<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 December 31, 1996
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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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(Name of small business issuer 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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(Issuer's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year)
Check 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
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
5,606,796 shares of common stock outstanding as of December 31, 1996.
Transitional small business disclosure format (check one);
Yes No X
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 June 30
1996 1996
ASSETS (Unaudited)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 411,966 $ 147,896
Trade accounts receivable (net of allowance for doubtful
accounts of $34,528 and $40,851) . . . . . . . . . . . . . 1,700,778 1,394,902
Inventories
Raw materials. . . . . . . . . . . . . . . . . . . . . . . 783,240 662,177
Work in process. . . . . . . . . . . . . . . . . . . . . . 265,906 122,510
Finished goods . . . . . . . . . . . . . . . . . . . . . . 736,052 985,735
----------- -----------
Total inventories. . . . . . . . . . . . . . . . . . . . 1,785,198 1,770,422
Other current assets . . . . . . . . . . . . . . . . . . . . 98,731 42,692
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . 3,996,673 3,355,912
----------- -----------
Property, plant and equipment - at cost. . . . . . . . . . . . 4,375,027 4,340,345
Less accumulated depreciation. . . . . . . . . . . . . . . . (4,104,305) (4,043,827)
----------- -----------
Property, plant and equipment - net. . . . . . . . . . . 270,722 296,518
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,267,395 $ 3,652,430
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements. 2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 June 30
1996 1996
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities
Accounts payable - trade. . . . . . . . . . . . . . . . . . . . . $ 764,397 $ 249,537
Accrued compensation and benefits . . . . . . . . . . . . . . . . 448,836 445,224
Accrued warranty expense. . . . . . . . . . . . . . . . . . . . . 31,008 32,842
Note payable to bank. . . . . . . . . . . . . . . . . . . . . . . 650,000 800,000
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . 117,489 22,933
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Total current liabilities. . . . . . . . . . . . . 2,011,730 1,550,536
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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 5,606,796 shares. . . . . . . . . . . . 2,998,685 2,988,275
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,806,169) (2,949,530)
----------- -----------
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . 2,255,665 2,101,894
----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,267,395 $ 3,652,430
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements. 3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31 Ended December 31
1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . $2,640,450 $2,374,268 $5,025,734 $4,794,777
Cost of goods sold . . . . . . . . . . . . . . 1,571,652 1,260,164 2,954,512 2,605,703
---------- ---------- ---------- ----------
Gross margin on sales. . . . . . . . . . . . . 1,068,798 1,114,104 2,071,222 2,189,074
---------- ---------- ---------- ----------
Operating expense
Selling, general and administrative . . . 742,256 779,545 1,468,093 1,540,874
Engineering and development . . . . . . . 196,655 206,176 401,231 397,977
---------- ---------- ---------- ----------
Total operating expenses. . . . 938,911 985,721 1,869,324 1,938,851
---------- ---------- ---------- ----------
Income from operations . . . . . . . . . . . 129,887 128,383 201,898 250,223
Other expense. . . . . . . . . . . . . . . . . (27,834) (18,342) (58,537) (36,204)
---------- ---------- ---------- ----------
Income before tax. . . . . . . . . . . . . . . 102,053 110,041 143,361 214,019
---------- ---------- ---------- ----------
Income tax provision . . . . . . . . . . . . . -- -- -- --
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . $ 102,053 $ 110,041 $ 143,361 $ 214,019
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per common and
common equivalent share. . . . . . . . . . . $ .02 $ .01 $ .02 $ .03
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average common and common
equivalent shares outstanding. . . . . . . . 6,710,956 7,336,905 6,718,539 7,102,450
</TABLE>
See Notes to Financial Statements. 4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended December 31
1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 143,361 $ 214,019
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 60,478 67,114
Changes in:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . (305,876) 31,449
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . (14,776) (228,354)
Accounts payable and accrued items . . . . . . . . . . . . . . . (611,194) (333,503)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56,039) (15,053)
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Cash provided by (used for) operating activities. . 438,342 (264,328)
Cash flows from investing activities:
Investment in property, plant and equipment. . . . . . . . . . . (34,682) (40,253)
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Cash used for investing activities. . . . . . . . . (34,682) (40,253)
Cash flows from financing activities:
Note payable to bank . . . . . . . . . . . . . . . . . . . . . . (150,000) 435,000
Lease subsidies. . . . . . . . . . . . . . . . . . . . . . . . . - (113,484)
Employee stock purchases, net. . . . . . . . . . . . . . . . . . 10,410 5,401
--------- ---------
Cash provided by (used for) financing activities. . (139,590) 326,917
--------- ---------
Increase in cash and equivalents . . . . . . . . . . . . . . . . . 264,070 22,336
Cash and cash equivalents, beginning of period . . . . . . . . . . 147,896 59,892
--------- ---------
Cash and cash equivalents, end of period . . . . . . . . . . . . . $ 411,966 $ 82,228
--------- ---------
--------- ---------
</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 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. Of this total, options to purchase 240,000 shares of common stock
are outstanding and 80,000 shares remain available for grant.
