<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1997
-------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission file number 0-11275
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TELTONE CORPORATION
(Name of small business issuer in its charter)
WASHINGTON 91-0839067
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
22121 - 20th Avenue SE, Bothell, WA 98021
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (425) 487-1515
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- -------------------- ----------------------
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)
Check whether the registrant (1) filed all reports required to be filed
by Sections 13 or 15(d) of the Exchange Act 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
----- -----
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. [ X ]
State issuer's revenues for its most recent fiscal year. $10,053,000
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State the aggregate market value of the voting and non-voting common
equity held by non affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act.) $516,000
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(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the registrant's classes
of common equity, as of the latest practicable date.
5,606,796 shares of common stock outstanding as of September 2, 1997.
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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 29, 1997 FOR USE IN CONNECTION WITH THE
COMPANY'S ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON OCTOBER 30, 1997.
(PART III, ITEM 9, (DIRECTORS ONLY) AND ITEMS 10, 11, AND 12).
Transitional Small Business Disclosure Format (check one): Yes No X
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PART I
ITEM 1. BUSINESS
Teltone Corporation (Teltone or the Company) sells specialized
telecommunications software, equipment and components in the United States
and international markets. Teltone's customers include business end-users,
original equipment manufacturers (OEMs), telephone call centers, and
utilities. Teltone Corporation was incorporated in the state of Washington in
July 1968.
INDUSTRY BACKGROUND
The telecommunications market has been changing dramatically and the rate of
change is accelerating. These changes have been driven by new computer and
telephony technologies, by deregulation, and by the Internet. This dynamic
and competitive environment provides many new opportunities for Teltone's
product lines. The equipment products are sold primarily in North America to
utilities, telecom carriers, and end users, both large and small. The
component products are sold to telecom original equipment manufacturers
(OEMs) throughout the world.
PRODUCTS
TELECOMMUTING SOLUTIONS
The concept of telecommuting or telework 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
increasing acceptance as businesses are encouraged to share in the reduction
of traffic congestion and energy consumption. Teltone's OfficeLink
I-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 I 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 or automatic
call distributors currently recommend OfficeLink I as a standard solution for
telecommuting. Teltone has also just introduced the OfficeLink 2000
telecommuting solution targeted to call center remote agents. The OfficeLink
2000 provides the remote agents with the full functionality of the call
center digital phones without requiring extra hardware in the remote location
by integrating the digital phone features into the Windows-based PC desktop.
For this system level solution, Teltone sells a portion of the hardware and
all of the software for the central server PC and the remote agent PC. The
Company is interested in developing further software based products directed
at the call center market. To the extent that the Company's software based
products are successful, it seeks to continue its efforts in this area.
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 TLS-5C, introduced in fiscal 1996, incorporates caller
identification in call waiting and several other new product features. The
latest member of this family, the Telephone Line Emulator (TLE), introduced
in August 1997, is a sophisticated emulator that is targeted for product
development and product test applications. The TLE basic unit includes
programmable attenuation and impedance as well as Type 2/3 Caller ID. In
addition, software modules are planned to be available that allow users to
perform a variety of more advanced test operations or emulation of
international call progress and dial tones. The TLE is also CE marked to
enable sales in Europe.
The ISDN digital line service is now widely available in North America.
Teltone provides two simulators for the OEMs that want to test or demonstrate
their ISDN equipment. The ILS 2000 is a fully featured simulator of both
North American and European (ETSI) switches and includes both the U and S/T
interfaces. The ISDN Demonstrator is a lower cost and lesser featured unit.
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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 sharing 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. In fiscal 1997 the
Weatherproof Line Sharing Switch was introduced for metering, recording, time
of use and other outdoor applications.
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 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-telephony 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 signaling 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.
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 last 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.
THE SOURCE FOR CUSTOM SOLUTIONS
Teltone's 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
application, regulatory requirements, and computer interface technologies.
These skills have often been brought to bear to create a unique solution
customized to precisely match the customer's requirements. The majority of
these customized products are based on Teltone's telephone line sharing
switch or CTI technology.
