciation in 2008.

    For the year ended December 31, 2008 the Company recorded an impairment charge for their US goodwill and their UK customer list of $169.  No impairment was recorded in 2007.

Other Income (Expense)

    For the year ended December 31, 2009, interest expense increased $39 and non-operating gain (loss) decreased $1,358 as compared to the same period in 2008.  The increase in interest costs was primarily the result of the increased balance on the line of credit due to increased sales.  The decrease in non-operating gain of $1,358 was primarily related to the gain on the sale from Telident recognized in 2008.

    For the year ended December 31, 2008, interest expense decreased $546 and non-operating gain (loss) increased $1,543 as compared to the same period in 2007.  The decrease in interest costs was primarily the result of an additional charge of approximately $489 from the debt restructuring in 2007.  The increase in non-operating gain of $1,543 was primarily related to a gain on the sale from Telident.

Liquidity and Capital Resources

Net cash flows provided by (used in) operating activities

    Net cash provided by operating activities was $2,779 for the year ended December 31, 2009.  The $2,779 was comprised of the following items: (a) net income of $5,427, (b) net non-cash expense of $348, (c) a decrease in operating assets of $787, and (d) a decrease in operating liabilities of $3,783.  The net decrease in operating assets was primarily the result of a decrease in accounts receivables of $536, a $188 decrease in inventory, a $158 decrease in prepaid expenses offset with a $95 increase in other assets.  The net decrease in operating liabilities was primarily the result of decreased accounts payable of $3,638, a $172 decrease in accrued liabilities offset with a $27 increase in deferred revenue.  The net non-cash expense in 2009 of $348 was primarily comprised of depreciation and amortization of $234, a $74 provision for slow moving inventory, a $26 recovery of doubtful accounts and amortization of deferred finance costs of $58.

    Net cash provided by operating activities was $392 for the year ended December 31, 2008.  The $392 was comprised of the following items: (a) net loss of $3,281, (b) net non-cash income of $485, (c) a decrease in operating assets of $3,561, and (d) an increase in operating liabilities of $597.  The net decrease in operating assets was primarily the result of a decrease in accounts receivables of $3,720, a $16 increase in inventory and a $170 increase in other assets.  The net increase in operating liabilities was primarily the result of increased accounts payable of $1,409, offset with a decrease in accrued liabilities of $736, and a $76 decrease in deferred revenue.  The net non-cash income in 2008 of $485 was primarily comprised of the $1,436 gain from the sale of the Telident line of products offset by depreciation and amortization of $367, the amortization and impairment of other intangible assets of $382, and a $312 provision for slow moving inventory.

    Net cash used in operating activities was $176 for the year ended December 31, 2007.  The $176 was comprised of the following items: (a) net loss of $2,070, (b) net non-cash expense of $770, (c) an increase in operating assets of $1,233, and (d) an increase in operating liabilities of $2,357.  The net increase in operating assets was primarily the result of an increase in accounts receivables of $593, a $281 increase in inventory and a $259 increase in other assets.  The net increase in operating liabilities was primarily the result of increased accounts payable of $2,239, an increase in accrued liabilities of $473, offset with a $355 decrease in deferred revenue.  The net non-cash expense in 2007 of $770 was primarily comprised of depreciation and amortization of $440, the amortization of deferred finance costs of $247, and an $85 provision for slow moving inventory.

 
16

 

Net cash flows provided by (used in) investing activities

    Net cash flows used in investing activities were $193 for the year ended December 31, 2009, as the Company acquired property and equipment to support its operations.

    Net cash flows provided by investing activities were $1,520 for the year ended December 31, 2008 primarily driven by the $1,750 proceeds from the sale of the Telident.

    Net cash flows used in investing activities were $534 for the year ended December 31, 2007 as the Company acquired property and equipment to support its operations.

Net cash flows provided by (used in) financing activities

    Net cash flows used in financing activities for the year ended December 31, 2009 were $2,865.  The Company had net repayments on its line of credit of $1,167 and net principal repayments of $1,246. Additionally, the Company paid off a note from a related party of $203 and paid dividends on the Preferred Series B convertible stock of $253.

    Net cash flows used in financing activities for the year ended December 31, 2008 were $2,221.  The Company had net borrowings on its line of credit of $262 and net principal repayments of $2,230. Additionally, the Company paid dividends on the Preferred Series B convertible stock of $253.

    Net cash flows provided by financing activities for the year ended December 31, 2007 were $1,067.  The Company had net repayments on its line of credit of $1,366 and net borrowings on the term loan of $2,685 associated with the refinancing.  Additionally, the Company paid dividends on the Preferred Series B convertible stock of $252.

Liquidity

    As of December 31, 2009 the Company had cash and cash equivalents of $339 as compared to $548 as of December 31, 2008.  Working capital deficiency as of December 31, 2009 was $962 as compared to $4,935 as of December 31, 2008.

    The Company’s management implemented plans during 2008 to increase gross margin and decrease operating costs.  These plans were successful and the Company continues to see efficiencies in operating expenses due to the cuts made in 2008.  The Company has plans to continue its efforts to increase sales and gross profits to ensure it is successful in meeting all the financial covenants associated with the Company’s credit facility as described in Note 6.  Should these plans not meet management’s objectives the Company may need to raise additional funds through debt or equity offerings.  There can be no assurance as to the availability of any needed funding and, if available, that the source of funds would be available on terms and conditions acceptable to management.

    As of December 31, 2008 the Company had cash and cash equivalents of $548 as compared to $1,123 as of December 31, 2007.  Working capital deficiency as of December 31, 2008 was $4,935 and a working capital surplus was $116 as of December 31, 2007.

    The Company has 12,625 shares of Series B and 40,000 shares of Series C Preferred Stock outstanding as of December 31, 2009.  Holders of shares of our Series B Preferred Stock are entitled to receive annual dividends of $20 per share.  Holders of shares of our Series C Preferred Stock are entitled to receive annual dividends of $20 per share.  If we are in arrears on four quarterly dividend payments on our Series B Preferred Stock (whether or not consecutive) or any part thereof, including interest, then the number of directors comprising our Board of Directors shall be increased to a number that allows the holders of our Series B Preferred Stock to elect a majority of our Board of Directors.  The Series C Preferred holder has agreed to defer the demand for payment of twenty-seven dividend payments until April 2011.  The Series B Preferred Stock dividend was in arrears three payments at December 31, 2009.

 
17

 

    Our contractual obligations consist of operating leases for facilities, debt financing and dividend requirements on our Preferred Series B and C Convertible stock. The following table summarizes our fixed cash obligations as of December 31, 2009 for the fiscal years ending December 31:

   
2010
   
2011
   
2012
   
2013
   
2014
   
2015
and
thereafter
 
                                     
Operating leases
  $ 1,558     $ 805     $ 569     $ 431     $ 412     $ 5,115  
Debt financing
    1,220       1,000       24       5       ---       ---  
Preferred Series B and C
    convertible stock dividends
    1,053       1,053       1,053       1,053       1,053       1,053  
Total contractual cash obligations
  $ 3,831     $ 2,858     $ 1,646     $ 1,489     $ 1,465     $ 6,168  

    Dividends payable on our Series C Preferred stock will continue at the rate of $800 per year as long as such shares are outstanding.  Dividends on Series B Preferred stock will continue at the rate of $253 per year as long as such shares are outstanding.  Unpaid dividends on both Series B and Series C Preferred shares accrue interest at 10% per annum.  As of December 31, 2009 and 2008, accrued interest on these Preferred Series C shares totaled $1,064 and $724, respectively.

    Teltronics does not engage in any off-balance sheet financing arrangements.  In particular, we do not have any interest in limited purpose entities, which include special purpose entities and structured finance entities.


ITEM  7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The Company had no holdings of derivative financial or commodity instruments at December 31, 2009.  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 recorded in U.S. dollars.  Accordingly, foreign exchange rate fluctuations should not have a significant impact on the Company.  The sum of EPS for the four quarters may differ from the annual EPS due to the required method of computing weighted average number of shares in respective periods.

Quarterly Results of Operations (Unaudited)

2009
 
1st Quarter
   
2nd Quarter
   
3rd Quarter
   
4th Quarter
 
                         
Net sales
  $ 9,649     $ 11,742     $ 14,205     $ 7,496  
Cost of goods sold
    6,169       6,673       8,367       4,233  
Net income
    529       2,169       2,581       148  
Net income (loss)per share:
                               
Basic
  $ 0.03     $ 0.22     $ 0.27     $ (0.01 )
Diluted
  $ 0.03     $ 0.20     $ 0.23     $ (0.01 )
                                 
2008
 
1st Quarter
   
2nd Quarter
   
3rd Quarter
   
4th Quarter
 
                                 
Net sales
  $ 8,327     $ 9,761     $ 8,096     $ 8,454  
Cost of goods sold
    5,524       6,456       4,954       6,262  
Net income (loss)
    87       (1,596 )     75       (1,847 )
Net income (loss) per share:
                               
Basic
  $ (0.03 )   $ (0.22 )   $ (0.02 )   $ (0.24 )
Diluted
  $ (0.03 )   $ (0.22 )   $ (0.02 )   $ (0.24 )


 
18

 

ITEM  8.    FINANCIAL STATEMENTS

    Certain information required by this item is included in Item 7A of Part II of this report under the heading "Quarterly Results of Operations (Unaudited)" and is incorporated into this item by reference.

Index to Financial Statements


   
Page
Financial Statements:
 
 
 
 
Report of Independent Registered Public Accounting Firm
20
 
 
 
Consolidated Balance Sheets – December 31, 2009 and 2008
21
 
 
Consolidated Statements of Operations for the Years Ended
December 31, 2009, 2008 and 2007
22
 
 
Consolidated Statements of Shareholders' Deficiency for the
Years Ended December 31, 2009, 2008 and 2007
23
 
 
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2009, 2008 and 2007
24
 
 
 
Notes to Consolidated Financial Statements
25
 
 
Financial Statement Schedule:
 
 
 
Item 15(a)(2):
 
 
 
Schedule II – Valuation and Qualifying Accounts
53
 
 
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.
 


 
19

 


 
Report of Independent Registered Public Accounting Firm
 
 
The Board of Directors and Shareholders of
Teltronics, Inc.:
 
We have audited the accompanying consolidated balance sheets of Teltronics, Inc. and subsidiaries (“Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders' deficiency and cash flows for each of the years in the three year period ended December 31, 2009.  Our audit also included the consolidated financial statement schedule listed in Item 15(a)(2).  The Company’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the years in the three year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the related consolidated financial statement schedule, which is presented for additional analysis and is not a required part of the basic consolidated financial statements, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
 
/s/ Kirkland, Russ, Murphy & Tapp, P.A.
 
