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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996 Commission file number 0-11275
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TELTONE CORPORATION
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(Exact name of registrant as specified in its charter)
WASHINGTON 91-0839067
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22121 - 20th Avenue SE, Bothell, WA 98021
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(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (206) 487-1515
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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NONE
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Securities registered pursuant to Section 12(g) of the Act:
Common stock without par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 if Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $9,471,000
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State the aggregate market value of the voting stock held by non affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
Teltone's stock trades on the NASD electronic OTC Bulletin
Board system underthe symbol TTNC.
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
5,576,796 shares of common stock outstanding as of September 2, 1996.
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DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-KSB into which the document is incorporated: (1) Any
annual report to security holders; (2) Any proxy or information statement; and
(3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities
Act of 1933. The listed documents should be clearly described for
identification purposes.
(1) PROXY STATEMENT DATED SEPTEMBER 30, 1996 FOR USE IN CONNECTION WITH THE
COMPANY'S ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON OCTOBER 29, 1996. (PART
III, ITEM 10, (DIRECTORS ONLY) AND ITEMS 11, 12, AND 13).
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PART I
ITEM 1. BUSINESS
Teltone Corporation ("Teltone" or the "Company") designs, manufactures, and
sells specialty electronic telecommunications equipment and components in the US
and international markets. Teltone's customers include telephone operating
companies and other telecommunications carriers, business end-users, and
original equipment manufacturers ("OEMs"). Teltone Corporation was incorporated
in the state of Washington in July 1968.
INDUSTRY BACKGROUND
The breakup of the Bell System in January 1984 began an era of profound change
in the domestic telecommunications market served by the Company. Similarly, the
deregulation and privatization of national telephone authorities around the
world has changed the faces of Teltone's international markets. The structural
changes of the world's telecommunications services providers, (the "carriers"),
has been matched by rapid advances of technology in the field of
telecommunications. Optical fibers allow more information to be transmitted
over greater distances at lower costs; digital switches, really special-purpose
computers, direct the flow of information to its intended recipients; cellular
telephone and other wireless technologies make the physical location of senders
and recipients largely irrelevant; and, the operation of the networks is done
mainly by computers controlled by specialized operations software programs.
These structural and technological changes have combined to establish an
environment of competition at every level of the world's telecommunications
markets. New market entrants have emerged to challenge the supremacy of the
established service providers, the "carriers". New suppliers have sprung up to
make new products for both the new and established carriers. New products are
being developed and marketed to telecommunications services consumers, i.e.
"users", to enable them to take full advantage of the competitive choices that
are now available to them. The established carriers and suppliers, many of whom
are long-term customers of Teltone, are streamlining their operations and
introducing new products and services to meet the competition. One example is
the rapidly accelerating growth of the Integrated Services Digital Network
("ISDN") both domestically and in foreign markets. Another example is the rapid
deployment of Call Waiting Deluxe in North America.
Several of Teltone's new products provide specialized functions to customers who
depend on the public network to transfer voice and data information between
locations. These new customer premise equipment products do not have the long
standardization periods required by products sold to Teltone's telephone company
("telco") customers. Neither do they have the long product life cycles that
have traditionally applied to products used internally by telephone companies.
Teltone's continued success will depend upon its ability to quickly identify
applications for its technology, transform them into new products, and introduce
the products to penetrate its markets.
PRODUCTS
TELECOM EQUIPMENT
Teltone is a market leader in telecommunications test and demonstration
products. Our portable Telephone Line Simulators provide extensive PBX and
telephone central office functionality for testing, training, and demonstration
of telecommunications equipment, without installing costly phone lines. The
latest member of this product family, the TLS-5C, incorporates caller
identification in call waiting and several other new product features. The
Company plans to continue introducing simulators as the network continues to
offer enhanced services.
In fiscal 1996 Teltone introduced an ISDN line simulator, the ILS-1000, to
provide simulation of the ISDN Basic Rate Interface services. This new digital
service is now widely available in North America, and the ILS-1000 has been very
well received by the OEMs wanting to test and demonstrate their ISDN terminal
equipment. Teltone plans to expand the ILS family in the coming year.
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Teltone's Line Sharing Products enable multiple devices at remote locations to
share a single telephone line for voice and data transmission. Benefits to the
user include greatly reduced monthly line charges and installation costs,
improved data security, faster connect times, and quick return of the initial
investment. In a typical application, a headquarters office will poll or
exchange data with hundreds of widely dispersed locations.
The Substation Line Sharing Switch (SLSS) is an embodiment of Teltone's line
sharing technology specially suited for line switching in power utility
substations. This product was introduced near the beginning of Teltone's 1994
fiscal year and has quickly developed into the core of a new line of products
for utility "distribution automation applications." In fiscal 1996 two RS-232
data switches were added to the substation product family to provide a more
complete solution for substations with a large number of data sources. A
cellular interface unit was also introduced for those substations that are not
conveniently connected to a land line.
The concept of "telecommuting" is the movement among businesses to allow
employees to work from home or other remote locations, thus eliminating the
daily round trip from home to workplace. Telecommuting is enjoying great
acceptance as businesses are encouraged to share in the reduction of traffic
congestion and energy consumption. Teltone's OfficeLink-Registered Trademark-
extends the functions of an office telephone system to a home worker through the
public switched telephone network. Thus the employee is telephonically "at the
office" without physically coming to the office. OfficeLink is currently being
sold to business users through a network of specialized distributors and by
means of alliances with suppliers of business telephone systems. Several major
suppliers of PBXs and automatic call distributors currently recommend OfficeLink
as a standard solution for telecommuting. Teltone has supplied substantial
quantities of OfficeLink to a major supplier of such systems for resale under
the supplier's own brand name. The Company hopes to expand this product line
during the current fiscal year.