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MARKETING, SALES, AND DISTRIBUTION
TELECOM EQUIPMENT AND TELECOMMUTING PRODUCTS
Teltone's products for end user businesses are sold directly, through
specialized distributors, or through value added resellers (VARs). The
OfficeLink 2000 is sold directly and through VARs, and may be sold through
OEMs in the future.
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.
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
30 international distributors for OEM products.
INTERNATIONAL SALES
As was discussed above, Teltone's international sales are made through
distributors.
COMPETITION
Teltone concentrates on applications for which its technology is particularly
well matched and which can be quickly addressed with unique product
solutions. 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.
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 1997 the Company spent
$962,000 or approximately 10% of each sales dollar on product development.
In both fiscal 1996 and 1995 the Company spent
4
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approximately $819,000 (9% of sales for both years) on product development.
Management of the Company expects to spend approximately 11% of sales on
product development in fiscal 1998.
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. Field service personnel are located at the Company's facilities in
Bothell, WA.
BACKLOG
At June 30, 1997, backlog totaled $1,177,000 compared to $1,021,000 at June
30, 1996. Teltone's experience is that most customers normally order Company
products on an "as needed" basis.
MANUFACTURING
Teltone assembles its equipment 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.
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EMPLOYEES
As of June 30, 1997, the Company employed 62 persons full time. On such
date, 25 employees were engaged in production, 12 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.
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
<TABLE>
<CAPTION>
NAME AND BUSINESS EXPERIENCE AGE POSITION
- ----------------------------- ----- ---------
<S> <C> <C>
Richard W. Soshea 65 President and Chief
M/A-COM, Inc., 1988-1991 Executive Officer
Harris Corp. & Litton Systems, Inc.,1980-1988 Effective August 1, 1991
Hewlett Packard, 1962-1980
Richard G. Johnson 53 Vice President, Operations
Director of Manufacturing, 1983-1987 Effective February 25, 1987
Senior Operations Manager, 1982-1983
Manufacturing Manager, 1977-1982
Ray Ma 51 Vice President Engineering
Director of Engineering, 1989-1995 Effective March 1, 1995
Engineering Manager, 1976-1989
Design Engineer, 1972-1976
Jeffrey B. deCillia 38 Vice President Finance and
AccessLine Technologies, Inc., 1994-1996 Chief Financial Officer
MacPherson's, Inc., 1989-1994 Effective August 22, 1996
Deloitte & Touche, 1982-1989
Mark Blazek 33 Vice President Sales & Marketing
Market Group Manager, 1994-1997 Effective June 17, 1997
GN Netcom, 1988-1994
Industrial Servo, Inc., 1986-1988
Peter C. Spratt 42 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
</TABLE>
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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.
Following are the Company's high and low sales prices by quarter for
the fiscal years ended June 30, 1997 and 1996:
Fiscal Year 1997 High Low
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Quarter ended September 30, 1996 $.50 $.35
Quarter ended December 31, 1996 $.63 $.31
Quarter ended March 31, 1997 $.38 $.31
Quarter ended June 30, 1997 $.31 $.19
Fiscal Year 1996 High Low
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Quarter ended September 30, 1995 $1.88 $.63
Quarter ended December 31, 1995 $2.25 $.75
Quarter ended Markch 31, 1996 $.94 $.63
Quarter ended June 30, 1996 $.65 $.50
There were 905 common shareholders and 138 preferred shareholders as
of September 2, 1997.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This annual report may contain forward-looking statements that
involve risks and uncertainties. These statements may differ
materially from actual future events or results which could cause
actual results to differ from those forward looking statements
contained in this report.
1997 VS. 1996
Net sales for 1997 were $10,053,000 as compared to $9,471,000 for
1996. This increase was driven by an 8% increase in customer
premises equipment sales and by an 11% increase in the sale of
integrated circuits. Gross margin was $3,950,000 or 39% of net sales
for 1997 compared to $4,202,000 or 44% for 1996. The decrease in
margin is attributable to an unfavorable product mix that resulted
from two large orders which were given special volume pricing and a
decrease in margin on integrated circuits. Operating expenses were
39% of net sales in 1997 and 41% of net sales for 1996, reflecting
management's continued success in controlling costs while growing
both net sales and engineering and development efforts. During the
year the Company instituted new policies regarding the manufacturing
and assembly process and its payment of trade payables. These
changes resulted in improved cash flow through lower inventory
levels and an increase in trade accounts payable when compared to
the prior year.