Clearwater, Florida
March 19, 2010

 
20

 

TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)


ASSETS

   
December 31,
 
   
2009
   
2008
 
Current assets:
           
Cash and cash equivalents
  $ 339     $ 548  
Accounts receivable, net
    4,856       5,366  
Inventories, net
    4,823       5,085  
Prepaid expenses and other current assets
    406       622  
Total current assets
    10,424       11,621  
Property and equipment, net
    751       748  
Other assets, net
    368       275  
Total assets
  $ 11,543     $ 12,644  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
 
                 
Current liabilities:
               
Line of credit
  $ 3,124     $ 4,291  
Current portion of long-term debt and capital lease obligations
    1,220       1,440  
Accounts payable
    3,316       6,954  
Accrued expenses and other current liabilities
    3,200       3,372  
Deferred revenue
    526       499  
Total current liabilities
    11,386       16,556  
Long-term liabilities:
               
Deferred dividends
    3,800       3,000  
Long-term debt and capital lease obligations, net of current portion
    1,029       2,214  
Total long-term liabilities
    4,829       5,214  
Commitments and contingencies
Shareholders' deficiency:
               
Common stock, $.001 par value, 40,000,000 shares authorized,
8,703,539 issued and outstanding at December 31, 2009 and
8,647,539 issued and outstanding at December 31, 2008
    9       9  
Non-voting common stock, $.001 par value, 5,000,000 shares
authorized, zero shares issued and outstanding
    ---       ---  
Preferred Series A stock, $.001 par value, 100,000 shares
authorized, 100,000 shares issued and outstanding
    ---       ---  
Preferred Series B Convertible stock, $.001 par value, 25,000
shares authorized, 12,625 shares issued and outstanding
    ---       ---  
Preferred Series C Convertible stock, $.001 par value, 50,000
shares authorized, 40,000 shares issued and outstanding
    ---       ---  
Additional paid-in capital
    24,735       24,725  
Other comprehensive loss
    (169 )     (239 )
Accumulated deficit
    (29,247 )     (33,621 )
Total shareholders' deficiency
    (4,672 )     (9,126 )
Total liabilities and shareholders' deficiency
  $ 11,543     $ 12,644  

The accompanying notes are an integral part of these consolidated financial statements.

 
21

 

TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)

 
   
Years Ended December 31,
 
   
2009
   
2008
   
2007
 
                   
Net sales
                 
Product sales and installation
  $ 32,493     $ 23,228     $ 29,035  
Maintenance and service
    10,599       11,410       11,596  
      43,092       34,638       40,631  
Cost of goods sold
    25,442       23,196       25,183  
Gross profit
    17,650       11,442       15,448  
Operating expenses:
                       
General and administrative
    4,725       6,112       5,714  
Sales and marketing
    2,946       3,987       4,785  
Research and development
    2,826       3,928       4,671  
Depreciation and amortization
    215       523       271  
Impairment of goodwill and intangible assets
    ---        169       ---  
      10,712       14,719       15,441  
Income (loss) from operations
    6,938       (3,277 )     7  
                         
Other income (expense):
                       
Interest
    (1,441 )     (1,402 )     (1,948 )
Non-operating gain (loss)
    49       1,407       (136 )
      (1,392 )     5       (2,084 )
Income (loss) before income taxes
    5,546       (3,272 )     (2,077 )
Income taxes
    119       9       (7 )
                         
Net income (loss)
    5,427       (3,281 )     (2,070 )
                         
Dividends on Preferred Series B and C
Convertible stock
    1,053       1,095       952  
Net income (loss) available to common
Shareholders
  $ 4,374     $ (4,376 )   $ (3,022 )
 
                       
Net income (loss) per share:
                       
Basic
  $ 0.51     $ (0.51 )   $ (0.35 )
Diluted
  $ 0.48     $ (0.51 )   $ (0.35 )
                         
Weighted average shares outstanding:
                       
Basic
    8,653,090       8,647,539       8,646,706  
Diluted
    9,730,310       8,647,539       8,646,706  





The accompanying notes are an integral part of these consolidated financial statements.


 
22

 

TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
(In thousands, except share data)


   
COMMON STOCK
   
PREFERRED STOCK
                         
   
SHARES
   
AMOUNT
   
SHARES
   
AMOUNT
   
ADDITIONAL
PAID-IN
CAPITAL
   
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME/(LOSS)
   
ACCUMULATED
DEFICIT
   
TOTAL
 
                                                 
BALANCE, DECEMBER 31, 2006
    8,639,539     $ 9       152,625       ---     $ 24,707     $ 55     $ (26,223 )   $ (1,452 )
Shares issued for exercise of stock options
    8,000       ---       ---       ---       ---       ---       ---       ---  
Stock based compensation expense
    ---       ---       ---       ---       15       ---       ---       15  
Comprehensive income:
                                                               
Net loss
    ---       ---       ---       ---       ---       ---       (2,070 )     (2,070 )
Foreign currency
    ---       ---       ---       ---       ---       (28 )     ---       (28 )
Comprehensive loss
                                                            (2,098 )
Dividends on Preferred Series B and C
    Convertible stock
    ---       ---       ---       ---       ---       ---       (952 )     (952 )
BALANCE, DECEMBER 31, 2007
    8,647,539     $ 9       152,625       ---     $ 24,722     $ 27     $ (29,245 )   $ (4,487 )
Stock based compensation expense
    ---       ---       ---       ---       3       ---       ---       3  
Comprehensive income:
                                                               
Net loss
    ---       ---       ---       ---       ---       ---       (3,281 )     (3,281 )
Foreign currency
    ---       ---       ---       ---       ---       (266 )     ---       (266 )
Comprehensive loss
    ---       ---       ---       ---       ---       ---       ---       (3,547 )
Dividends on Preferred Series B and C
    Convertible stock
    ---       ---       ---       ---       ---       ---       (1,095 )     (1,095 )
BALANCE, DECEMBER 31, 2008
    8,647,539     $ 9       152,625       ---     $ 24,725     $ (239 )   $ (33,621 )   $ (9,126 )
Shares issued for exercise of stock options
    56,000       ---       ---       ---       4       ---       ---       4  
Stock based compensation expense
    ---       ---       ---       ---       6       ---       ---       6  
Comprehensive income:
                                                               
Net income
    ---       ---       ---       ---       ---       ---       5,427       5,427  
Foreign currency
    ---       ---       ---       ---       ---     $ 70       ---       70  
Comprehensive loss
    ---       ---       ---       ---       ---       ---       ---       ---  
Dividends on Preferred Series B and C
    Convertible stock
    ---       ---       ---       ---       ---       ---     $ (1,053 )   $ (1,053 )
BALANCE, DECEMBER 31, 2009
    8,703,539     $ 9       152,625       ---     $ 24,735     $ (169 )   $ (29,247 )   $ (4,672 )
                                                                 





The accompanying notes are an integral part of these consolidated financial statements.


 
23

 

TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)


   
Years Ended December 31,
 
   
2009
   
2008
   
2007
 
                   
OPERATING ACTIVITIES:
                 
Net income (loss)
  $ 5,427     $ (3,281 )   $ (2,070 )
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
                       
Impairment of goodwill and intangible assets
    ---       169       ---  
Depreciation and amortization
    234       367       394  
Provision for slow moving inventories
    74       312       85  
Recovery of doubtful accounts
    (26 )     (171 )     (17 )
Amortization of deferred financing costs
    58       58       247  
Amortization of other intangible assets
    2       213       46  
Stock based compensation expense
    6       3       15  
Other non-operating gains
    ---       (1,436 )     ---  
Changes in operating assets and liabilities:
                       
Accounts receivable
    536       3,720       (593 )
Inventories
    188       (16 )     (281 )
Prepaid expenses and other current assets
    158       27       (100 )
Other assets
    (95 )     (170 )     (259 )
Accounts payable
    (3,638 )     1,409       2,239  
Accrued expenses and other current liabilities
    (172 )     (736 )     473  
Deferred revenue
    27       (76 )     (355 )
Net cash flows provided by (used in) operating activities
    2,779       392       (176 )
 
INVESTING ACTIVITIES:
                       
Acquisition of property and equipment
    (193 )     (230 )     (534 )
Proceeds from sale of property and equipment
    ---        1,750       ---  
Net cash flows provided by (used in) investing activities
    (193 )     1,520       (534 )
 
FINANCING ACTIVITIES:
                       
Net borrowings (repayments) on line of credit
    (1,167 )     262       (1,366 )
Net principal borrowings (repayments) on loans, notes
and capital leases
    (1,246 )     (2,054 )     2,685  
Net proceeds from exercised options
    4       ---        ---   
Dividends paid on Preferred Series B Convertible stock
    (253 )     (253 )     (252 )
Repayment of loan from related party
    (203 )     (176 )     ---  
Net cash flows provided by (used in) financing activities
    (2,865 )     (2,221 )     1,067  
Effect of exchange rate changes on cash
    70       (266 )     (28 )
Net increase (decrease) in cash and cash equivalents
    (209 )     (575 )     329  
Cash and cash equivalents - beginning of year
    548       1,123       794  
Cash and cash equivalents - end of year
  $ 339     $ 548     $ 1,123  






The accompanying notes are an integral part of these consolidated financial statements.

 
24

 

TELTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands, except share data)



   
Years Ended December 31,
 
   
2009
   
2008
   
2007
 
                   
SUPPLEMENTAL NONCASH FINANCING AND
                 
INVESTING ACTIVITIES:
                 
                   
Equipment acquired under notes payable and capital lease
  $ 44     $ 134     $ ---  
   
                         
SUPPLEMENTAL DISCLOSURES:
                       
Interest paid
  $ 1,104     $ 1,113     $ 1,702  
Income taxes paid
  $ ---     $ ---     $ 28  



































The accompanying notes are an integral part of these consolidated financial statements.


 
25

 

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(All amounts in thousands, except share amounts)


NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION

Teltronics, Inc. ("Teltronics" or "Company"), a Delaware corporation, designs, develops, installs, manufactures and markets electronic hardware and application software products, and engages in electronic manufacturing services primarily in the telecommunication industry.  The accompanying consolidated financial statements include the accounts of the Company which is comprised of its wholly owned subsidiaries, TTG Acquisition Corp., 36371 Yukon Inc. and Teltronics Limited.

During 2008 the Company closed the Mexico segment.  This segment’s closing does not indicate a discontinuation of the Mexico business.  Existing business and new business within Mexico is being handled by United States personnel.

On December 19, 2007, Teltronics Direct, Inc. (“TDI”) a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement to acquire substantially all of the assets of FMG Ventures, LLC and JC Ventures, LLC, (”collectively the “Sellers”).  The Sellers are local interconnect resellers and provide support of small to medium size telephone switches in the Tampa to Naples, Florida area.

On January 18, 2008, TDI closed the acquisition of substantially all of the assets of the Seller in exchange for $200 cash and possible future payments based on the net earnings of TDI for a period of five years.  TDI also issued seven and one-half shares to each of the Sellers two principals, representing a fifteen percent aggregate ownership in TDI.

TDI also agreed to employ the two principals on a salary and commission basis for a period of five years, subject to termination under certain conditions.