Teltone is a leading supplier of 9-1-1 call routing equipment. The 9-1-1
Switched Access System (9-1-1SAS) is an intelligent, distributed network that
assures the completion of emergency calls. The patented 9-1-1SAS provides
primary enhanced 911 and expanded network services, including intelligent call
routing, trunk monitoring, and interface to land as well as cellular networks.
It reroutes E9-1-1 calls and their automatic number identification over the
diverse public switched telephone network, allowing public safety answering
points to remain in service when dedicated lines are interrupted. Elements of
the 9-1-1SAS product line are also being supplied to a leading manufacturer of
local exchange switching systems to be incorporated in that company's remote
ISDN switch modules.
These equipment products are priced from $200 to $2,500, depending on features
and functions.
TELECOM COMPONENTS
Teltone offers the industry a wide selection of tone-based telecom IC solutions
for telecom equipment manufacturers. With the Telephone Line Simulators and
ISDN Line Simulators described above, these devices provide OEMs with a broad
set of options for their tone signaling needs in development, production,
marketing and sales.
Teltone is a market leader in call progress detection, offering this critical
CPE function both as part of industry-standard single-function devices (such as
our M-980 and newly-introduced low power 3V/5V M-9220) and integrated with DTMF
reception and generation functions in our industry-standard M-8880 and M-8888
devices. In addition, Teltone has a unique line of precise call progress
detection devices (M-981, M-982 and M-984) and corresponding generator (M-991)
that allow customers to rapidly determine precisely which call progress signal
is present without waiting for several cycles. All these receivers are used in
equipment that connects to the telephone network worldwide, such as computer-
telephone integration (CTI) equipment, automatic dialers, voice mail and pay
phone systems. The M-991 generator is used extensively by manufacturers of
wireless switches, simulators and test equipment.
Teltone's MF signalling IC product line supports tone-based inter-switch
signaling with proprietary, DSP-based single channel and dual channel CCITT
Region 1 and Region 2 transceivers (the M-986 transceiver product line and the
M-993 generator). These devices enable Central Office, customer premises, and
PBX/Centrex switch manufacturers to build switches compatible with standards
used in the largest and fastest-growing telephone equipment markets worldwide,
including a new device introduced specifically for China last fall, the M-976-
2C2P. Partly as a result of these new products, Teltone's component sales
overseas increased to 52% of the FY96 total for components.
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Teltone's most broadly used product line is its DTMF signaling line. This
consists of proprietary DTMF receivers (M-957), industry-standard DTMF receivers
(M-8870 and M-88L70), and industry-standard DTMF transceivers with call progress
(M-8880 and M-8888). Teltone introduced two new products in this arena this
year, the low power 3V M-88L70 and a lower cost industry standard M-8870-03.
Teltone also offers a selection of line current sensing relays and tone/pulse
ICs. Also, the Company introduced Tape and Reel forms for all its surface mount
products in FY96.
List prices of these components range from $3 to $100 each, depending on the
component chosen and quantity ordered.
THE SOURCE FOR CUSTOM SOLUTIONS
Teltone's telecommunications engineering expertise and customer-oriented focus
allow it to rapidly respond to its customers' requests for changes to standard
products or for new product designs. Teltone's engineering staff has a thorough
understanding of telephone network interface technology, analog and digital
applications and regulatory standards and requirements. These skills have often
been brought to bear to create a unique solution customized to precisely match
the customer's requirements.
MARKETING, SALES, AND DISTRIBUTION
TELECOM EQUIPMENT
Teltone's principal telephone company customers include the Regional Bell
Operating Companies ("RBOCs") and major independent telephone companies in the
United States and Canada. Teltone sells its products directly to these
customers as well as through a network of manufacturers representatives and
telecommunications distributors. Teltone provides applications engineering and
other service and support as required from its Bothell, WA headquarters. The
products are promoted through magazine articles and advertising, trade shows and
direct sales calls. Product and sales support are provided from Teltone's
Bothell facility.
Certain of Teltone's systems-level products are supplied to other manufacturers
of telecommunications equipment for incorporation into larger scale product
offerings to telephone companies and other carriers.
The power utilities are served primarily through a network of manufacturers
representatives. The SLSS and other products are usually delivered directly to
these customers with no distributors involved. Other customers are served
through specialized distributors or by the traditional telephone supply houses.
Additionally, Teltone has already concluded a private label arrangement with a
major manufacturer of business telephone systems for the OfficeLink product and
other such arrangements may follow for this or other products.
Due to differing signaling standards, products for use in countries outside
North America normally must be modified for each application. Thus,
international sales tend to be special products sold to a distributor in each
country. Products are promoted through magazine articles and advertising,
direct mail, and telephone sales. Product and sales support are provided from
Teltone's Bothell, WA, facility.