At June 30, 1997, approximately $12,282,000 in net operating loss
carryforwards were available to offset future taxable income and
expire from 2000 through 2012. 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.
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 sales of
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. The decrease in margin was attributable to the telco and
integrated circuit product lines. Operating expenses decreased to
41% of sales from 42% as management was able to grow net sales
without requiring a corresponding increase in expenses. Other
income for 1996 includes a $134,000 reversal of an accrued lease
liability that was settled.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a line of credit agreement for $1,500,000, renewable
in September of 1998. 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,
1997, borrowings under this line totaled $400,000.
Cash generated from operations and the line of credit should enable
the Company to meet its operating and working capital needs during
the next twelve months.
The Company invested $130,000 in capital equipment in 1997 compared
to $62,000 in 1996. The Company does not anticipate any significant
change in the level of capital expenditures from 1997 to 1998.
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ITEM 7. FINANCIAL STATEMENTS AND SUPPORTING DATA
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the five years ended June 30, 1997
In thousands except per share data 1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales.............................. $10,053 $9,471 $9,176 $7,600 $9,679
Gross margin........................... 3,950 4,202 4,261 2,947 3,127
Net income (loss)...................... (42) 377 405 (907) (932)
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PER SHARE DATA
Net income (loss) per common and
common equivalent shares outstanding. $(.01) $.05 $.06 $(.17) $(.17)
Average common and common
equivalent shares outstanding........ 6,666,937 7,201,784 6,679,253 5,489,150 5,491,518
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OTHER FINANCIAL INFORMATION
Cash and short-term cash investments... $ 530 $ 148 $ 60 $ 64 $ 938
Working capital........................ 1,777 1,805 1,314 1,256 2,293
Property, plant, and equipment - net... 294 297 369 416 518
Total assets........................... 3,523 3,652 3,606 3,213 4,191
Long-term liabilities.................. - - - 394 624
Stockholders' equity................... 2,071 2,102 1,684 1,278 2,187
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OTHER STATISTICS
Current ratio.......................... 2.2 to 1 2.2 to 1 1.7 to 1 1.8 to 1 2.7 to 1
Long-term liabilities to equity........ - - - .3 to 1 .3 to 1
Number of employees at end of year..... 62 65 60 57 73
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</TABLE>
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders 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,
1997 and 1996, 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 4, 1997
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STATEMENTS OF OPERATIONS
For the two years ended June 30, 1997
1997 1996
----------- ----------
Net sales........................................ $10,053,062 $9,471,023
Cost of goods sold............................... 6,103,288 5,268,904
----------- ----------
Gross margin on sales............................ 3,949,774 4,202,119
Operating expenses:
Selling, general, and administrative........... 2,915,787 3,077,502
Engineering and development.................... 962,490 819,037
----------- ----------
3,878,277 3,896,539
----------- ----------
Income from operations........................... 71,497 305,580
----------- ----------
Other income (expense):
Interest expense................................. (62,262) (76,107)
Other income (expense)--net (See Note 2)......... (50,795) 147,500
----------- ----------
(113,057) 71,393
----------- ----------
Income tax provision............................. - -
----------- ----------
Net (loss) income................................ $ (41,560) $ 376,973
----------- ----------
----------- ----------
Net (loss) income per common and
common equivalent shares....................... $ (.01) $ .05
----------- ----------
----------- ----------
Average common and common equivalent
shares outstanding............................. 6,666,937 7,201,784
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BALANCE SHEETS
June 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
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<S> <C> <C>
Current assets
Cash.............................................................. $ 530,074 $ 147,896
Trade accounts receivable (net of allowance for
doubtful accounts of $35,024 and $40,851)....................... 1,315,819 1,394,902
Inventories (net of allowance for obsolescence of
$296,346 and $207,193)
Raw materials................................................... 699,414 662,177
Work in process................................................. 74,405 122,510
Finished goods.................................................. 575,274 985,735
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Total inventories.................................... 1,349,093 1,770,422