As part of the Company’s overall review of its operations and a review of TDI’s accumulated losses since the acquisition and low sales volume, it ceased operation of this subsidiary during 2008 and as such, the Company recorded a $164 impairment of the customer list in depreciation and amortization, and a $30 reserve to inventory in cost of sales.  The Company ceased operations of TDI during August 2008 and disposed of its remaining assets.

On January 18, 2008, the Company sold certain of its assets related to the Telident 911 Solutions line of products to Amcom Software, Inc. (“Amcom”) for a purchase price of $1,750 and the assumption by Amcom of certain liabilities.  A gain of $1,436 has been recognized from this disposal and is recorded in other income in the accompanying Consolidated Statement of Operations.

The Company used $718 from the sale to pay down the term loan balance as stipulated in the Revolving Credit Term Loan and Security Agreement.

The Company’s management implemented plans during 2008 to increase gross margin and decrease operating costs.  These plans were successful and the Company continues to see efficiencies in operating expenses due to the cuts made in 2008.  The Company has plans to continue its efforts to increase sales and gross profits to ensure it is successful in meeting all the financial covenants associated with the Company’s credit facility as described in Note 6.  Should these plans not meet management’s objectives the Company may need to raise additional funds through debt or equity offerings.  There can be no assurance as to the availability of any needed funding and, if available, that the source of funds would be available on terms and conditions acceptable to management.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates - The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the
 
 
26

   
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 
 
financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents - The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.

Concentration of Credit Risk - The Company's largest customer was 50%, 30% and 24% of sales in 2009, 2008 and 2007, respectively.  The second largest customer in 2009 and 2008 did not meet the threshold for disclosure.  The second largest customer was 11% in 2007.  The Company has accounts receivable from federal, state and city governmental agencies, independent telephone companies, alternative service companies and telecommunication companies primarily located in the United States. The Company does not believe that there are substantial credit risks associated with those receivables.  Cash balances are maintained in financial institutions.  Occasionally, deposits may exceed amounts insured by the Federal Deposit Insurance Corporation.

Fair Value of Financial Instruments – Cash and cash equivalents, accounts receivable and accounts payable are reflected in the consolidated financial statements at their carrying amount which approximates fair value because of the short-term maturity of those instruments.  The line of credit, note payable, capital leases and long-term debt reflect interest rates that are currently available to the Company based on the financing arrangement and the collateral provided.  As a result, the carrying amount of the note payable and long-term debt approximates fair value.

Accounts Receivable - Accounts receivable are recorded at their net realizable value.  A considerable amount of judgment is required when we assess the ultimate realization of receivables, including assessing the probability of collection and the current credit-worthiness of each customer.  We recognize an allowance for doubtful accounts based on the length of time the receivables are past due and an analysis of the specific facts relative to the customer.  We have evaluated our allowance for doubtful accounts based on the economy and have adjusted it as necessary.  We charge off outstanding balances only after all collection efforts have been exhausted.

Accounting for Stock-based Compensation – The Company measures compensation cost for employees stock options at fair value and recognizes this cost over the vesting period.

Inventories - Inventories are stated at the lower of cost or market. Costs are determined principally on the weighted average method.  Shipping and handling costs are included in cost of goods sold in the accompanying consolidated statements of operations.  We recognize a reserve for slow moving inventory based primarily on our estimated forecast of product demand and production requirements.

Property and Equipment - Property and equipment are stated at cost less accumulated depreciation and amortization.  Depreciation and amortization are provided over the estimated useful lives (three to fifteen years) of the respective assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes.

Capitalized Software - Capitalization of computer software development costs begins upon the establishment of technological feasibility.  Technological feasibility for the Company's computer software products is generally based upon achievement of a detail program design free of high-risk development issues.  The Company capitalizes only those costs directly attributable to the development of the software.  The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized computer software development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technology.  Prior to reaching technological feasibility, these costs are expensed as incurred and included in research and development.  Activities undertaken after the products are available for general release to customers to correct errors or keep the product updated are expensed as incurred and included in research and development.  Amortization of capitalized computer software development costs commences when the
 
 
27

 
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 
related products become available for general release to customers.  Amortization is provided on a product-by-product basis over three to five years. Capitalized costs are reviewed annually for impairment.

The Company periodically performs reviews of the recoverability of such capitalized software costs.  At the time a determination is made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software, any remaining capitalized amounts are impaired.

Impairments - If the carrying value of an asset exceeds the sum of estimated undiscounted future cash flows, an impairment loss is recognized for the difference between the estimated fair value and carrying value.

The Company assesses the recoverability of goodwill and intangible assets not subject to amortization under ASC 350 “Intangibles-Goodwill and Other.”

Income Taxes - 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.

Revenue Recognition

    Manufacturing.   Revenues from sales of product, including our electronic manufacturing services business are recognized when title and risk of loss passes, which is generally when the product is shipped.  Based on the Company's history of providing manufacturing services, we believe that collectibility is reasonably assured.

    Revenue Recognition – Multiple-Element Arrangements.  Certain of the Company's arrangements include multiple deliverables, which consist of product, installation, and training.  In the absence of higher-level specific authoritative guidance, the Company determines the units of accounting for multiple-element arrangements in accordance ASC 605-25 “Revenue Recognition – Multiple-Element Arrangements.”  Specifically, the Company will consider a delivered item as a separate unit of accounting if it has value to the customer on a standalone basis, if there is objective and reliable evidence of the fair value of the undelivered elements, and, if the arrangement includes a general right of return relative to the delivered element, delivery or performance of the undelivered element is considered probable and is substantially within the Company's control.

On those contracts in which the customer accepts ownership of the individual deliverables, and it is both probable and substantially within the Company’s control to deliver the remaining elements, revenues will be recognized as the customer accepts the deliverables.

    For those customers that only accept multiple deliverable projects at the conclusion of the project, revenue is recognized under either the completed contract method or the percentage-of-completion method depending on the right to require the customer to make progress payments to support their ownership investment and to approve the services performed to date if they meet the contract requirements.  If the percentage-of-completion method is used, revenues and related costs are recognized as work on a contract progresses. The progress of a contract in terms of recognizing revenue and related costs is based on satisfying the milestones for the specific contract.  Provision is made for any anticipated contract losses in the period that the loss becomes evident.  At December 31, 2009, there were no contracts accounted for using percentage of completion accounting methods.
 
 
28

 
 
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 
    Maintenance and Service.  Revenue from support and maintenance activities is recognized ratably over the term of the maintenance period and the unrecognized portion is included in deferred revenue.  Costs from support and maintenance activities are recognized when the related revenue is recognized or when those costs are incurred, whichever occurs first.

Research and Development - Research and development costs are expensed as incurred.

Warranty and Service - The Company provides currently for the estimated cost that may be incurred under product warranties.  Factors that affect the Company's product liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim.  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, at the Company's sole discretion, units defective in material or workmanship, provided the equipment has not been subjected to alteration or abuse.

Changes in the Company's product liability during the years ended December 31, 2009, 2008 and 2007 are as follows:

   
2009
   
2008
   
2007
 
                   
Balance, beginning of the year
  $ 109     $ 212     $ 221  
Warranties issued during the year
    35       83       97  
Payments made during the year
    (49 )     (85 )     (111 )
Change in liability based on sale of line of products
    ---       (38 )     ---  
Changes in liability for pre-existing warranties during the year
    13       (63 )     5  
Balance, end of the year
  $ 108     $ 109     $ 212  

Accounting for Fair Value Measurement - In September 2006, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification 820 “Fair Value Measurements and disclosures” (“ASC 820”) with an effective date on or after November 15, 2007.  ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.  The requirements of ASC 820 did not have a material effect on the Company’s Consolidated Financial Statements.

Reclassifications – Certain amounts from prior years have been reclassified to conform to the current year’s presentation.

NOTE 3 - ACCOUNTS RECEIVABLE, NET

Accounts receivable, net at December 31, 2009 and 2008 are as follows:

   
December 31,
 
   
2009
   
2008
 
             
Accounts receivable
  $ 5,000     $ 5,543  
Allowance for doubtful accounts
    (144 )     (177 )
    $ 4,856     $ 5,366  

As of December 31, 2009 and 2008, accounts receivable included $68 and $313 of retainage, respectively.

 
29

 

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 4 - INVENTORIES, NET

The major classes of inventories, net at December 31, 2009 and 2008 are as follows:

   
December 31,
 
   
2009
   
2008
 
             
Raw materials
  $ 2,566     $ 2,697  
Work-in-process
    1,099       841  
Finished goods
    1,158       1,547  
    $ 4,823     $ 5,085  

The reserve for slow moving inventories was $626 and $1,033 as of December 31, 2009 and 2008, respectively.

NOTE 5 - PROPERTY AND EQUIPMENT, NET

The major classifications of property and equipment, net at December 31, 2009 and 2008 are as follows:

   
December 31,
 
   
2009
   
2008
 
             
Machinery and equipment
  $ 7,460     $ 7,400  
Furniture, fixtures and computers
    4,944       4,859  
Equipment under capital leases
    820       780  
Capitalized software
    2,254       2,254  
Leasehold improvements
    625       573  
      16,103       15,866  
Accumulated depreciation and amortization
    (15,352 )     (15,118 )
    $ 751     $ 748  

Depreciation and amortization expense was $234, $367 and $394 for the years ended December 31, 2009, 2008 and 2007, respectively. For the years ended December 31, 2009, 2008 and 2007, depreciation and amortization expense of $21, $58 and $170, respectively, was included in cost of goods sold.  Amortization of equipment under capital leases is included in depreciation and amortization of property and equipment.

The unamortized cost of capitalized software to be sold, leased or otherwise marketed was $22, $30 and $94 as of December 31, 2009, 2008 and 2007, respectively.  For the years ended December 31, 2009, 2008 and 2007, amortization and impairment expense related to capitalized software was $8,  $64 and $50, respectively.


 
30

 

 
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 6 - LINE OF CREDIT AND LONG-TERM DEBT

The Company’s credit facility, as amended on December 31, 2009, is subject to compliance with various financial covenants and borrowing base criteria.  The Company was in compliance with these covenants as of December 31, 2009 and received a waiver for December 31, 2008.  The credit facility consists of a $6,000 revolving line of credit and a five year term-loan with a maximum principal amount of $5,842.  Advances under the Revolving credit facility are subject to availability based upon percentages of eligible receivables and eligible inventory.  Borrowings under the facility bear interest at an annual rate of Prime Rate, plus 3.75%, with a minimum rate of 9.75%, and are subject to mandatory prepayments in certain situations.  The obligations of the agreement are secured by a first lien and security interest in all of the Company’s assets.  The availability under this facility as of December 31, 2009 was $1,226.

In May 2007, the Company recognized an additional $489 of interest costs in connection with the termination of the previous financing arrangement.

During 2005 the Company borrowed $250 from an entity controlled by a director.  Principal and cumulative interest, at an annual rate of fifteen percent (15%), totaling $221 was repaid in July 2009.
 