TELECOM COMPONENTS
In the United States and Canada, components are sold direct from Teltone to high
volume users, as well as through a network of manufacturers' representatives and
electronics distributors. Specifications, literature, and customer support are
provided by Teltone from its headquarters. In foreign countries the Company's
OEM products are marketed through stocking distributors who purchase the
products from Teltone and resell them to telecommunications OEMs in the
countries they serve. Teltone currently has 27 international distributors for
OEM products.
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INTERNATIONAL SALES
As was discussed above, Teltone's international sales are made through
distributors.
COMPETITION
The major competitive factors in selling to telecommunications carriers are
superior product performance, reliability and customer service. As the
conversion to tone signaling has been completed in developed countries, many of
Teltone's historic competitors for tone conversion products have left the
market, leaving Teltone as the only significant provider of tone-to-pulse
conversion products. At the same time, as the use of the newer digital
technology opens other opportunities for specialty interface and functional
subsystems, Teltone is well positioned to identify these opportunities early and
quickly address them with product solutions.
Teltone plans to concentrate on applications for which its technology is
particularly well matched and which can be quickly addressed with unique product
solutions. Where possible, Teltone will protect its proprietary interests with
patents to add to the normal barriers to the entry of effective competition.
Over the years, Teltone has developed a strong reputation for delivering high
quality products and excellent customer service. This reputation helps the
Company sell its products throughout the telecommunications industry. Teltone
is also known for solving unique customer problems in specialty niches of the
business-user market. Some user products face significant competition from
suppliers which are larger and more established in their particular market
segments. Many of the competitors have lower overhead costs and are able to
sell their products at lower prices than Teltone. In these situations, Teltone
concentrates on selling its products into applications that require the
relatively high performance, reliability and excellent service that will allow
it to command its relatively high prices.
Teltone's component business to OEMs, though not supported by in-house
manufacturing, has been able to compete successfully in the marketplace because
of the value added by the Company's proprietary products, customer service and
applications support for its component products. The most significant
competition for Teltone's components comes from integrated circuit
manufacturers, some of them Teltone's suppliers, that also sell to Teltone's
customer base.
Digital-Signal-Processing ("DSP") technology offers another form of competition
which allows the customer to implement sophisticated signaling schemes by
programming standard DSP devices. In some cases, depending on the product and
volume, a potential customer can literally replace the older component function
with software when DSP is used. To respond to this competitive threat, Teltone
has developed and is marketing products using DSP techniques to better serve the
customer's needs with competitive products. Teltone hopes to develop other such
components based in DSP technology as the need arises.
RESEARCH AND DEVELOPMENT
The telecommunications industry is subject to continuous technological changes.
Thus, well positioned new products that solve problems for customers are
essential to Teltone's ability to grow. In fiscal 1996 the Company spent
$818,000 or 9% of each sales dollar on product development. In fiscal years
1995 and 1994 the Company spent $819,000 and $769,362 (9% and 10% of sales) on
product development. Management of the Company expects to spend approximately
10% of sales on product development in fiscal 1997.
CUSTOMER SERVICE AND SUPPORT
Responsive customer service and field support are important in the customer's
decision to buy the Company's products, often at a premium over competitive
products. Teltone customers are offered a variety of service, maintenance, and
extended warranty options. In addition, the Company is willing to enter into
customized service agreements to suit specific needs of a customer. Field
service personnel are located at the Company's facilities in Bothell, WA.
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BACKLOG
At June 30, 1996, backlog totaled $1,021,000 compared to $2,107,000 at June 30,
1995. Teltone's experience is that most customers normally order Company
products on an "as needed" basis.
MANUFACTURING
Teltone assembles its products from standard and specialized components
manufactured by others to Teltone's specifications. The Company then performs
all assembly and test steps in the manufacture of its products at its Bothell,
WA, facility. Component testing takes place upon their receipt from suppliers,
and functional testing is completed after assembly and burn-in of the
subsystems. These tests are primarily performed by automated equipment.
RAW MATERIALS
Most standard components are available from a number of suppliers. Custom
microcircuitry components are normally purchased from single sources but,
because the Company owns the tooling for these components, other electronics
manufacturers could take over if an existing vendor ceased production. In such
a case, the Company's supply of a component might be affected by start-up
delays. The Company enters into contracts for one year or longer with both its
standard and custom component suppliers as a means of insuring that short-term
supplies will be available. To date, the Company has not had any significant
procurement problems. However, future shortages could result in production
delays that could adversely affect the Company's business.
PATENTS AND TRADEMARKS
The Company owns a number of trademarks which are used on its products. It is
the owner of federal registrations for its trademarks TELTONE, stylized TELTONE,
CableLink, CallData, CallPro, Convert-A-Pak, and Teltone OfficeLink. In
addition, its REMOBS and stylized TELTONE trademarks have been registered in
Canada. In Europe, its stylized TELTONE has been registered in France and
Benelux (Belgium-Netherlands-Luxembourg), West Germany and Italy.
The Company owns United States and foreign patents on various features
incorporated into certain equipment it produces. Because of the technological
nature of the telecommunications industry, and the significant number of patents
extant that cover various aspects of such technology, companies producing
products for the telephone industry often find that they have included patented
technology in the design of one or more of their products. In such an event,
the use of such technology may be licensed from the patent holder and a
licensing fee paid by the user, or the patent holder may insist that use of the
patented technology be discontinued. In that event, the user has the option of
either discontinuing use or risking suit. In any such suit, the issues may
include the validity of the patent or the fact of infringement. Management is
not currently aware of any infringements.
