<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q-SB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
-----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
For the transition period from to
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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, Washington 98021
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(Address of principal executive offices) (Zip Code)
(206) 487-1515
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
5,522,796 shares of common stock outstanding as of March 31, 1996.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 June 30
1996 1995
ASSETS (Unaudited)
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<S> <C> <C>
Current assets
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,029 $ 59,892
Trade accounts receivable (net of allowance for doubtful
accounts of $30,290 and $36,739) . . . . . . . . . . . . . . . . . . . 1,557,456 1,471,735
Inventories
Raw materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 791,394 767,259
Work in process. . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,186 181,001
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 982,330 698,440
----------- -----------
Total inventories. . . . . . . . . . . . . . . . . . . . . . . . . 1,933,910 1,646,700
----------- -----------
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 55,297 58,536
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 3,570,692 3,236,863
----------- -----------
Property, plant and equipment - at cost. . . . . . . . . . . . . . . . . . 4,322,564 4,284,341
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . (4,011,128) (3,915,123)
----------- -----------
Property, plant and equipment - net. . . . . . . . . . . . . . . . . 311,436 369,218
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,882,128 $ 3,606,081
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements 2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 June 30
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities
Accounts payable - trade . . . . . . . . . . . . . . . . . . $ 431,230 $ 640,149
Lease subsidy. . . . . . . . . . . . . . . . . . . . . . . . 205,793 367,914
Accrued compensation and benefits. . . . . . . . . . . . . . 335,564 439,676
Accrued warranty expense . . . . . . . . . . . . . . . . . . 36,035 38,015
Note payable to bank . . . . . . . . . . . . . . . . . . . . 825,000 400,000
Other accrued expenses . . . . . . . . . . . . . . . . . . . 15,262 36,738
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . 1,848,884 1,922,492
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Stockholders' equity
Convertible preferred stock - no par value; authorized
6,000,000 shares; 1,075,641 shares issued and outstanding 2,063,149 2,063,149
Common stock - no par value; authorized 20,000,000 shares;
issued and outstanding 5,522,796 shares. . . . . . . . . 2,963,412 2,946,943
Deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (2.993,317) (3,326,503)
Stockholders' equity . . . . . . . . . . . . . . . . . . 2,033,244 1,683,589
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,882,128 $ 3,606,081
------------ ------------
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</TABLE>
See Notes to Financial Statements 3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31 Ended March 31
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . $2,378,036 $2,207,585 $7,172,813 $6,612,207
Cost of goods sold . . . . . . . . . . . . . . . 1,304,574 1,171,118 3,910,278 3,551,026
---------- ---------- ---------- ----------
Gross margin on sales. . . . . . . . . . . . . . 1,073,462 1,036,467 3,262,535 3,061,181
---------- ---------- ---------- ----------
Operating expenses
Selling, general and administrative. . . . . . 731,114 779,884 2,271,988 2,160,942
Engineering and development. . . . . . . . . . 201,935 214,844 599,912 596,515
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . . . . 933,049 994,728 2,871,900 2,757,457
---------- ---------- ---------- ----------
Income from operations . . . . . . . . . . . . . 140,413 41,739 390,635 303,724
Other expense. . . . . . . . . . . . . . . . . . (21,245) (2,980) (57,449) (12,108)
---------- ---------- ---------- ----------
Income before tax. . . . . . . . . . . . . . . . 119,168 38,759 333,186 291,616
---------- ---------- ---------- ----------
Income tax provision . . . . . . . . . . . . . . -- -- -- --
Net income . . . . . . . . . . . . . . . . . . . $ 119,168 $ 38,759 $ 333,186 $ 291,616
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per common and
common equivalent share . . . . . . . . . . . $ .02 $ . 01 $ .05 $ .04
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average common and common
equivalent shares outstanding. . . . . . . . 7,044,802 6,616,329 7,069,761 6,598,127
</TABLE>
See Notes to Financial Statements 4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended March 31
1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 333,186 $ 291,616
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,468 103,120
Changes in:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . (85,721) (59,127)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (287,210) (48,799)
Accounts payable and accrued items . . . . . . . . . . . . . . . . . (336,487) (128,890)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,239 (25,424)
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Cash provided by (used for) operating activities . . . . . . . . . . (271,525) 132,496
--------- ---------
Cash flows from investing activities:
Investment in property, plant and equipment-net. . . . . . . . . . . (43,686) (63,198)
Cash used for investing activities . . . . . . . . . . . . . . . . . (43,686) (63,198)
--------- ---------
Cash flows from financing activities:
Net borrowings from bank . . . . . . . . . . . . . . . . . . . . . . 425,000 115,000
Lease subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . (162,121) (232,120)
Employee stock purchases, net. . . . . . . . . . . . . . . . . . . . 16,469 152
--------- ---------
Cash provided by (used for) financing activities . . . . . . . . . . 279,348 (116,968)
--------- ---------
Decrease in cash and equivalents . . . . . . . . . . . . . . . . . . . (35,863) (47,670)
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Cash and cash equivalents, beginning of period . . . . . . . . . . . . 59,892 64,367
--------- ---------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . $ 24,029 $ 16,697
--------- ---------
--------- ---------
</TABLE>
See Notes to Financial Statements 5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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1. STOCKHOLDERS' EQUITY
The Company's 1992 Employee Stock Option Plan (the "1992 Plan") has 800,000
shares of common stock reserved for issuance upon the exercise of stock
options granted pursuant to the 1992 Plan. Of this total, options to
purchase 498,750 shares of common stock are outstanding, and 301,250
shares remain available for grant.