Other current assets.............................................. 33,922 42,692
----------- -----------
Total current assets................................. 3,228,908 3,355,912
Property, plant, and equipment--at cost............................... 2,346,028 4,340,345
Less accumulated depreciation................................... (2,051,926) (4,043,827)
----------- -----------
Property, plant, and equipment--net.................. 294,102 296,518
----------- -----------
TOTAL................................................................. $ 3,523,010 $ 3,652,430
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
Current liabilities
Accounts payable--trade............................................ $ 548,599 $ 249,537
Accrued compensation and benefits.................................. 406,714 445,224
Accrued warranty expense........................................... 33,373 32,842
Notes payable to bank.............................................. 400,000 800,000
Other accrued expenses............................................. 63,580 22,933
----------- -----------
Total current liabilities............................... 1,452,266 1,550,536
Commitments: Notes 2 and 3
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 1997-5,606,796, 1996-5,575,796.... 2,998,685 2,988,275
Accumulated deficit................................................ (2,991,090) (2,949,530)
----------- -----------
Stockholders' equity............................................... 2,070,744 2,101,894
----------- -----------
TOTAL................................................................. $ 3,523,010 $ 3,652,430
----------- -----------
----------- -----------
</TABLE>
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STATEMENTS OF CASH FLOWS
For the two years ended June 30, 1997
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income.............................................. $ (41,560) $ 376,973
Adjustments to reconcile net (loss) income to cash
provided by (used by) operating activities:
Depreciation.......................................... 129,970 134,146
Loss on disposal of property.......................... 2,506 632
Change in:
Trade accounts receivable............................. 79,083 76,833
Inventories........................................... 421,329 (123,722)
Accounts payable and accrued liabilities.............. 301,730 (593,623)
Other current assets.................................. 8,770 15,844
---------- ----------
Cash provided by (used by) operating activities............ 901,828 (112,917)
Investing activities:
Investment in property, plant, and equipment.......... (130,060) (62,078)
---------- ----------
Cash used by investing activities.......................... (130,060) (62,078)
Financing activities:
Notes payable to bank................................. (400,000) 400,000
Lease subsidies, net.................................. - (178,333)
Employee stock sales, net............................. 10,410 41,332
---------- ----------
Cash (used by) provided by financing activities............ (389,590) 262,999
---------- ----------
Increase in cash and equivalents............................... 382,178 88,004
Cash, beginning of year........................................ 147,896 59,892
---------- ----------
Cash, end of year.............................................. $ 530,074 $ 147,896
---------- ----------
---------- ----------
</TABLE>
Supplemental Disclosure of Cash Flow
Interest paid during 1997 and 1996 was $62,691 and $83,635, respectively.
14
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
For the two years ended June 30, 1997
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
---------------------------- ------------------------- Accumulated
Shares Amount Shares Amount Deficit Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 stock 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
Issuance of common stock under
employee stock option plan........ 31,000 10,410 10,410
Net loss.............................. (41,560) (41,560)
--------- ---------- --------- ---------- ----------- ----------
Balance, June 30, 1997................ 1,075,641 $2,063,149 5,606,796 $2,998,685 $(2,991,090) $2,070,744
--------- ---------- --------- ---------- ----------- ----------
--------- ---------- --------- ---------- ----------- ----------
</TABLE>
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 2-7 years. Property and equipment consists
primarily of manufacturing and engineering equipment, 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
Income taxes are calculated using the assets and liability approach under
which 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.
NET (LOSS) INCOME PER COMMON SHARE
Net (loss) 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.
The FASB recently issued Statement of Financial Accounting Standard No. 128
Earnings Per Share (SFAS 128). This pronouncement changes the Company's
method of calculating earnings per share. SFAS 128 is effective for the
year ended June 30, 1998, and is not expected to have a material effect on
the Company's calculation of earnings per share.
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 their fair value.
16
<PAGE>
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.