WORKING CAPITAL ITEMS
The Company manages its working capital items by means of normal sales
activities.
EMPLOYEES
As of June 30, 1996, the Company employed 65 persons full time. On such date,
29 employees were engaged in production, 11 in engineering, 13 in sales,
marketing, and service, and 12 in administrative functions. The Company
believes its relations with its existing employees to be excellent. None of the
Company's employees are represented by a labor union.
SEASONALITY
No material portion of the business of the Company is regarded as seasonal.
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ITEM 2. PROPERTIES
Teltone's corporate headquarters are located approximately fifteen miles
northeast of Seattle in Bothell, WA. The leased headquarters building provides
65,000 square feet of floor space of which 50,000 square feet are used for the
manufacturing, product development, marketing, sales, quality control, and
administrative functions of the Company and 15,000 square feet are subleased.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various contractual and warranty liability cases and
claims which are considered normal to its business. In the opinion of
management, these claims, when concluded, will not have a material adverse
impact on the consolidated financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AND BUSINESS EXPERIENCE AGE POSITION
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Richard W. Soshea 64 President and Chief
M/A-COM, Inc., 1988-1991 Executive Officer
Harris Corp. & Litton Systems, Effective August 1, 1991
Inc., 1980-1988
Hewlett Packard, 1962-1980
Richard G. Johnson 52 Vice President, Operations
Director of Manufacturing, 1983-1987 Effective February 25, 1987
Senior Operations Manager, 1982-1983
Manufacturing Manager, 1977-1982
Ray Ma 50 Vice President Engineering
Director of Engineering, 1989-1995 Effective March 1, 1995
Engineering Manager, 1976-1989
Design Engineer, 1972-1976
Jeffrey B. deCillia 37 Vice President Finance and
AccessLine Technologies, Inc., Chief Financial Officer
1994-1996 Effective August 22, 1996
MacPherson's, Inc., 1989-1994
Deloitte & Touche, 1982-1989
Peter C. Spratt 41 Secretary & General Counsel
Secretary 1991-1995 Effective June 12, 1995
Preston Gates & Ellis, 1990-1995
Touche Ross & Co., 1985-1987
Shidler McBroom Gates & Lucas, 1982-1985
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Ragen MacKenzie Incorporated is a market maker for Teltone stock,
which is traded on the NASD electronic OTC Bulletin Board under the
symbol TTNC. For further information call Ragen MacKenzie
Incorporated at (206) 343-5000. While the Board of Directors has
declared and paid dividends in past years, in fiscal 1983 it adopted a
policy of retaining all earnings to fund business development and
growth.
There were 905 common shareholders and 119 preferred shareholders as
of September 2, 1996.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1996 VS. 1995
Net sales for 1996 were $9,471,000 as compared to $9,176,000 for 1995.
This increase was driven by a $2,300,000 increase in customer premises
equipment offset by reductions in the sales of telco products and
integrated circuits. Gross margin was $4,202,000 or 44% of net sales for
1996 compared to $4,261,000 and 46% for 1995, respectively. The decrease
in margin is attributable to the telco and integrated circuit product
lines. Operating expenses were 41% of net sales in 1996 and 42% of net
sales for 1995, reflecting management's continued success in controlling
costs while growing net sales. Other income for 1996 includes $134,000
reversal of an accrued lease liability that was settled.
At June 30, 1996, approximately $12,325,000 in net operating loss
carryforwards were available to offset future taxable income and expire
from 2001 through 2011. If substantial changes in the Company's ownership
should occur, there may be annual limitations on the utilization of such
carryforwards. The Company also has investment tax credit as well as
research and development tax credit carryforwards of $290,000 and $752,000,
respectively, available to offset future income tax liabilities through
2001. Although the Company has adopted the Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes", there is no tax
asset recognized for the net operating loss carryforwards and tax credits
due to the Company's loss history and therefore uncertainty regarding
future taxable income.
1995 VS. 1994
The Company returned to profitability in fiscal 1995 after losses the four
previous years. This was the result of 21% growth in net sales which
represented growth in all product lines. The most significant increases
were in sales of customer premises equipment to end users and semiconductor
device sales to OEM (Original Equipment Manufacturer) customers. In
addition, gross margins increased to 46% from 39% in the prior year as a
result of changes in product mix as well as more fully utilizing the
available production capacity. Operating expenses decreased to 42% of
sales from 51% as management was able to grow net sales without requiring a
corresponding increase in expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a line of credit agreement for $1,500,000, renewable in
September of 1997. The agreement is collateralized by eligible accounts
receivable, inventory, and other tangible and intangible assets and
contains financial covenants including working capital and debt ratios, as
well as maximum loss provisions. As of June 30, 1996, borrowings under
this line totaled $800,000.
In 1996, the Company established an international line of credit with the
same bank for $500,000, renewable in September of 1997. The agreement is
collateralized by eligible foreign accounts receivable and inventory. As
of June 30, 1996, there were no outstanding borrowings under this line.
Cash and the lines of credit should enable the Company to meet its
operating and working capital needs during the next twelve months.
The Company invested $62,000 in capital equipment in 1996 compared to
$105,200 in 1995. The Company does not anticipate any significant change
in the level of capital expenditures from 1996 to 1997.