 
Long-term debt at December 31, 2009 and 2008 consists of the following:

   
December 31,
 
   
2009
   
2008
 
 
Term Loan, payable in monthly installments of $97 plus interest (9.75% at December 31, 2009) at prime plus 3.75%.
  $ 2,134     $ 3,303  
 
Note payable to related party, repaid in July 2009.
    ---       203  
 
Notes payable to finance companies, payable in monthly installments of $6 with interest at approximately 20%.  The notes mature through 2012 and are collateralized by vehicles.
    75       99  
 
Capital lease obligations, interest at approximately 14%
    40       49  
 
Total
    2,249       3,654  
Less current portion
    1,220       1,440  
Long-term portion
  $ 1,029     $ 2,214  

Future principal maturities of long-term debt and capital lease obligations, as of December 31, 2009, are as follows:

2010
  $ 1,220  
2011
    1,000  
2012
    24  
2013
    5  
     $ 2,249  

NOTE 7 - SHAREHOLDERS' EQUITY

The total number of shares of all classes of capital stock which the Company has the authority to issue is 50,000,000 shares divided into three classes of which 5,000,000 shares, par value $.001 per share are designated Preferred stock, 40,000,000 shares, par value $.001 per share are designated Common stock and 5,000,000 shares, par value $.001 per share, are designated Non-Voting Common stock.

 
31

 
TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 
 
(A)           Preferred Stock - The Preferred Series A stock are restricted securities owned by the Company's Director and Senior Vice President of Business Development and are subject to resale restrictions including the right of the Company to approve or disapprove any sale, transfer or disposition to any third party not controlled by the Director.  Each share is entitled to 400 votes and is not entitled to any dividends.  Accordingly, this would give the Senior Vice President voting control of the Company.

The Preferred Series B Convertible stock, which is owned by a company controlled by a Director, provides for a $20 per share annual dividend, payable quarterly.  The holder of the Preferred Series B Convertible stock has the right, at its option, to convert the 12,625 preferred shares to 721,429 common shares.  The Company has the right, but not the obligation, to redeem the Preferred Series B Convertible stock in full at 100% of the face value plus accrued and unpaid dividends.  Unpaid dividends accrue interest at 10% per annum.  The Preferred Series B Convertible stock contains certain covenants, including the right to appoint a director which the holder has exercised.

The Company is in arrears on three quarterly dividend payments due on Preferred Series B Convertible stock at December 31, 2009 that total $189, which represents $20 per Preferred Series B share.  If the Company is in arrears on four quarterly dividend payments on our Preferred Series B Convertible stock (whether or not consecutive) or any part thereof, including interest, then the number of directors comprising our Board of Directors shall be increased to a number that allows the holders of our Preferred Series B Convertible stock to elect a majority of our Board of Directors.

The Preferred Series C Convertible stock, which is owned by an entity controlled by the Company’s Director and Senior Vice President of Business Development, provides for a $20 per share annual dividend, payable quarterly.  The holder of the Preferred Series C Convertible stock has the right, but not the obligation, at its option, to convert the 40,000 preferred shares to 1,454,545 common shares, subject to adjustment.  The Company has the right, but not the obligation, to redeem all or a portion of the then outstanding Preferred Series C Convertible stock at any time for 100% of the face value plus accrued and unpaid dividends.  Unpaid dividends accrue interest at 10% per annum.  As of December 31, 2009 and 2008, accrued interest on these Preferred Series C shares totaled $1,064 and $724, respectively.

(B)           Warrants - In July 2005, the Company issued a warrant to purchase 236,236 common shares in connection with the July 2005 loan agreement.  As part of the May 2007 refinancing, the Company paid $42 to the lender for the appreciated value of the warrants and the warrants have been cancelled.

In September 2002, the Company issued a warrant to a financial advisor to purchase 300,000 shares of common stock at $1 per share which expired in September 2007.

(C)           Incentive Stock Option Plan In 1995, the Company adopted an Incentive Stock Option Plan ("1995 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 1995 Plan, under which the Company may issue options for up to 2,500,000 shares of the Company’s common stock, terminated August 8, 2005.  In September 2004, the Company’s shareholders approved the Company’s 2005 Incentive Stock Option Plan (“2005 Plan”) under which the Company may issue options for up to 1,000,000 shares of the Company’s common stock.  The 2005 Plan will terminate September 28, 2014 unless terminated by the Board of Directors or extended by the Board and approved by the shareholders.  Both plans authorize 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.  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.

 
32

 

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The following table summarizes certain weighted average data for options outstanding and currently exercisable as of December 31, 2009, 2008 and 2007:

December 31, 2009:
         
Outstanding
   
Exercisable
 
           
Weighted Average
             
Exercise
Price Range
   
Shares
   
Exercise
Price
   
Remaining
Contractual
Life (yrs)
   
Shares
   
Weighted
Average
Exercise
Price
 
$ 0.07 - $0.49       564,000     $ 0.15       5.6       378,000     $ 0.15  
$ 0.50 - $1.00       553,000       0.99       1.1       553,000       1.00  
$ 1.63 - $3.03       88,000       2.32       0.8       88,000       2.32  
          1,205,000     $ 0.69       3.2       1,019,000     $ 0.80  

December 31, 2008:
         
Outstanding
   
Exercisable
 
           
Weighted Average
             
Exercise
Price Range
   
Shares
   
Exercise
Price
   
Remaining
Contractual
Life (yrs)
   
Shares
   
Weighted
Average
Exercise
Price
 
$ 0.07 - $0.49       500,000     $ 0.15       5.4       427,000     $ 0.14  
$ 0.50 - $1.00       558,000       0.99       2.1       556,000       1.00  
$ 1.63 - $3.03       123,000       2.18       1.4       123,000       2.18  
          1,181,000     $ 0.76       3.4       1,106,000     $ .80  

December 31, 2007:
         
Outstanding
   
Exercisable
 
           
Weighted Average
             
Exercise
Price Range
   
Shares
   
Exercise
Price
   
Remaining
Contractual
Life (yrs)
   
Shares
   
Weighted
Average
Exercise
Price
 
$ 0.07 - $0.49       703,000     $ 0.18       6.1       530,400     $ 0.17  
$ 0.50 - $1.00       583,000       0.99       3.1       579,000       1.00  
$ 1.63 - $3.03       167,000       2.27       2.5       167,000       2.27  
          1,453,000     $ 0.74       4.5       1,276,400     $ 0.82  
                                             

The per share weighted average fair value of options granted during the years ended December 31, 2009, 2008 and 2007 were $0.15, $0.14 and $0.35, respectively.  All options were granted at not less than the fair market value at date of grant. Generally, stock options become exercisable over a five-year graded vesting period and expire ten years from the date of grant. Options totaling 710,000 shares were available for grant under the 2005 Plan at December 31, 2009.


 
33

 

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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:

   
2009
 
2008
 
2007
 
Risk-free interest rates
2.5%
 
2.6%
 
4.75%
 
Weighted average expected life of the options
5 years
 
5 years
 
5 years
 
Volatility factor of the expected market price
of the Company's Common Stock
102%
 
101%
 
116%
 
Dividend yield
None
 
None
 
None

Weighted average exercise prices for option activity:

   
Number of
Shares
   
Weighted Average
Exercise Price
 
Outstanding, December 31, 2006
    1,556,000     $ 0.77  
Granted
    10,000       0.35  
Exercised
    (8,000 )     0.07  
Forfeited
    (91,000 )     1.50  
Expired
    (14,000 )     2.00  
Outstanding, December 31, 2007
    1,453,000       0.74  
Granted
    130,000       0.14  
Exercised
    ---       ---  
Forfeited
    (402,000 )     0.51  
Expired
    ---       ---  
Outstanding, December 31, 2008
    1,181,000       0.76  
Granted
    160,000       0.15  
Exercised
    (56,000 )     0.07  
Forfeited
    (45,000 )     0.29  
Expired
    (35,000 )     1.82  
Outstanding, December 31, 2009
    1,205,000       0.69  
Exercisable, December 31, 2009
    1,019,000     $ 0.80  

NOTE 8 - INCOME TAXES

The components of the income tax provision (benefit) are as follows:

   
Years ended December 31,
 
   
2009
   
2008
   
2007
 
Current:
                 
Federal
  $ 113     $ 3     $ (14 )
State
    6       6       7  
      119       9       (7 )
Deferred:
                       
Federal
    ---       ---       ---  
State
    ---       ---       ---  
      ---       ---       ---  
    $ 119     $ 9     $ (7 )


 
34

 

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following is a reconciliation of income tax expense recognized to that computed by applying the federal statutory rate of 34% in 2009, 2008 and 2007 to income before income taxes:

   
Years ended December 31,
 
   
2009
   
2008
   
2007
 
                   
Federal tax at the statutory rate
  $ 1,886     $ (1,113 )   $ (624 )
Foreign income tax at statutory rate
    (14 )     4       (83 )
State income taxes, net of federal tax benefit
    5       (114 )     4  
Change in valuation allowance for deferred tax assets
    (1,826 )     1,419       696  
Permanent differences
    68       15       ---  
Change in rate for tax credits
    ---     $ (202 )     ---  
    $ 119     $ 9     $ (7 )

Significant components of the Company's deferred tax assets and liabilities are as follows:

   
December 31,
 
   
2009
   
2008
 
Deferred tax assets:
           
Net operating loss carryforward
  $ 5,260     $ 7,223  
Accrued vacation
    157       169  
Inventory
    381       390  
Fixed assets and intangible
    702       315  
Bad debt reserve
    67       67  
Accrued expenses
    44       434  
Change in tax credits and other
    420       259  
      7,031       8,857  
Valuation allowance
  $ (7,031 )   $ (8,857 )

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 likely than not that some portion or all of the deferred tax assets will not be realized.  Due to the uncertain nature of the ultimate realization of deferred tax assets based upon the Company's financial performance and the potential expiration of the net operating loss carryforward, the Company has established a valuation allowance against its deferred tax assets.  The Company will recognize the benefits associated with the deferred tax assets only as reassessment demonstrates they are realizable.  Realization is entirely dependent upon future earnings in specific tax jurisdictions.  While the need for this valuation allowance is subject to periodic review, if the allowance is reduced, the tax benefits will be recorded in future operations as a reduction of the Company's income tax expense.  The valuation allowance decreased $1,826 in 2009, increased $1,419 in 2008 and increased $696 in 2007.

At December 31, 2009, for federal income tax purposes, the Company had a net operating loss carryforward of approximately $13.9 million, which will expire in the years 2017 through 2028.  Such net operating losses are available to offset future taxable income.

During 2006, the Company adopted Accounting Standards Codification 740, “Income Taxes” (“ASC Topic 740”).  This standard prescribes a recognition and measurement of tax positions taken or expected to be taken in a tax return.  For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.  There was no material impact on the Company’s consolidated balance sheets or consolidated statements of operations as a result of the adoption of this standard.  The Company is no longer subject to income tax examinations by taxing authorities for years 2005 and before.

 
35

 

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 9 - 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 and potential common shares.  Potential common shares consist of convertible preferred stock, and warrants computed using the if converted method, and stock options (vested and unvested) using the treasury stock method.