2. LEASE COMMITMENTS
The Company leases its headquarters facility under an operating lease
agreement. Future minimum lease payments for the years ending June 30, 1998
and 1999, are $603,858 and $362,385 respectively. Operating lease expense,
net of sublease income, was $574,666 in 1997 and $501,785 in 1996.
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 1991, the facility was subleased for the remaining lease term.
The remaining obligation under the Company's original lease agreement,
inclusive of anticipated increases in the consumer price index, exceeded the
total rental income from the sublease. In 1996 obligations under this lease
expired and the remaining accrual of $134,000 was reversed and is included in
other income.
3. LINE OF CREDIT
The Company has a line of credit agreement with a bank for the lesser of
$1,500,000 or an amount calculated based on 75% of eligible domestic and 60%
of eligible foreign accounts receivable. The line is renewable in September
1998, and 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. The line of credit bears interest at prime + 5/8%, which was
9.125% at June 30, 1997. As of June 30, 1997, borrowings under this line
totaled $400,000.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
June 30, 1997 June 30, 1996
------------- -------------
Manufacturing and engineering equipment.... $ 2,281,641 $ 4,085,177
Furniture and fixtures..................... 59,688 238,596
Other...................................... 4,699 16,572
----------- -----------
2,346,028 4,340,345
Less accumulated depreciation.............. (2,051,926) (4,043,827)
----------- -----------
$ 294,102 $ 296,518
----------- -----------
----------- -----------
During fiscal 1997, the Company determined approximately $2.1 million of
primarily fully depreciated fixed assets to be surplus. The loss on the
disposal of these assets was approximately $2,500.
17
<PAGE>
5. INCOME TAX
Deferred tax assets consisted of the following:
June 30, 1997 June 30, 1996
------------- -------------
Net operating loss carryforwards $ 4,177,000 $ 4,190,000
Depreciation and amortization 315,000 313,000
Tax credits 1,043,000 1,042,000
Inventory reserves 101,000 70,000
Other 110,000 119,000
----------- ------------
Deferred tax assets 5,746,000 5,734,000
Valuation allowance (5,746,000) (5,734,000)
----------- ------------
$ - $ -
----------- ------------
----------- ------------
Due to the Company's loss history and therefore uncertainty regarding future
taxable income, the Company has established a valuation allowance of
$5,746,000 against deferred tax assets. At June 30, 1997, the Company had
net operating loss carryforwards of approximately $12,282,000. The
carryforwards expire from 2000 through 2012. 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, 1997 June 30, 1996
------------- -------------
Tax at statutory rate $(14,130) $ 128,171
Nondeductible items 2,130 20,829
Change in valuation allowance 12,000 (149,000)
--------- ----------
$ - $ -
--------- ----------
--------- ----------
6. STOCK OPTIONS
The Company has two active stock option plans. The Nonemployee Directors'
Stock Option Plan 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.
18
<PAGE>
The Company accounts for common stock options of the Nonemployee Directors
Stock Option Plan and the Employees Stock Option Plan under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25). In 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (FAS 123) which requires companies who elect to adopt its
provisions to utilize a fair value approach for accounting for stock
compensation. The Company has elected to continue to apply the provisions of
APB 25 in its financial statements. Accordingly, no compensation expense cost
has been recognized for its fixed stock option plans. Had compensation cost
for the Company's two stock-based compensation plans been determined based on
the fair value at the grant dates for awards under those plans consistent
with the method of FASB Statement 123, the Company's net income and earnings
per share would have been reduced to the amounts indicated below:
1997 1996
----- -----
Net (loss) income As reported $ (41,560) $376,973
Pro forma (107,737) 375,274
Net (loss) income per common As reported $(.01) $0.05
and common equivalent shares Pro forma (.02) 0.05
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
expected volatility of 45.7%, an expected life of 6 years, risk-free interest
rate ranging from 6.44% and 6.51%; no expected dividend payments, and assumed
forfeiture rate of 0%, The weighted average fair value of options granted
during fiscal 1997 and fiscal 1996 was $.27 and $.20, respectively.
The proforma effect on net income and primary earnings per share resulting
from the compensation expense attributed to stock options as calculated under
FASB Statement 123 may not be representative of the effects on future years
as options vest over several years and additional awards may be granted in
the future.