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ITEM 7. FINANCIAL STATEMENTS AND SUPPORTING DATA
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the five years ended June 30, 1996
In thousands except per share data 1996 1995 1994 1993 1992
---------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales . . . . . . . . . . . . . . . . . . . $9,471 $9,176 $7,600 $9,679 $9,433
Gross margin. . . . . . . . . . . . . . . . . . 4,202 4,261 2,947 3,127 3,729
Net income (loss) . . . . . . . . . . . . . . . 377 405 (907) (932) (237)
PER SHARE DATA
Net income (loss) per common and
common equivalent shares outstanding . . . . $.05 $.06 $(.17) $(.17) $(.04)
Average common and common
equivalent shares outstanding . . . . . . . 7,201,784 6,679,253 5,489,150* 5,491,518* 5,494,375*
OTHER FINANCIAL INFORMATION
Cash and short-term cash investments. . . . . . $ 148 $ 60 $ 64 $ 938 $ 755
Working capital . . . . . . . . . . . . . . . . 1,805 1,314 1,256 2,293 2,776
Property, plant, and equipment - net. . . . . . 297 369 416 518 624
Total assets. . . . . . . . . . . . . . . . . . 3,652 3,606 3,213 4,191 6,045
Long-term liabilities . . . . . . . . . . . . . - - 394 624 876
Stockholders' equity. . . . . . . . . . . . . . 2,102 1,684 1,278 2,187 3,119
OTHER STATISTICS
Current ratio . . . . . . . . . . . . . . . . . 2.2 to 1 1.7 to 1 1.8 to 1 2.7 to 1 2.3 to 1
Long-term liabilities to equity . . . . . . . . - - .3 to 1 .3 to 1 .3 to 1
Number of employees at end of year. . . . . . . 65 60 57 73 84
</TABLE>
* Excludes common stock equivalents, including 1,075,641 shares of preferred
stock, as the effect is antidilutive.
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Report of Independent Accountants
To the Board of Directors and Shareholders of Teltone Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity, and of cash flows present fairly, in all
material respects, the financial position of Teltone Corporation at June 30,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Seattle, Washington
September 16, 1996
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STATEMENTS OF OPERATIONS
For the two years ended June 30, 1996
1996 1995
---- ----
Net sales. . . . . . . . . . . . . . . . . . $9,471,023 $9,175,800
Cost of goods sold . . . . . . . . . . . . . 5,268,904 4,914,637
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Gross margin on sales. . . . . . . . . . . . 4,202,119 4,261,163
Operating expenses:
Selling, general, and administrative . . . 3,077,052 3,025,105
Engineering and development. . . . . . . . 819,037 819,020
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3,896,539 3,844,125
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Income from operations . . . . . . . . . . . 305,580 417,038
---------- ----------
Other income (expense):
Interest income. . . . . . . . . . . . . . . 48 3,791
Interest expense . . . . . . . . . . . . . . (76,107) (28,398)
Other income--net (See Note 3). . . . . . 147,452 12,135
---------- ----------
71,393 (12,472)
---------- ----------
Net income . . . . . . . . . . . . . . . . . $ 376,973 $ 404,566
---------- ----------
---------- ----------
Net income per common and
common equivalent shares . . . . . . . . . $ .05 $ .06
---------- ----------
---------- ----------
Average common and common equivalent
shares outstanding . . . . . . . . . . . . 7,201,784 6,679,253
The accompanying notes are an integral part of these Financial Statements.
13
<PAGE>
BALANCE SHEETS
June 30, 1996 and 1995
ASSETS 1996 1995
---- ----
Current assets
Cash . . . . . . . . . . . . . . . . . . . . . . $ 147,896 $ 59,892
Trade accounts receivable (net of allowance for
doubtful accounts of $40,851 and $49,889) . . . 1,394,902 1,471,735
Inventories (net of allowance for obsolescence
of $207,193 and $188,882)
Raw materials . . . . . . . . . . . . . . . . 662,177 767,259
Work in process . . . . . . . . . . . . . . . 122,510 181,001
Finished goods. . . . . . . . . . . . . . . . 985,735 698,440
----------- -----------
Total inventories . . . . . . . . . . . . . 1,770,422 1,646,700
----------- -----------
Other current assets . . . . . . . . . . . . . . 42,692 58,536
----------- -----------
Total current assets. . . . . . . . . . . . 3,355,912 3,236,863
----------- -----------
Property, plant, and equipment--at cost. . . . . . 4,340,345 4,284,341
Less accumulated depreciation . . . . . . . . (4,043,827) (3,915,123)
----------- -----------
Property, plant, and equipment--net . . . . 296,518 369,218
----------- -----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . $ 3,652,430 $ 3,606,081
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable--trade. . . . . . . . . . . . . $ 249,537 $ 640,149
Current portion of long-term lease subsidy . . . - 367,914
Accrued compensation and benefits. . . . . . . . 445,224 439,676
Accrued warranty expense . . . . . . . . . . . . 32,842 38,015
Notes payable to bank. . . . . . . . . . . . . . 800,000 400,000
Other accrued expenses . . . . . . . . . . . . . 22,933 36,738
----------- -----------
Total current liabilities . . . . . . . . . 1,550,536 1,922,492
----------- -----------
Commitments: Notes 3 and 4
Stockholders' equity
Convertible preferred stock--no par value;
authorized 6,000,000 shares; 1,075,641
shares issued and outstanding, ($2,151,282
liquidation preference; or $2 per share) . . . 2,063,149 2,063,149
Common stock--no par value; authorized
20,000,000 shares; shares issued and
outstanding 1996-5,575,796,
1995-5,487,096 . . . . . . . . . . . . . . . . 2,988,275 2,946,943
Accumulated deficit. . . . . . . . . . . . . . . (2,949,530) (3,326,503)
----------- -----------
Stockholders' equity . . . . . . . . . . . . . . 2,101,894 1,683,589
----------- -----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . $3,652,430 $3,606,081
----------- -----------
----------- -----------
The accompanying notes are an integral part of these Financial Statements.