The following table sets forth the computation of basic and diluted net income (loss) per share:

   
2009
   
2008
   
2007
 
Basic
                 
Net income (loss)
  $ 5,427     $ (3,281 )   $ (2,070 )
Preferred dividends
    (1,053 )     (1,095 )     (952 )
Net income (loss) available to common
Shareholders
    4,374       (4,376 )   $ (3,022 )
Weighted average shares outstanding
    8,653,090       8,647,539       8,646,706  
Net income (loss) per share
  $ 0.51     $ (0.51 )   $ (0.35 )
 
Diluted
                       
Net income (loss)
  $ 5,427     $ (3,281 )   $ (2,070 )
Preferred dividends
    (800 )     (1,095 )     (952 )
Net income (loss) available to commonshareholders
  $ 4,627     $ (4,376 )   $ (3,022 )
Weighted average shares outstanding
    8,653,090       8,647,539       8,646,706  
Effect of dilutive securities:
                       
Employee stock options
    355,791       ---       ---  
Convertible preferred stock
    721,429       ---       ---  
Dilutive potential common shares
    9,730,310       8,647,539       8,646,706  
Net income (loss) per share
  $ 0.48     $ (0.51 )   $ (0.35 )

For the years ended December 31, 2009, 2008 and 2007, options to purchase 849,209, 1,181,000 and 1,453,000 shares of common stock, respectively, were not included in the computation of diluted net income (loss) per share because the effect would be anti-dilutive.

For the year ended December 31, 2009, 40,000 shares of Preferred Series C stock were not included in the computation of dilutive net income (loss) per share because the effect would be anti-dilutive.  For the years ended December 31, 2008 and 2007, the preferred series stock were not included in the computation of dilutive net income (loss) per share because the effect would be anti-dilutive.

NOTE 10 - EMPLOYEE BENEFIT PLANS

The Company sponsors a savings plan ("401(k) plan") which covers substantially all employees of the Company.  The Company has suspended its 401(k) match and did not make any discretionary matching contributions to the 401(k) plan in 2009.  The Company made discretionary matching contributions to the 401(k) plan totaling $195 and $217 in 2008 and 2007, respectively.

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 765,000 shares of common stock funding the Plan have been registered on Form S-8.  The Purchase Plan has been suspended and no hares were issued in 2009, 2008 or 2007.

 
36

 

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 11 - 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 entered into a new agreement to lease a state of the art manufacturing facility in May 2009.  This lease including land and building under an operating lease and matures on December 31, 2025.

The Company is currently still under lease with the previous manufacturing facility which also includes  land and building, under an operating lease which expires on February 28, 2011.

The Company is responsible for paying all taxes, insurance and maintenance cost relating to both leased properties.  The Company also leases offices in several locations under leases expiring at various dates.

The Company also leases various equipment under operating leases expiring over a period of four years.

Future minimum lease payments for all non-cancelable operating leases at December 31, 2009 are as follows:

 
2010
$
1,558
 
 
2011
 
805
 
 
2012
 
569
 
 
2013
 
431
 
 
2014
 
412
 
 
Thereafter
 
5,115
 
     $
8,890
 

Rental expense for operating leases totaled approximately $1,350, $1,691and $1,372 for the years ended December 31, 2009, 2008 and 2007, respectively.

(C)           Legal Proceedings - The Company from time to time is involved in legal actions arising in the ordinary course of business.  With respect to these matters, management believes that it has adequate legal defenses or has provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on the Company's future financial position or results of operations.

NOTE 12 - OTHER RELATED PARTY TRANSACTIONS

An entity controlled by a Director of the Company occupied approximately 1,000 square feet of office space in our Sarasota facility during 2009 and 150 square feet of the office space in the Company’s New York office.  The annual rent payment was approximately $122, $101 and $8 for 2009, 2008 and 2007, respectively.

The Company entered into a formal sub-lease agreement with an affiliated entity, controlled by one of the directors of the Company of which the affiliate has agreed to pay the lease obligations from June 1, 2009 through December 31, 2010.  As of December 31, 2009, total rent expense paid by the affiliated company, on behalf of the Company, under this agreement was $342 of which a portion of this is in lieu of future rent.  The Company will begin paying the affiliated company $30 monthly beginning March 2010 for its use of the office space and furniture rental.  The related entity occupies approximately 8,000 square feet of the new Palmetto facility which will be offset by the amount payable to the entity each month.

During 2005 the Company borrowed $250 from an entity controlled by this same director.  Principal and cumulative interest, at an annual rate of fifteen percent (15%), totaling $221 was repaid in July 2009.

 
37

 

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Company leases two vehicles from another entity controlled by this director.  Monthly costs are $3 and are due through October 2010.

In addition, the spouse of the same director is employed by the Company in an administrative capacity at a salary of $33 per year.

NOTE 13 - SEGMENT INFORMATION

The Company’s operations are classified into two reportable segments, Teltronics, Inc. and Teltronics Limited (UK).  During 2008 the Company closed the Mexico segment.  This segment’s closing does not indicate a discontinuation of the Mexico business.  Existing business and new business with in Mexico will be handled by United States personnel.
 
 
The accounting policies of the segments are the same. Company management evaluates performance based on segment income (loss), which is net income (loss) before income taxes, excluding nonrecurring gains or losses.

 
38

 

TELTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The following table presents information about reportable segment operations and assets.

   
Years ended December 31,
 
   
2009
   
2008
   
2007
 
Net Sales
                 
Teltronics
  $ 42,153     $ 33,106     $ 38,790  
Mexico
    ---       ---       260  
UK
    939       1,532       1,581  
Total net sales
  $ 43,092     $ 34,638     $ 40,631  
Depreciation, Amortization and Impairment
                       
Teltronics
  $ 212     $ 548     $ 386  
Mexico
    ---       1       2  
UK
    3       143       52  
Total depreciation, amortization and impairment
  $ 215     $ 692     $ 440  
Interest and Financing Costs
                       
Teltronics
  $ (1,442 )   $ (1,410 )   $ 1,943  
Mexico
    ---       (1 )     5  
UK
    1       9       ---  
Total interest and financing costs
  $ (1,441 )   $ (1,402 )   $ 1,948  
Segment Income (Loss)
                       
Teltronics
  $ 5,729     $ (4,377 )   $ (1,747 )
Mexico
    ---       (111 )     (19 )
UK
    (183 )     (221 )     (311 )
Subtotal
  $ 5,546     $ (4,709 )   $ (2,077 )
Non-operating gain
    ---       1,438       ---  
Income before income taxes
  $ 5,546     $ (3,272 )   $ (2,077 )
Segment Assets
                       
Teltronics
  $ 11,089     $ 12,053     $ 16,670  
Mexico
    ---       ---       29  
UK
    454       591       1,334  
Total segment assets
  $ 11,543     $ 12,644     $ 18,033  
Acquisition of Property and Equipment
                       
Teltronics
  $ 193     $ 228     $ 530  
Mexico
    ---       ---       ---  
UK
    ---       2       4  
Total acquisition of property and equipment
  $ 193     $ 230     $ 534  

Information on major customers is discussed in the Summary of Significant Accounting Policies.  All material assets are located in the United States.  It is impracticable for the Company to provide segment information by product.

NOTE 14 – SUBSEQUENT EVENTS

On February 12, 2010 the Company signed a bonding indemnity agreement which includes a $5,000 aggregate with a $500 single surety program.  The program is to support bid bonds and performance bonds on standard supply, install, and maintenance contract obligations with a duration of 12 months or less.



 
39

 

ITEM 9.             CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE  -  None.


ITEM 9A(T).       CONTROLS AND PROCEDURES

The Company’s management, under the direction of its Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.  Based upon the evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2009, in timely alerting them to material information required to be included in the Company’s periodic SEC filings.


INTERNAL CONTROL OVER FINANCIAL REPORTING

    Our Chief Executive Officer and our Chief Financial Officer have evaluated the changes to the Company's internal control over financial reporting that occurred during our fiscal quarter ended December 31, 2009, as required by paragraph (d) of Rules 13a and 15d-15 under the Securities Exchange Act of 1934, as amended, and have concluded that there were no such changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


MANAGEMENT’S ASSESSMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

    Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Internal control over financial reporting includes those policies and procedures that:

·  
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·  
Provide reasonable assurance that transactions are recorded, as necessary, to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

·  
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

    Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation under the Internal Control – Integrated Framework, management concluded that the internal control over financial reporting was effective as of December 31, 2009.

    This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 
40

 

PART  III


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


Directors and Executive Officers

The following table sets forth the names and positions of all directors and executive officers of the Company.
 
Name
Position
 
 
    Ewen R. Cameron
Director, President, Chief Executive Officer and Assistant Secretary
    Angela L. Marvin
Vice President Finance, Chief Financial Officer, Secretary and Treasurer
    Norman R. Dobiesz
Director and Executive Vice President Business Development
    Duncan J. Anderson
Senior Vice President, Sales and Marketing
    Richard W. Begando
Senior Vice President, International Sales
    Gregory G. Barr
Director (1)
    Richard L. Stevens
Director (1)(3)
    Peter Friedmann
Director (2)
________________
(1)           Audit Committee Members
(2)           Appointed by holder of Series B Preferred stock in October 2005
(3)           Financial Expert

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 35 years in the computer and telecommunications industry.

    Angela L. Marvin, Vice President of Finance, Chief Financial Officer, Secretary and Treasurer joined Teltronics in 2008.  Prior to joining Teltronics, Ms. Marvin served as Chief Financial Officer and Treasurer at JCI Jones Chemicals, Inc., a privately held manufacturer and distributor of water treatment chemicals, and a senior auditor at Deloitte.  She holds a Bachelors of Science in Accounting from St. John Fisher College and is a Certified Public Accountant licensed in the State of New York.

    Norman R. Dobiesz has served as a Director of the Company since October 25, 1991 and is the Company's Executive 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.

    Duncan J. Anderson, Senior Vice President, Sales and Marketing, joined Teltronics in 2001 as Managing Director of Teltronics Limited to handle the sale of Teltronics products in the UK and Western Europe.  In his current position, Mr. Anderson heads up the sales and marketing organization for North America.  He has held senior positions in management and sales for a number of other computer and telecom companies for the last 23 years.


 
41

 

Richard W. Begando, Senior Vice President, International Sales, has been in charge of our overseas sales since he started at Teltronics in June 2000.  He also serves as Product Manager for the 20-20 Digital Switching products.  Mr. Begando's former position was with Harris Communications Corporation as Managing Director of Harris Corporation Moscow Office.  Prior to this position at Harris, he established the Harris Communications Products Division Regional Sales office in London and was Director of International sales for Africa, Middle East, Eastern Europe, and Asia.  Mr. Begando has more than 36 years of experience in digital switching sales for both domestic and international companies.

    Gregory G. Barr was formerly Area President of Orion Bank (formerly known as 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.  Mr. Barr meets the definition of an independent director as defined by the NASD’s listing standard.