The Company's stock option plans are summarized below:
<TABLE>
<CAPTION>
Employee Stock Nonemployee Directors
Option Plan* Stock Option Plan
----------------------------- ------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
--------- ---------------- -------- -----------------
<S> <C> <C> <C> <C>
Shares under option:
Outstanding at June 30, 1995 1,119,000 $.46
Options granted 45,000 .62
Options exercised (81,300) .47
Options lapsed (88,700) .47
----------
Outstanding at June 30, 1996 994,000 .47
Options granted 285,000 .49 240,000 $.50
Options exercised (31,000) .34
Options lapsed (260,000) .51
----------- --------
Balance, June 30, 1997 988,000 $.47 240,000 $.50
----------- --------
----------- --------
Available to grant at June 30, 1997 104,750 80,000
----------- --------
----------- --------
</TABLE>
* Includes options granted under option plans previous to the 1992 plan of
546,800, 527,500 and 400,000 for the years ended June 30, 1995, 1996 and
1997, respectively.
At June 30, 1997, there were 617,250 options exercisable in the Employee
Stock Option Plan and 65,000 in the Nonemployee Directors Stock Option Plan.
19
<PAGE>
The following table summarizes information about stock options outstanding at
June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ---------------------------------
Number Weighted Average Weighted Number Weighted
Range of Exercise Outstanding at Remaining Average Exercisable at Average
Prices 6/30/97 Contractual Life Exercise Price 6/30/97 Exercise Price
----------------- --------------- ------------------ --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Employee Plan
$.30 to $.45 272,000 3 years $.37 162,250 $.36
$.50 to $.51 716,000 3 years $.51 455,000 $.51
Director Plan
$.50 240,000 6 years $.50 65,000 $.50
</TABLE>
7. 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 30, 1997 (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)
10.1 Teltone Corporation 1983 Stock Option Plan, as amended(1)
10.2 Teltone Corporation 1989 Employees' Stock Purchase Plan(2)
10.3 Sales agreement covering Kirkland, Washington, property(4)
10.4 Building sublease covering Kirkland, Washington, property(5)
10.5 Building lease covering Bothell, Washington, property(6)
10.6 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 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 26, 1997.
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------- ------ -----
<S> <C> <C>
/s/ Charles L. Anderson Chairman and Director September 27, 1997
- -------------------------
Charles L. Anderson
(a) Principal Executive Officer:
/s/ Richard W. Soshea President and Chief September 26, 1997
- ------------------------ Executive Officer and
Richard W. Soshea Director
(b) Principal Financial and Accounting Officer:
/s/ Jeffrey B. deCillia Vice President of Finance September 26, 1997
- --------------------------- Chief Financial Officer
Jeffrey B. deCillia
(c) Other Directors:
/s/ Robert L. Bailey Director September 26, 1997
- -----------------------
Robert L. Bailey
/s/ Tracy S. Storer Director September 26, 1997
- -----------------------
Tracy S. Storer
/s/ Charles P. Waite Director September 26, 1997
- ----------------------
Charles P. Waite
/s/ Don C. Wilson Director September 26, 1997
- -------------------
Don C. Wilson
/s/ Paul M. Wythes Director September 26, 1997
- ---------------------
Paul M. Wythes
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 530,074
<SECURITIES> 0
<RECEIVABLES> 1,315,819
<ALLOWANCES> 35,024
<INVENTORY> 1,349,093
<CURRENT-ASSETS> 3,228,908
<PP&E> 2,346,028
<DEPRECIATION> 2,051,926
<TOTAL-ASSETS> 3,523,010
<CURRENT-LIABILITIES> 1,452,266
<BONDS> 0
0
2,063,149
<COMMON> 2,998,685
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,523,010
<SALES> 10,053,062
<TOTAL-REVENUES> 10,053,062
<CGS> 6,103,288
<TOTAL-COSTS> 6,103,288
<OTHER-EXPENSES> 3,878,277
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,262
<INCOME-PRETAX> (41,560)
<INCOME-TAX> 0
<INCOME-CONTINUING> (41,560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,560)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