14
<PAGE>
STATEMENTS OF CASH FLOWS
For the two years ended June 30, 1996
1996 1995
---- ----
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . $ 376,973 $ 404,566
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation. . . . . . . . . . . . . . . . . 134,146 137,620
Loss on disposal of property. . . . . . . . . 632 13,849
Change in:
Trade accounts receivable . . . . . . . . . . 76,833 (196,161)
Inventories . . . . . . . . . . . . . . . . . (123,722) (202,958)
Accounts payable and accrued liabilities. . . (593,623) 82,925
Other current assets. . . . . . . . . . . . . 15,844 (45,648)
----------- -----------
Cash (used by) provided by operating
activities . . . . . . . . . . . . . . . . . . (112,917) 194,193
----------- -----------
Investing activities:
Investment in property, plant, and
equipment . . . . . . . . . . . . . . . . . (62,078) (105,223)
Proceeds from sale of property and equipment. - 473
----------- -----------
Cash used by investing activities: . . . . . . . (62,078) (104,750)
----------- -----------
Financing activities:
Notes payable to bank . . . . . . . . . . . . 400,000 230,000
Lease subsidies, net. . . . . . . . . . . . . (178,333) (324,969)
Employee stock sales, net . . . . . . . . . . 41,332 1,051
----------- -----------
Cash provided by (used by) financing
activities . . . . . . . . . . . . . . . . . . 262,999 (93,918)
----------- -----------
Increase (decrease) in cash and equivalents. . . . 88,004 (4,475)
Cash, beginning of year. . . . . . . . . . . . . . 59,892 64,367
----------- -----------
Cash, end of year. . . . . . . . . . . . . . . . . $ 147,896 $ 59,892
----------- -----------
----------- -----------
Supplemental Disclosure of Cash Flow
Interest paid during 1996 and 1995 was $83,635 and $27,181, respectively.
The accompanying notes are an integral part of these Financial Statements.
15
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
For the two years ended June 30, 1996
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
--------------- ------------ Accumulated
Shares Amount Shares Amount Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 . . . . . . . . 1,075,641 $2,063,149 5,486,082 $ 2,945,892 $(3,731,069) $ 1,277,972
Repurchase of common shares under
employee profit sharing plan . . . . (7,136) (2,139) (2,139)
Issuance of common stock under
employee purchase plan . . . . . . . 1,400 364 364
Issuance of common stock under
employee option plan . . . . . . . . 6,750 2,826 2,826
Net income . . . . . . . . . . . . . . 404,566 404,566
--------- ---------- --------- ----------- ----------- -----------
Balance, June 30, 1995 . . . . . . . . 1,075,641 $2,063,149 5,487,096 $ 2,946,943 $(3,326,503) $ 1,683,589
Issuance of common stock under
employee option plan . . . . . . . . 88,700 41,332 41,332
Net income . . . . . . . . . . . . . . 376,973 376,973
--------- ---------- --------- ----------- ----------- -----------
Balance, June 30, 1996 . . . . . . . . 1,075,641 $2,063,149 5,575,796 $ 2,988,275 $(2,949,530) $ 2,101,894
--------- ---------- --------- ----------- ----------- -----------
--------- ---------- --------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Teltone Corporation designs, manufactures, and sells specialty electronic
telecommunications equipment and components to a variety of telephone operating
companies, business end users, and original equipment manufacturers
internationally. Customers are primarily located in North America, Asia and
Western Europe.
REVENUE RECOGNITION
Revenue is recognized at the time of shipment. Estimated sales returns are
subtracted from sales to obtain net sales and are not material.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization which is calculated on a straight-line basis over their estimated
useful lives of 4-7 years. Property and equipment consists primarily of
leasehold improvements, manufacturing and engineering equipment, vehicles and
furniture and fixtures.
ENGINEERING AND DEVELOPMENT COSTS
Engineering and development costs are charged to expense as incurred.
WARRANTY COSTS
Estimated warranty costs are accrued at the time products are sold.
INCOME TAX
In accordance with FAS 109, deferred tax liabilities and assets are determined
based on the difference between the financial statements carrying amount and the
tax basis of assets and liabilities using the enacted tax rates in effect in the
years in which the differences are expected to reverse.
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock is convertible one-for-one into common stock at the
stockholder's option.
RECENT ACCOUNTING PRONOUNCEMENT
In October 1995 the Financial Accounting Standards Board issued FAS 123,
Accounting for Stock Based Compensation, which is effective for fiscal years
that begin after December 15, 1995. FAS 123 establishes financial accounting
and reporting standards for stock based employee compensation plans and for the
issuance of equity instruments to acquire goods and services from non-employees.