    Richard L. Stevens, CPA, provides tax compliance and consulting services to clients in a variety of industries.  Mr. Stevens also serves as Chief Financial Officer of Avalon Global Group, Inc., a holding company with operating subsidiaries in car rental, franchising and technology solutions for the travel industry located in St. Petersburg, Florida.  From 1984 to 2000, Mr. Stevens held various management positions with the international accounting firms of Grant Thornton, LLP, Coopers & Lybrand and KPMG Peat Marwick.  He has experience in taxation, accounting, capital transactions and mergers and acquisitions.  Mr. Stevens holds a B.S. in Business Administration from the University of Louisville and is a Certified Public Accountant.  Mr. Stevens meets the definition of an independent director as defined by the NASD’s listing standards, and qualifies as a “financial expert” in accordance with SEC regulations.

    Peter Friedmann graduated in Chemical Engineering from the University of Western Ontario and built a successful career with Procter and Gamble.  Following that, he developed and operated major businesses in North America and Europe.  Through his involvement, he gained significant experience and knowledge in business and management covering retail, distribution, steel, rubber and tire businesses.  In addition, Mr. Friedmann continues to be involved in the software business, real estate development and is a principal of a venture capital company which is investing in start up technology driven companies.  Also he has been involved in amateur and professional sports as a player and team owner.



Code of Ethics

We have a Code of Ethics that applies to our chief executive officer and senior financial and accounting officers.  On November 9, 2007, the Company also adopted a Code of Ethics that applies to our board of directors.  Both codes are available without charge upon request by contacting our Corporate Secretary in writing at, Teltronics, Inc., 2511 Corporate Way, Palmetto, Florida 34221.



Section 16(a) Beneficial Ownership Reporting Compliance

    Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers and directors, and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership of such securities with the SEC. Directors, officers and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.  Based solely on its review of the copies of such forms received by it and written representations from certain reporting persons that no Forms 5 were required for them, the Company believes that during its most recently completed fiscal year ended on December 31, 2009, all filing requirements applicable to our directors, officers and greater than 10% shareholders were satisfied.

 
42

 

ITEM 11.     EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

    The Company’s compensation arrangements with its named executive officers are designed to attract and retain the best available personnel for positions of substantial responsibility within the Company.  In addition, these arrangements have been developed to provide additional incentive to the Company’s key employees and promote the success of the Company’s business.

    The Compensation arrangements consist of three components.  The first component, applicable to all of the named executives is base compensation (See Table 1).  In addition to the base compensations those executives with an involvement in expanding the Company’s revenues receive a commission component (See Table 2).  And finally, to align the named executives interest with the Company’s performance, there is a stock option plan (See Table 3 and 4).

Base Compensation

The table below sets forth the base compensation of our named executive officers in 2009.

Table 1 – Summary Compensation During 2009
 
Name and
Principal Position
Year
 
Salary
   
Non-Equity
Incentive Plan
Compensation
   
Other Annual
Compensation
(Car/401(k) match//Life Ins)
   
Total
 
                           
Ewen R. Cameron
2009
  $ 422,308       ---     $ 4,550     $ 426,858  
President & CEO
2008
  $ 449,038       ---     $ 9,675     $ 458,713  
 
2007
  $ 424,038       ---     $ 9,550     $ 433,588  
                                   
Angela L. Marvin
2009
  $ 188,077       ---     $ 4,800     $ 192,877  
Vice President Finance, CFO,
2008
  $ 22,885       ---     $ 738     $ 23,623  
Secretary & Treasurer
                                 
                                   
Russell R. Lee III
2009
  $ ---       ---     $ 129,519     $ 129,519  
Former Vice President Finance,
2008
  $ 228,337       ---     $ 5,560     $ 233,897  
CFO, Secretary & Treasurer
2007
  $ 211,538       ---     $ 9,800     $ 221,338  
                                   
Norman R. Dobiesz
2009
  $ 422,308       ---     $ 4,550     $ 426,858  
Executive Vice President
2008
  $ 449,038       ---     $ 4,550     $ 453,588  
Business Development
2007
  $ 424,038       ---     $ 4,500     $ 428,538  
                                   
Duncan J. Anderson
2009
  $ 143,942     $ 223,420     $ 4,800     $ 372,162  
Senior Vice President
2008
  $ 238,318       ---     $ 22,510     $ 260,829  
Sales & Marketing
2007
  $ 299,595       ---     $ 27,762     $ 327,357  
                                   
Richard W. Begando
2009
  $ 143,942     $ 69,277     $ 4,800     $ 218,019  
Senior Vice President
2008
  $ 152,740     $ 103,770     $ 9,925     $ 266,435  
International Sales
2007
  $ 155,480     $ 185,276     $ 9,800     $ 350,556  
                                   

Mr. Cameron’s and Mr. Dobiesz’s base compensation is stipulated under ten-year employment contracts.  These contracts, which are renewable for an additional five-year period at the employee’s option were offered to the employees by the Company’s Board of Directors in October 2005.  Each employment agreement provides for a base salary of $400 subject to annual increases of $25.  If the Company terminates the employment of either Mr. Cameron or Mr. Dobiesz, the terminated employee will be entitled to severance equal to the salary for the remaining term on this contract.

The base compensation for the other named executives is reviewed annually by the Chief Executive Officer and adjustments are made based on the objectives set forth above.

 
43

 

Mr. Anderson has an employment agreement that provides for his compensation and can be terminated by either party with twelve months notice.

Plan Based Compensation

The table below sets forth the grants of plan based compensation during 2009.  The only plan based compensation resulted from sales commission plans.

Table 2 – Grants of Plan-Based Awards During 2009
 
Name and
Principal Position
Grant Date
Estimated Future Payouts Under
Non-equity Incentive Plans
   
Threshold
Target
Maximum
         
Ewen R. Cameron
President & CEO
---
---
---
---
         
Angela L. Marvin
Vice President Finance,
CFO, Secretary & Treasurer
---
---
---
---
         
Norman R. Dobiesz
Executive Vice President
Business Development
---
---
---
---
         
Duncan J. Anderson
Senior Vice President
Sales & Marketing
1/1/2009
---
$151,200
$223,420 (1)
         
Richard W. Begando
Senior Vice President
International Sales
1/1/2009
---
$136,305
$69,277 (1)
         

(1)           Based on 2009 actual payout.

    Mr. Anderson and Mr. Begando are the only named executive who have commission based compensation. Commission plans are designed annually by management to incentivize the executive to increase the sale of the products and services for which he is responsible.

Equity Based Compensation

    The Company also periodically issues stock options to key personnel in an effort to keep the employee’s overall compensation tied to shareholder value.  Mr. Cameron makes periodic recommendations to the Company’s Board of Directors, based on employee performance.  The Company’s Board of Directors approves all equity based compensation.

 
44

 
The table below sets forth the number of the Company’s common shares and value thereof of options which vested during 2009.

Table 3 – Option Vesting During 2009
 
Name and
Principal Position
Number of
Shares
Acquired on
 Vesting (#)
Value Realized
on Vesting ($)
Number of
Shares
Acquired on
Exercise
Value
Realized on Exercise
         
Ewen R. Cameron
President & CEO
---
---
---
---
         
Angela L. Marvin
Vice President Finance,
CFO, Secretary & Treasurer
---
---
---
---
         
Norman R. Dobiesz
Executive Vice President
Business Development
---
---
---
---
         
Duncan J. Anderson
Senior Vice President
Sales & Marketing
6,000
$2,640
50,000
$75,000
         
Richard W. Begando
Senior Vice President
International Sales
---
---
---
---

The following table shows the outstanding equity awards to named executive officers at December 31, 2009.

Table 4 – Outstanding Equity Awards at December 31, 2009
 
Name and
Principal Position
Number of Securities
Underlying
Unexercised
Options (#)
Exercisable
Number of Securities
Underlying
Unexercised
Options (#)
Un-exercisable
Option Exercise
Price ($)
Option
Expiration
Date
Number of
Shares of
Stock That
Have Not
Vested
Market Value of Shares of Stock That Have Not Vested
             
Ewen R. Cameron
500,000
---
$1.00
1/2/2011
---
---
President & CEO
30,000
---
$0.36
12/23/2015
---
---
             
Angela L. Marvin
 
100,000
$0.15
5/21/2019
100,000
$154,000
Vice President Finance,
           
CFO, Secretary &
           
Treasurer
           
             
Norman R. Dobiesz
30,000
---
$0.40
12/23/2015
---
---
Executive Vice President
           
Business Development
           
             
Duncan J. Anderson
20,000
---
$1.00
10/05/2011
---
---
Senior Vice President
6,000
24,000
$0.14
8/15/2018
24,000
$36,960
Sales & Marketing
           
             
Richard W. Begando
5,000
---
$2.56
9/19/2010
---
---
Senior Vice President
30,000
---
$0.07
1/3/2013
---
---
International Sales
           
 
 
45

 

    All of the compensation adjustments or recommendations, other than the contract commitments to Messrs. Cameron and Dobiesz, are made by the Chief Executive Officer based upon individual and Company performance, the product marketplace and the metrics of the Company’s stock price in the market.

Incentive Stock Option Plans

    The Company adopted an Incentive Stock Option Plan, as amended ("1995 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 1995 Plan authorized 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.  The 1995 Plan terminated August 8, 2005.

    In September 2004, the shareholders of the Company ratified the 2005 Incentive Stock Option Plan (“2005 Plan”) which became effective May 1, 2005 and expires September 28, 2014.  The maximum number of shares of common stock authorized under the 2005 Plan is 1,000,000 shares.

    As of December 31, 2009, an aggregate of 710,000 shares of the Company's Common Stock may be issued or transferred to grantees under the 2005 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.
 
    During 2007, the Company granted options to purchase 10,000 shares to non-executive employees under the 2005 Plan and options to purchase 105,000 shares previously granted to employees were forfeited.

    During 2008, the Company granted options to purchase 20,000 shares to non-executive employees under the 2005 Plan and options to purchase 90,000 shares previously granted to employees were forfeited.

    During 2009, the Company granted options to purchase 60,000 shares to non-executive employees under the 2005 Plan and options to purchase 45,000 shares previously granted to employees were forfeited.

    Under both plans, options may be exercised solely by the Participant or his or her legal representative during his or her employment with the Company 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.

Director Compensation

    The Company has a policy to compensate non-employee members of its Board of Directors elected by common shareholders and such members appointed to the Audit Committee in the amount of $2,500 plus expenses for each meeting attended in person and $1,500 for participating in each meeting via telephone.

 
46

 


The table below shows director’s compensation for the year ended December 31, 2009.  We did not grant any options to our directors in 2009.