2. FEDERAL INCOME TAX
The Company has net operating loss carryforwards of approximately
$11,480,000 available to offset future taxable income through fiscal years
2002 to 2009, as well as $290,000 and $752,000 in investment tax and
research and development tax credits, respectively. The Company has
adopted the Statement of Financial Accounting Standards No. 109 Accounting
for Income Taxes, and no tax asset has been recognized for the net
operating loss carryforwards and tax credits due to the Company's loss
history. The Company recognized no income tax expense in fiscal 1996 or
1995 due to an expected annual effective tax rate of zero.
The unaudited Interim Financial Statements reflect all adjustments which
are, in the opinion of management, necessary to a fair statement of the
results for the interim periods presented. The results of operations for
the period ending March 31, 1996, are not necessarily indicative of
operating results to be expected for the full year. These interim
condensed financial statements should be read in conjunction with the June
30, 1995, financial statements.
6
<PAGE>
TELTONE CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In the third quarter of fiscal 1996, net sales increased 8% over the same period
in the prior year. This was the result of increased sales of end user products
which increased 110% over the same period in the prior year, offset by decreased
sales of semiconductor devices. Gross margins decreased to 45% from 47% in the
prior year due to price erosion in the semiconductor products.
Operating expenses decreased 4% over the same period in the prior year as a
result of timing of expenses associated with sales and marketing management
recruiting efforts. Net income for the quarter was $119,168 or $.02 per share
which results in year to date net income of $333,186 or $.05 per share. This
is a 207% improvement over the same quarter in the prior year and a 14%
improvement in year to date earnings.
For the nine months ending March 31, 1996, net sales increased 8% over the same
period in the prior year, also as the result of increasing sales of end user
products. Gross margins decreased to 45% from 46% also as a result of semi-
conductor price erosion.
At March 31, 1996, approximately $11,400,000 in net operating loss carryforwards
were available to offset future taxable income at varying amounts with
expiration from 2002 to 2009, as well as $290,000 and $752,000 in investment tax
and research and development tax credits, respectively.
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. The Company recognized no income tax expense in fiscal 1996 or 1995
due to an expected annual effective tax rate of zero.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a line of credit agreement for up to $1,500,000 depending upon
collateral levels, renewable in October 1996. Management is currently
implementing a new international line of credit agreement backed by the EXIM
bank for up to $500,000 depending upon international collateral levels. These
agreements are collateralized by accounts receivable, inventory, and other
tangible and intangible assets and contain financial covenants including working
capital and debt ratios, as well as maximum loss provisions. At March 31,
1996, borrowings under these lines of credit totaled $825,000.
The Company is in the process of introducing several new products to the
marketplace. As a result, the working capital requirements to support inventory
and accounts receivable have increased during the period ended March 31, 1996,
resulting in increased usage of the available line of credit.
Cash on hand, as well as the lines of credit should enable the Company to meet
its operating and working capital needs during the next twelve months.
7
<PAGE>
PART II. OTHER INFORMATION
Item 5 - Other Information
Two new directors have been elected to the Board of Directors to replace
Hubert Kertz, formerly of AT&T, and Milton Zeutschel, chairman of Zetron,
Inc., who have resigned. The new directors elected are Robert L. Bailey
and Tracy S. Storer. Mr. Bailey is president and CEO of PMC-Sierra of
Vancouver, B.C., a supplier of advanced integrated circuits to the
telecommunications markets. He was previously a vice president at AT&T
Microelectronics and had also been with Texas Instruments' Semiconductor
Group. Mr Storer is president of The Stanbridge Group, a technology
business consulting firm. He has also held management positions related to
telecommunications equipment at Hewlett Packard, Telenova, and TRW Vidar.
In response to the new network service offerings by telecommunications
carriers, Teltone has now expanded its family of telephone line simulators
to include the TLS-5C with SCWID (Spontaneous Call Waiting Identification),
or Caller ID in Call Waiting, as well as several other advanced features.
This will enable telecom carriers to demonstrate new services without
connecting to the network, and will aid manufacturers of products which
take advantage of these new network services to both test and demonstrate
their products. This is the second simulator introduced this fiscal year.
The ILS-1000 ISDN Line Simulator was introduced in the second quarter and
has contributed to the growth in sales for the period ending March 31,
1996.
Teltone has also introduced a new product engineered for the power utility
substation environment. The DS-100 Data Switch allows users to reduce
their operating costs by communicating with up to eight intelligent
electronic devices at the substation through a single serial data
connection. This, along with our new Cellular Interface Units tailored for
the utility substations, provides a more complete solution for the utility
marketplace moving us closer to our goal of being a leading supplier of
telecommunications products to that market segment.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1996.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELTONE CORPORATION
(Registrant)
Date April 12, 1996 By /s/ Richard W. Soshea
-------------------- ------------------------------
Richard W. Soshea
President & Chief Executive Officer
Date April 12, 1996 By /s/ Debra L. Griffith
-------------------- ------------------------------
Debra L. Griffith
Vice President Finance & Administration
Chief Financial Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 24,029
<SECURITIES> 0
<RECEIVABLES> 1,557,456
<ALLOWANCES> 36,739
<INVENTORY> 1,933,910
<CURRENT-ASSETS> 3,570,693
<PP&E> 4,322,564
<DEPRECIATION> 4,011,128
<TOTAL-ASSETS> 3,882,129
<CURRENT-LIABILITIES> 1,848,885
<BONDS> 0
0
2,063,149
<COMMON> 2,963,412
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,882,129
<SALES> 7,172,813
<TOTAL-REVENUES> 7,172,813
<CGS> 3,910,278
<TOTAL-COSTS> 3,910,278
<OTHER-EXPENSES> 3,187,086
<LOSS-PROVISION> 18,000
<INTEREST-EXPENSE> 57,449
<INCOME-PRETAX> 333,186
<INCOME-TAX> 0
<INCOME-CONTINUING> 333,186
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 333,186
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