The Company may elect to follow the provisions of FAS 123 or APB 25. The
Company has not determined its method of adoption as of June 30, 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, trade accounts receivable, inventories, accounts
payable trade, notes payable and accrued compensation and benefits approximate
eVtheir fair value.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
17
<PAGE>
2. NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of common
shares outstanding during the year. Common equivalent shares, including
preferred shares, warrants and stock options, are included to the extent they
are dilutive in the calculation of earnings per share and are excluded to the
extent they are antidilutive in the calculation of loss per share.
3. LEASE COMMITMENTS
The Company leases its headquarters facility under an operating lease agreement.
Future minimum lease payments, as of June 30, 1996, are $516,984 for each of the
next two years and $301,574 in the third year. Operating lease expense, net of
sublease income, was $501,785 in 1996 and $538,600 in 1995.
In May 1986, the Company entered into a ten-year lease agreement for the
Company's Kirkland headquarters facility as part of a sale leaseback agreement.
In conjunction with the Company's relocation in the third fiscal quarter of
1991, the facility was subleased for the remaining lease term at an annual rent
of approximately $1,000,000. The remaining obligation under the Company's
original lease agreement, inclusive of anticipated increases in the consumer
price index, exceeds the total rental income from the sublease. This excess is
reflected on the balance sheet as lease subsidy at June 30, 1995. In 1996
obligations under this lease expired and the remaining accrual of $134,000 was
reversed and is included in other income.
4. LINE OF CREDIT
In October 1993 the Company entered into a line of credit agreement with a bank
for the lesser of $1,000,000 or an amount calculated based on 75% of eligible
accounts receivable. The line of credit was subsequently increased to
$1,500,000 and is renewable in September 1997. The line of credit bears
interest at prime + 1%, which was 8.75% at June 30, 1996. As of June 30, 1996,
borrowings under this line totaled $800,000.
In April 1996 the Company entered into another line of credit with the same bank
for the lesser of $500,000 or an amount calculated based on 90% of foreign
accounts receivable and 70% of related inventory, renewable in September 1997.
As of June 30, 1996, there were no outstanding borrowings under this line.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
June 30, 1996 June 30, 1995
------------- -------------
Manufacturing and engineering equipment $ 4,085,177 $ 4,034,058
Furniture and fixtures 238,596 233,711
Other 16,572 16,572
----------- -----------
4,340,345 4,284,341
Less accumulated depreciation (4,043,827) (3,915,123)
----------- -----------
$ 296,518 $ 369,218
----------- -----------
----------- -----------
18
<PAGE>
6. INCOME TAX
Deferred tax assets consisted of the following:
June 30, 1996 June 30, 1995
------------- -------------
Net operating loss carryforwards $ 4,190,000 $ 4,154,000
Depreciation and amortization 313,000 334,000
Tax credits 1,042,000 1,042,000
Deferred gain on building sale 0 174,000
Inventory reserves 70,000 64,000
Other 119,000 115,000
----------- -----------
Deferred tax assets 5,734,000 5,883,000
Valuation allowance (5,734,000) (5,883,000)
----------- -----------
$ - $ -
----------- -----------
----------- -----------
Due to the Company's loss history and therefore uncertainty regarding future
taxable income, the Company has established a valuation allowance of $5,734,000
against deferred tax assets. At June 30, 1996, the Company had net operating
loss carryforwards of approximately $12,325,000. The carryforwards expire from
2001 through 2011. If substantial changes in the Company's ownership should
occur, there may be annual limitations on the utilization of such carryforwards.
The Company also has investment tax credit as well as research and development
tax credit carryforwards of $290,000 and $752,000, respectively, available to
offset future income tax liabilities through 2001.
The reconciliation of taxes on income at the federal statutory rate to the
actual tax expense of $0 is:
June 30, 1996 June 30, 1995
------------- -------------
Tax at statutory rate $ 128,171 $ 137,552
Nondeductible items 20,829 27,448
Change in valuation allowance (149,000) (165,000)
----------- -----------
$ - $ -
----------- -----------
----------- -----------
7. STOCK OPTIONS
The Company has two active stock option plans, both of which have been approved
by the Board of Directors. The Nonemployee Directors' Stock Option Plan,
pending final shareholder approval, provides for the grant of options to
purchase up to 320,000 common shares to outside directors of the Company.
Options are granted at the fair market value of the stock on the date of grant
and vest over a four year period. The maximum term of an option may not exceed
six years.
The Employees Stock Option Plan provides for the grant of options to purchase up
to 800,000 common shares to key employees of the Company. Options are granted
at the fair market value of the stock on the date of grant and vest over a four
year period. The maximum term of an option may not exceed six years.
Information regarding the Company's employee stock option plan is summarized
below:
19
<PAGE>
Employee Stock
Option Plan*
------------
Shares under option:
Outstanding at June 30, 1994 1,051,500
Options granted 120,500
Options exercised (6,750)
Options lapsed (46,250)
-----------
Outstanding at June 30, 1995 1,119,000
Options granted 45,000
Options exercised (81,300)
Options lapsed (88,700)
-----------
Balance, June 30, 1996 994,000
-----------
-----------
Outstanding available to grant at June 30, 1996 256,250
-----------
-----------
Average option price per share $ .47
-----------
-----------
There were 657,525 options exercisable at June 30, 1996.
* Includes options granted under option plans previous to the 1992 plan of
587,500, 546,800 and 527,500 for the years ended June 30, 1994, 1995 and 1996,
respectively.