Table 5 – Director’s Compensation During 2009
 
Name and
Principal Position
Fees Earned or
Paid in Cash
 
     
Gregory G. Barr
$  9,000
 
Director
   
     
Richard L. Stevens
$  8,000
 
Director
   
     
Peter G. Friedmann
           ---      (1)
 
Director
   
     

(1)           Mr. Friedmann is appointed by the Preferred Series B shareholder and is not a member of theAudit Committee.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee currently consists of Messrs. Cameron, Dobiesz, Barr and Stevens.  There were no transactions during the year ended December 31, 2009 between the Company and members of the Compensation committee or entities in which they own an interest, other than as disclosed in the sections “EXECUTIVE COMPENSATION” and “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.”

Compensation Committee Report

    The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.


Compensation Committee:

Ewen R. Cameron
Norman R. Dobiesz
Gregory G. Barr
Richard L. Stevens


 
47

 
ITEM 12.           SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS

    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 22, 2010.  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.
 
Name of Beneficial
Owner and Address
Title of Class
Amount and
Nature of
Beneficial
Ownership (1)
Percentage
of Class (1)
           
Directors and Officers
         
           
Norman R. Dobiesz
2511 Corporate Way
Palmetto, Florida 34221
(2)(4)
Common Stock
Preferred Series A Stock
Preferred Series C Convertible Stock
1,527,191
100,000
18,824
17.55%
100%
47.06%
(3)
 
(9)(12)
           
Ewen R. Cameron
2511 Corporate Way
Palmetto, Florida 34221
(2)(4)
Common Stock
Preferred Series C Convertible Stock
761,786
11,764
8.75%
29.41%
(5)
(9)(12)
           
Angela L. Marvin
2511 Corporate Way
Palmetto, Florida 34221
(4)
Common Stock
100,000
1.15%
(6)
           
Gregory G. Barr
2511 Corporate Way
Palmetto, Florida 34221
(2)
Common Stock
202,000
2.32%
(7)(10)
           
Richard L. Stevens
2511 Corporate Way
Palmetto, Florida 34221
(2)
Common Stock
200,000
2.30%
(10)
           
Richard Begando
2511 Corporate Way
Palmetto, Florida 34221
(4)
Common Stock
43,575
0.50%
(8)
           
Duncan Anderson
2511 Corporate Way
Palmetto, Florida 34221
(4)
Common Stock
100,000
1.15%
(9)
           
Peter G. Friedmann
4850 Keele Street
Toronto, Ontario M3J 3K1
(2)
Preferred Series B Convertible Stock
Preferred Series C Convertible Stock
12,625
9,412
100%
23.53%
(10)(11)
(10)(12)
           
All Directors and Officers as a Group (10 persons)
 
Common Stock
Preferred Series A Stock
3,190,167
100,000
36.65%
100%
 
   
Preferred Series B Convertible Stock
12,625
100%
 
   
Preferred Series C Convertible Stock
40,000
100%
 
           
Greater than 5% Ownership
(10)
       
           
FGC Holdings Ltd.
4850 Keele Street
Toronto, Ontario M3J 3K1
(11)
Preferred Series B Convertible Stock
Common Stock
12,625
721,429
100%
8.29%
 
           
IHL Investments, LLC
2511 Corporate Way
Palmetto, Florida 34221
(12)
Preferred Series C Convertible Stock
Common Stock
40,000
1,454,545
100%
16.71%
 
 
 
48

 
(1)
Does not include an aggregate of 710,000 shares of Common Stock which may be issued upon exercise of incentive stock options which could be granted under the Company's 2005 Incentive Stock Option Plan.
(2)
Director of the Company.
(3)
Includes 56,000 shares owned by virtue of 100% ownership of H & N Management Co., Inc. "H&N"), 1,140,100 shares owned by virtue of 100% ownership of W&D Consultants, Inc., 24,000 shares owned by virtue of 100% ownership of National Communications of Sarasota, Inc., 6,649 shares owned by virtue of 100% ownership of Whitfield Capital of Sarasota, Inc., and 30,000 issued stock options.  Does not include 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.
(4)
Executive Officer of the Company named in Item 11 of this Report on Form 10-K.
(5)
Includes 530,000 shares of issued stock options.
(6)
Includes 100,000 shares of issued stock options.
(7)
Includes 2,000 shares owned jointly with Mr. Barr's wife.
(8)
Includes 35,000 shares of issued stock options.
(9)
Includes 50,000 shares of issued stock options.
(10)
The information concerning the shares attributable to each beneficial owner is based solely on information contained in Section 13D filings each beneficial owner made with the SEC.
(11)
FGC Holdings Ltd. Is controlled by Peter G. Friedmann, a Director of the Company.
(12)
IHL Investments, LLC is controlled by Norman R. Dobiesz, Ewen R. Cameron and Peter G. Friedman, Directors of the Company.

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.  The Company is in arrears on three dividend payments as of the date of this filing.

Equity Compensation, Plan Information

The following table presents information as of December 31, 2009, relating to our equity compensation plans:

Plan Category
Number of Securities
to be Issued upon
Exercise of
Outstanding Options
Weighted
Average
Exercise Price
Of Outstanding
Options
Number of
Securities Remaining
Available for
Future Issuance
       
Equity compensation plans
approved by security holders:
 
     
1995 Incentive Stock Option Plan
915,000
$ 0.85
---
2005 Incentive Stock Option Plan
290,000
   0.22
710,000


 
49

 


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Effective October 21, 2005 the Company amended its employment agreements with Ewen R. Cameron, President and CEO, and Norman R. Dobiesz, Senior Vice President Business Development. See Executive Compensation - Employment Agreements.

    An entity controlled by a Director of the Company occupied approximately 1,000 square feet of office space in our Sarasota facility during 2009 and 150 square feet of the office in the Company’s New York office.  The annual rent payment was approximately $122, $101 and $8 for 2009, 2008 and 2007, respectively.

    The Company entered into a formal sub-lease agreement with an affiliated entity, controlled by one of the directors of the Company of which the affiliate has agreed to pay the lease obligation from June 1, 2009 through December 31, 2010.  As of December 31, 2009, total rent expense paid by the affiliated company, on behalf of the Company, under this agreement was $342 of which a portion of this is in lieu of future rent.  The Company will begin paying the affiliated company $30 monthly beginning March 2010 for it’s use of the office space and furniture rental.  The related entity occupies approximately 8,000 square feet of the new Palmetto facility which will be offset by the amount payable to the entity each month.

    During 2005 the Company borrowed $250 from an entity controlled by this same director.  Principal and cumulative interest, at an annual rate of fifteen percent (15%), totaling $221 was repaid in July 2009.

    The Company leases two vehicles from another entity controlled by this director.  Monthly costs are $3 and are due through October 2010.

    In addition, the spouse of the same director is employed by the Company in an administrative capacity at a salary of $33 per year.

    All of the outstanding shares of the Company’s Series C Preferred Stock are owned by IHL Investments, LLC.  Ownership of IHL Investments, LLC was acquired by two management Directors of the Company on February 5, 2008.  See Current Report on Form 8-K dated February 8, 2008 filed with the SEC on February 8, 2008.

 
50

 


ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

Kirkland, Russ, Murphy & Tapp, P.A.:

Kirkland, Russ, Murphy & Tapp, P.A. were engaged in July 2004 and have served as our registered certified public accounting firm during the years ended December 31, 2008 and 2009.  The following table summarizes the aggregate fees billed to the Company by Kirkland, Russ, Murphy & Tapp, P.A. for professional services performed in 2009 and 2008:


 
Fees
2009
2008
 
Audit Fees (1)
$143
$159
 
Tax Fees (2)
$ 13
$ 13

1.           Audit Fees

Fees for audit services billed in 2009 and 2008 consisted of:
--           Audit of the Company’s annual financial statements for 2009 and 2008.
--           Reviews of the Company’s quarterly financial statements for 2009 and 2008.
--           Reviews of Securities and Exchange Commission documents.

2.           Tax Fees

Fees for tax services billed in 2009 consisted of:
--           Preparation of the Company’s federal and state income tax returns for 2009.

The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent accountants on a case-by-case basis.  The Audit Committee approved 100% of the services performed by Kirkland, Russ, Murphy & Tapp, P.A. in 2009 and 2008 as identified above.

 
51

 

PART  IV


ITEM 15.    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 19.
     
 
(2)
Financial Statement Schedules:
 
Schedule II - Valuation and Qualifying Accounts is on page 53.
 
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.
 
 
(3)
See Item 15(c) below.
 
(b)
Reports on Form 8-K:
 
The Company filed one report on Form 8-K during the fourth quarter of fiscal year ended December 31, 2009.  Information regarding the item reported on is as follows:
 
 
Date
Item Reported On
 
 
November 17, 2009
Item 2.02:  Results of Operations and Financial Condition
   
Item 9.01:  Financial Statements and Exhibits
 
(c)
Exhibits: The exhibits listed on the Exhibit Index are filed as part of, or incorporated by reference into, this Report.
 
(d)
Financial Statement Schedules: See Item 15(a) above.



 
52

 

SCHEDULE  II


VALUATION AND QUALIFYING ACCOUNTS


Description
 
Balance at
Beginning
Of Period
   
Additions
Charged to
Costs and
Expenses
   
Additions
Charged
to Other
Accounts
   
Writeoffs
   
Balance at
end of
Period
 
                               
Allowance for doubtful accounts:
                             
                               
Year ended December 31, 2009
  $ 177     $ (26 )   $ ---     $ (7 )   $ 144  
Year ended December 31, 2008
    348       (171 )     ---       ---       177  
Year ended December 31, 2007
    365       (17 )     ---       ---       348  
                                         
Reserve for slow-moving inventories:
                                       
                                         
Year ended December 31, 2009
  $ 1,033     $ 74     $ ---     $ (481 )   $ 626  
Year ended December 31, 2008
    1,069       312       ---       (348 )     1,033  
Year ended December 31, 2007
    1,185       85       ---       (201 )     1,069  
                                         
Valuation allowance for deferred tax assets:
                                       
                                         
Year ended December 31, 2009
  $ 8,857     $ ---     $ (1,826 )   $ ---     $ 7,031  
Year ended December 31, 2008
    7,438       ---       1,419       ---       8,857  
Year ended December 31, 2007
    6,742       ---       696       ---       7,438  



 
53

 


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:   March 23, 2010
By:
/s/ Angela L. Marvin       
Angela L. Marvin
Vice President Finance and
Chief Financial 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. Cameron                       
Ewen R. Cameron
Director, President and
Chief Executive Officer
 March 23, 2010
     
     
/s/ Angela L.. Marvin                        
Angela L. Marvin
Vice President Finance, Chief
Financial Officer, Secretary and
Treasurer
March 23, 2010
     
/s/ Norman R. Dobiesz                     
Norman R. Dobiesz
Director
March 23, 2010
     
/s/ Gregory G. Barr                          
Gregory G. Barr
Director
March 23, 2010
     
/s/ Richard L. Stevens                       
Richard L. Stevens
Director
March 23, 2010
     
/s/ Peter G. Friedmann                      
Peter G. Friedmann
Director
March 23, 2010


 
54

 