The 1992 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. Of this total, options to purchase 578,500 shares of
common stock are outstanding and 114,250 shares remain available for grant.
In addition, options to purchase 500,000 shares of common stock are
outstanding under certain of the Company's predecessor stock option plans.
2. FEDERAL INCOME TAX
At of December 31, 1996, the Company had net operating loss carryforwards
of approximately $12,185,000. The carryforwards expire from 2001 to 2011.
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. Due to an expected annual effective tax rate of
zero, the Company recognized no income tax expense in the first or second
quarter of fiscal 1997 or 1996.
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
December 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, 1996, audited financial statements.
6
<PAGE>
TELTONE CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-QSB 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 Form 10-QSB.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 VERSUS 1995
Sales for the second quarter for fiscal 1997 were $2,640,000 which represented
an 11% increase over the $2,374,000 for the same period of last year. This
increase was due to increased sales in the CPE (Customer Premise Equipment)
product line. Gross margin percentage decreased from 47% in the second quarter
of fiscal 1996 to 40% for the same period in the current year. The majority of
the decrease in gross margin percentage is due to two large custom orders which
were given special volume pricing. The remaining decrease in gross margin
percentage is due to product mix variations which are normal occurrences for the
Company.
The reduction in gross margin percentage, netted with a 5% decrease in operating
expenses over the same period last year, resulted in comparable net income of
$102,000 in the second quarter this year versus $110,000 for the second quarter
last year.
SIX MONTHS ENDED DECEMBER 31, 1996 VERSUS 1995
For the six months ended December 31, 1997, net sales increased 5% from
$4,795,000 to $5,026,000. This increase was also driven by increases in the
sales of CPE products. Gross margin percentage was 41% for the first six months
of fiscal year 1997 as compared to 46% for the same period last year. This
decrease was also driven primarily by the two large custom orders and normal
product mix variations as discussed above.
The reduction in gross margin percentage, netted with a 3% decrease in operating
expenses over the same period last year, reduced net income from approximately
$214,000 for the first six months last year to $143,000 this year.
The Company currently has a significant number of new products under
development. Certain of these products require the use of outside developers
much more extensively than the Company has experienced in the recent past.
Management expects research and development expenses associated with these
development contracts to occur primarily in the third and fourth quarter of
fiscal 1997 and that these expenses will significantly reduce the Company's
reported results.
As of December 31, 1996, approximately $12,185,000 in net operating loss
carryforwards were available to offset future taxable income at varying amounts
with expiration from 2001 to 2011, 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 and therefore uncertainty regarding future taxable income. The Company
recognized no income tax expense in the first or second quarter of fiscal 1997
or 1996 due to an expected annual effective tax rate of zero.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has two line of credit agreements with a bank renewable in September
of 1997. The first line of credit provides for borrowings equal to the lesser
of an amount calculated based on 75% of eligible accounts receivable or $1.5
million. This credit line is collateralized by domestic 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. At December 31, 1996, borrowings under this line of credit totaled
$650,000.
The second line of credit is for the lesser of an amount calculated based on 90%
of eligible foreign accounts receivable and 70% of related inventory or
$500,000. This credit line is collateralized by foreign accounts receivable and
inventory and contains financial covenants including working capital and debt
ratios, as well as maximum loss provisions. At December 31, 1996, there were no
borrowings under this line of credit.
The Company anticipates increased spending on the development of several new
products and thus expects to continue to utilize its lines 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.
PART II. OTHER INFORMATION
Item 5 - Other Information
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
December 31, 1996.
8
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TELTONE CORPORATION
(Registrant)
Date January 24, 1997 By /s/ Richard W. Soshea
--------------------- -----------------------------------
Richard W. Soshea
President & Chief Executive Officer
Date January 24, 1997 By /s/ Jeffrey B. deCillia
--------------------- -----------------------------------
Jeffrey B. deCillia
Vice President Finance &
Chief Financial Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 411,966
<SECURITIES> 0
<RECEIVABLES> 1,700,778
<ALLOWANCES> 34,528
<INVENTORY> 1,785,198
<CURRENT-ASSETS> 3,996,673
<PP&E> 4,375,027
<DEPRECIATION> 4,104,305
<TOTAL-ASSETS> 4,267,395
<CURRENT-LIABILITIES> 2,011,730
<BONDS> 0
0
2,063,149
<COMMON> 2,998,685
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,267,395
<SALES> 5,025,734
<TOTAL-REVENUES> 5,025,734
<CGS> 2,954,512
<TOTAL-COSTS> 2,954,512
<OTHER-EXPENSES> 1,869,324
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,537
<INCOME-PRETAX> 143,361
<INCOME-TAX> 0
<INCOME-CONTINUING> 143,361
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,361
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