8. EMPLOYEE BENEFIT PLAN
The Company offers its employees a 401(k) savings plan which is designed to
allow participating employees to accumulate savings for retirement and other
purposes. Under the 401(k) plan, all Company employees are eligible to
participate following the first day of the month following their hire date.
Employees may elect to contribute up to 15% of their annual compensation to the
plan. In addition, the Company provides for discretionary employer
contributions.
Additionally, the Company offered a Profit Sharing Trust to its employees which
invested in a variety of investments, including stocks and bonds. The trust was
funded by the Company. However, contributions have not been made since 1983.
During 1995 the assets of the trust were combined with the Company's 401(k)
plan.
20
<PAGE>
ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
pages 2 through 4 of the Company's definitive Proxy Statement to be
used in connection with the Annual Meeting of Shareholders to be held
on October 29, 1996 (the "Proxy Statement"), which the Company will
file with the Commission within 120 days after the end of its 1996
fiscal year. Information regarding executive officers of the Company
is included at the end of Part I of this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
The section entitled "Executive Officer Compensation" on pages 7
through 9 of the Proxy Statement and the section entitled
"Compensation of Board Members" on page 5 of the Proxy Statement are
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections entitled "Election of Directors" to the extent of the
disclosures on pages 1 through 4, and "Principal Shareholders" on page
6 of the Proxy Statement are incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
21
<PAGE>
PART IV
ITEM 13. EXHIBITS, SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
A. Exhibits filed herewith:
3 Articles of Incorporation and Bylaws(3)
10.4 Teltone Corporation 1983 Stock Option Plan, as amended(1)
10.5 Teltone Corporation 1989 Employees' Stock Purchase Plan(2)
10.10 Sales agreement covering Kirkland, Washington, property(4)
10.11 Building sublease covering Kirkland, Washington, property(5)
10.12 Building lease covering Bothell, Washington, property(6)
10.13 Teltone Corporation 1992 Stock Option Plan(7)
21 List of subsidiaries(4)
23 Consent of Independent Auditors
27 Financial Data Schedules
B. Reports on Form 8-K:
None.
(1) Incorporated herein by reference to the Corporation's Registration
Statement on Form S-8, Commission file No. 2-94927 and 33-29304.
(2) Incorporated herein by reference to the Corporation's Registration
Statement on Form S-8, Commission file No. 33-28779.
(3) Incorporated herein by reference to the Corporation's Annual Report on Form
10-K for the fiscal year ended June 30, 1983, Commission file No. 0-11275.
(4) Incorporated herein by reference to the Corporation's Registration
Statement on Form S-1, Commission file No. 33-1703.
(5) Incorporated herein by reference to the Corporation's Annual Report on Form
10-K for the fiscal year ended June 30, 1987, Commission file No. 0-11275.
(6) Incorporated herein by reference to the Corporation's Annual Report on Form
10-K for the fiscal year ended June 30, 1991, Commission file No. 0-11275.
(7) Incorporated herein by reference to the Corporation's Annual Report on Form
10-K for the fiscal year ended June 30, 1992, Commission file No. 0-11275
22
<PAGE>
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 in the City of Bothell,
State of Washington, on September 23, 1996.
TELTONE CORPORATION
By /s/ Richard W. Soshea
--------------------------------
Richard W. Soshea
President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Charles L. Anderson Chairman and Director September 27, 1996
- ------------------------------
Charles L. Anderson
(a) Principal Executive Officer:
/s/ Richard W. Soshea President and Chief September 27, 1996
- ------------------------------ Executive Officer and
Richard W. Soshea Director
(b) Principal Financial and
Accounting Officer:
/s/ Jeffrey B. deCillia Vice President of September 27, 1996
- ------------------------------ Finance and Chief
Jeffrey B. deCillia Financial Officer
(c) Other Directors:
/s/ Robert L. Bailey Director September 27, 1996
- ------------------------------
Robert L. Bailey
/s/ Tracy S. Storer Director September 27, 1996
- ------------------------------
Tracy S. Storer
/s/ Charles P. Waite Director September 27, 1996
- ------------------------------
Charles P. Waite
/s/ Don C. Wilson Director September 27, 1996
- ------------------------------
Don C. Wilson
/s/ Paul M. Wythes Director September 27, 1996
- ------------------------------
Paul M. Wythes
23
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (no. 2-94927, No. 33-28779 and No. 33-29304) of Teltone
Corporation of our report dated September 16, 1996, appearing on page 12 of
this Form 10-KSB.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Seattle, Washington
September 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 147,896
<SECURITIES> 0
<RECEIVABLES> 1,394,902
<ALLOWANCES> 40,851
<INVENTORY> 1,770,422
<CURRENT-ASSETS> 3,355,912
<PP&E> 4,340,345
<DEPRECIATION> 4,043,827
<TOTAL-ASSETS> 3,652,430
<CURRENT-LIABILITIES> 1,550,536
<BONDS> 0
0
2,063,149
<COMMON> 2,988,275
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,652,430
<SALES> 9,471,023
<TOTAL-REVENUES> 9,471,023
<CGS> 5,268,904
<TOTAL-COSTS> 5,268,904
<OTHER-EXPENSES> 3,896,539
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,107
<INCOME-PRETAX> 376,973
<INCOME-TAX> 0
<INCOME-CONTINUING> 376,973
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 376,973
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