 EXHIBIT INDEX

(c)
Exhibits:
2.1
Tri-Link Technologies, Inc. and Teltronics, Inc. Agreement of Purchase and Sale of Vortex Technology, dated October 31, 2002, between Tri-Link Technologies, Inc. and Teltronics, Inc.
2.2
Amendment No. 1 to Agreement of Purchase and Sale of Vortex Technology, dated May 13, 2003, between Tri-Link Technologies, Inc. and Teltronics, Inc.
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 filed April 2, 1997.
3.3*
By-Laws of the Registrant, as amended.  Filed as Exhibit 1 to Teltronics’ Form 8-K filed March 10, 2010.
4.1
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 5 to Teltronics' Form 8-K filed October 7, 1996.
4.2
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 3.1 to Teltronics' Form 8-K filed March 9, 1998.
4.3
Amended Designation of Teltronics, Inc. filed with the Delaware Secretary of State on February 25, 1998.  Filed as Exhibit 3.2 to Teltronics' Form 8-K filed March 9, 1998.
4.4
Certificate of Designations Establishing Series of Shares and Articles of Amendment of Teltronics, Inc. filed with the Delaware Secretary of State on March 27, 2002.  Filed as Exhibit 3.6 to Teltronics' Form 10-K filed April 1, 2002.
4.5
Amended Designations Establishing Series of Shares and Articles of Amendment of Teltronics, Inc. filed with the Delaware Secretary of State on April 29, 2002.  Filed as Exhibit 3 to Teltronics' Form 10-Q filed August 14, 2002.
10.1
Loan and Security Agreement between Sirrom Capital Corporation and Teltronics, Inc. and its Subsidiaries dated February 25, 1998.  Filed as Exhibit 10.4 to Teltronics' Form 8-K filed March 9, 1998.
10.2
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 10.5 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 10.6 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 10.7 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 10.8 to Teltronics' Form 8-K filed March 9, 1998.
10.6
Registration Rights Agreement dated February 25, 1998 between Teltronics, Inc. and Sirrom Capital Corporation.  Filed as Exhibit 10.9 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 10.7 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
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.
10.10
Amended and Restated Senior Secured Promissory Note in the amount of $1,000,000 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.


 
55

 


10.11
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.
10.12
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.
10.13
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.
10.19
Amended and Restated Employment Agreement between the Company and Ewen R. Cameron dated August 31, 2002 Filed as Exhibit 10.1 to Teltronics' Form 10-Q filed November 13, 2001.
10.20
Amended and Restated Employment Agreement between the Company and Norman R. Dobiesz dated August 31, 2001 Filed as Exhibit 10.2 to Teltronics' Form 10-Q filed November 13, 2001.
10.21
Amended, Restated and Consolidated Secured Promissory Note restated as of March 28, 2002 delivered to Harris Corporation.  Filed as Exhibit 10.21 to Teltronics' Form 10-K filed April 1, 2002.
10.22
Third Amended and Restated Senior Secured Promissory Note in the amount of $1,000,000 dated and delivered May 2, 2002 by Teltronics, Inc. to Finova Mezzanine Capital, Inc. f/k/a/ Sirrom Capital Corporation.  Filed as Exhibit 10.1 to Teltronics' Form 10-Q filed August 14, 2002.
10.23
Amended and Restated Stock Purchase Warrant covering 525,000 shares Common Stock of Teltronics, Inc. issued May 2, 2002 to Finova Mezzanine Capital, Inc. f/k/a Sirrom Capital Corporation.  Filed as Exhibit 10.2 to Teltronics' Form 10-Q filed August 14, 2002.
10.24
Amended and Restated Stock Purchase Warrant covering 365,000 shares Common Stock of Teltronics, Inc. issued May 2, 2002 to Finova Mezzanine Capital, Inc. f/k/a Sirrom Capital Corporation.  Filed as Exhibit 10.3 to Teltronics' Form 10-Q filed August 14, 2002.
10.25
Employment Agreement between the Company and Patrick G. Min dated September 9, 2002.  Filed as Exhibit 10.1 to Teltronics' Form 10-Q filed November 14, 2002.
10.26
Employment Agreement between the Company and Robert B. Ramey dated September 9, 2002.  Filed as Exhibit 10.2 to Teltronics' Form 10-Q filed November 14, 2002.
10.27
Thirteenth Amendment to Loan and Security Agreement dated October 16, 2002 between The CIT Group/Business Credit, Inc. and Teltronics.  Filed as Exhibit 10.3 to Teltronics' Form 10-Q filed November 14, 2002.
10.28
First Amendment to Loan and Security Agreement, Fourth Amended and Restated Senior Secured Promissory Note and Pledge and Security Agreement dated September 30, 2002 between Finova Mezzanine Capital Inc. and Teltronics, Inc.  Filed as Exhibit 10.4 to Teltronics' Form 10-Q filed November 14, 2002.
10.29
Secured promissory note for $2,250,000 aggregate principal amount issued by Teltronics, Inc. in favor of Tri-Link Technologies, dated as of June 4, 2003.
10.30
Second Amendment to Loan and Security Agreement and Fifth Amended and Restated Senior Secured Promissory Note dated September 9, 2003 between Teltronics, Inc. and Finova Mezzanine Capital Inc.  Filed as Exhibit 10 to Form 10-Q filed November 14, 2003.
10.31
Patent Transfer Agreement dated August 16, 2004 by and between Harris Corporation and Teltronics, Inc.  Filed as Exhibit 10 to Form 10-Q filed August 16, 2004.
10.32
Investment Agreement between Teltronics, Inc. and International Media Network AG dated October 19, 2004.  Filed as Exhibit 10.1 to Form 10-Q filed November 15, 2004.


 
56

 


10.33
Share Exchange Agreement between International Media Network AG and Norman R. Dobiesz dated October 19, 2004.  Filed as Exhibit 10.2 to Form 10-Q filed November 15, 2004.
10.34
Extension and Amendment of Lease between ARE Sarasota Limited Partnership and Teltronics, Inc. dated March 31, 2005.  Filed as Exhibit 10.1 to Form 10-Q filed May 11, 2005.
10.35
New York State Department of Education/DIIT Minibid #2189 Awarded January 31, 2005 to Teltronics, Inc.  Filed as Exhibit 10.2 to Form 10-Q filed May 11, 2005.
10.36
Amended Loan and Security Agreement between Teltronics, Inc. and The CIT Group/Business Credit, Inc. dated April 25, 2005.  Filed as Exhibit 10.3 to Form 10-Q filed May 11, 2005.
10.37
Settlement Agreement and Mutual Release among Teltronics, Inc., Tri-Link Technologies Inc., and Hargan-Global Ventures Inc. dated October 12, 2005.  Filed as Exhibit 10.1 to Form 10-Q filed November 14, 2005.
10.38
Promissory Note of Teltronics, Inc. in the principal amount of $750,000 dated October 12, 2005 delivered to Tri-Link Technologies Inc.  Filed as Exhibit 10.2 to Form 10-Q filed November 14, 2005.
10.39
Promissory Note of Teltronics, Inc. in the principal amount of $250,000 dated October 12, 2005 delivered to Dove Ventures, Ltd.  Filed as Exhibit 10.3 to Form 10-Q filed November 14, 2005.
10.40
Amended and Restated Employment Agreement between Teltronics, Inc. and Ewen R. Cameron dated October 21, 2005.
10.41
Amended and Restated Employment Agreement between Teltronics, Inc. and Norman R. Dobiesz dated October 21, 2005.
10.42
Amendment to Revolving Credit, Term Loan and Security Agreement by and among CapitalSource Finance LLC and Teltronics, Inc. dated May 15, 2007.  Filed as Exhibit 10.1 to Form 10-Q filed August 14, 2007.
10.43
Credit Agreement by and among Teltronics, Inc. and Wells Fargo Foothill, Inc. dated May 31, 2007.  Filed as Exhibit 10.1 to Form 8-K filed June 4, 2007.
10.44
Security Agreement by and among Wells Fargo Foothill, Inc. and Teltronics dated May 31, 2007. Filed as Exhibit 10.2 to Form 8-K filed June 4, 2007
10.45
Amendment Number One to Credit Agreement by and among Wells Fargo Foothill, Inc. and Teltronics, Inc. dated May 31, 2007.  Filed as Exhibit 10.2 to Form 10-Q filed August 14, 2007.
10.46
Employment Agreement between Teltronics Limited and Duncan Anderson dated March 1, 2005.  Filed as Exhibit 10.46 to Form 10-K for the fiscal year ended December 31, 2007.
10.47
Asset Purchase Agreement dated December 19, 2007 by and among Access Communications, Collier Business Systems, John Mitchell, Chris R. Fickey and Teltronics Direct, Inc.  Filed as Exhibit 10.47 to Form 10-K for the fiscal year ended December 31, 2007.
10.48
Amendment Number Two to Credit Agreement by and among Wells Fargo Foothill, Inc. and Teltronics, Inc. dated August 13, 2008.  Filed as Exhibit 10 to Form 10-Q filed August 14, 2008.
10.49
Stock Purchase Agreement between Teltronics, Inc., John Mitchell, Chris R. Fickey dated August 21, 2008.  Filed as Exhibit 10 to Form 8-K filed August 26, 2008.
10.50
Amendment Number Three to Credit Agreement by and among Wells Fargo Foothill, Inc. and Teltronics, Inc. dated February 18, 2009.  Filed as Exhibit 10.50 to Form 10-K for the fiscal year ended December 31, 2008.
10.51
Amendment Number Four to Credit Agreement by and among Wells Fargo Foothill, Inc. and Teltronics, Inc. dated March 1, 2009.  Filed as Exhibit 10.1 to Form 10-Q filed May 8, 2009
10.52
Employment Agreement between Teltronics, Inc. and Duncan Anderson dated April 16, 2009.  Filed as Exhibit 10.2 to Form 10-Q filed May 8, 2009
10.53
Lease Agreement dated May 14, 2009 between Gulfcoast Property No. 1, LLC (“Landlord”) and Teltronics, Inc. (“Tenant”) for the property located at 2511 Corporate Way, Palmetto, Florida, effective June 1, 2009.  Filed as Exhibit 10.1 to Form 10-Q filed August 12, 2009.
10.54
Amendment Number Five to Credit Agreement by and among Wells Fargo Foothill, Inc. and Teltronics, Inc. dated July 1, 2009.  Filed as Exhibit 10.2 to Form 10-Q filed August 12, 2009.
10.55*
Amendment Number Six to Credit Agreement by and among Wells Fargo Foothill, Inc. and Teltronics, Inc. dated December 31, 2009.
14.1
Code of Ethics.  Filed as Exhibit 14 to Form 10-K for the fiscal year ended December 31, 2003.
14.2
Code of Ethics.  Teltronics, Inc. Board of Directors Code of Ethical Business Conduct filed as Exhibit 14.2 to Form 10-K for the fiscal year ended December 31, 2007.


 
57

 


21*
List of Subsidiaries.
23*
Consent of Independent Registered Certified Public Accountants, Kirkland, Russ, Murphy & Tapp, P.A.
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
_____
(*)
 
Filed as an Exhibit to this Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
 
 
 
 
 
58