<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, 1998
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from to
-------------- ---------------------------
Commission file number 0-11275
-----------------------------------------------------
TELTONE CORPORATION
- ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-0839067
- ---------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22121 - 20th Avenue SE, Bothell, Washington 98021
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(425) 487-1515
- ---------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- ----------------------------------------------------------------------
(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.
5,606,796 shares of common stock outstanding as of March 31, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 June 30
1998 1997
ASSET (Unaudited)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 292,219 $ 530,074
Trade accounts receivable (net of allowance for
doubtful accounts of ($35,091and $35,024). . . . . . 1,360,228 1,315,819
Inventories
Raw materials. . . . . . . . . . . . . . . . . . . . 515,423 699,414
Work in process. . . . . . . . . . . . . . . . . . . 158,395 74,405
Finished goods . . . . . . . . . . . . . . . . . . . 369,819 575,274
----------- -----------
Total inventories . . . . . . . . . . . . . . . 1,043,637 1,349,093
----------- -----------
Other current assets. . . . . . . . . . . . . . . . . . 73,375 33,922
----------- -----------
Total current assets. . . . . . . . . . . . . . 2,769,459 3,228,908
----------- -----------
Property, plant and equipment - at cost. . . . . . . . . . . 2,430,794 2,346,028
Less accumulated depreciation . . . . . . . . . . . . . (2,159,561) (2,051,926)
----------- -----------
Property, plant and equipment - net . . . . . . 271,233 294,102
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,040,692 $ 3,523,010
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements. 2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 June 30
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities
Accounts payable - trade. . . . . . . . . . . . . . . . . . . . . $ 531,511 $ 548,599
Accrued compensation and benefits . . . . . . . . . . . . . . . . 343,658 406,714
Accrued warranty expense. . . . . . . . . . . . . . . . . . . . . 34,178 33,373
Notes payable to bank . . . . . . . . . . . . . . . . . . . . . . 200,000 400,000
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . 55,469 63,580
----------- -----------
Total current liabilities . . . . . . . . . . . . 1,164,816 1,452,266
----------- -----------
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;
5,606,796 shares issued and outstanding . . . . . . . . . . . 2,998,685 2,998,685
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . (3,185,958) (2,991,090)
----------- -----------
Stockholders' equity. . . . . . . . . . . . . . . . . . . . . 1,875,876 2,070,744
----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,040,692 $ 3,523,010
----------- -----------
----------- -----------
</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
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . $ 2,417,257 $ 2,567,290 $ 6,779,132 $ 7,593,023
Cost of goods sold . . . . . . . . . . . . . 1,309,264 1,654,149 3,816,515 4,608,660
----------- ----------- ----------- -----------
Gross margin on sales. . . . . . . . . . . . 1,107,993 913,141 2,962,617 2,984,363
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative . . 757,110 759,785 2,173,095 2,227,878
Engineering and development . . . . . . 204,492 312,833 952,825 714,064
----------- ----------- ----------- -----------
Total operating expenses. . . 961,602 1,072,618 3,125,920 2,941,942
----------- ----------- ----------- -----------
Income (loss) from operations. . . . . . . . 146,391 (159,477) (163,303) 42,421
Other (expense) income . . . . . . . . . . . (14,659) (33,584) (31,565) (92,121)
----------- ----------- ----------- -----------
Income (loss) before tax . . . . . . . . . . 131,732 (193,061) (194,868) (49,700)
----------- ----------- ----------- -----------
Income (loss) tax provision . . . . . . . . - - - -
----------- ----------- ----------- -----------
Net income (loss). . . . . . . . . . . . . . $ 131,732 $ (193,061) $ (194,868) $ (49,700)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per share:
Basic $ .02 $ (.03) $ (.03) $ (.01)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted $ .02 $ (.03) $ (.03) $ (.01)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average number of shares outstanding:
Basic 6,682,437 6,682,437 6,682,437 6,666,937
Diluted 6,927,437 6,716,510 6,682,437 6,733,120
</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
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (194,868) $ (49,700)
Adjustments to reconcile net loss to cash provided
by operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . 107,635 93,549
Changes in:
Trade accounts receivable . . . . . . . . . . . . . . . (44,409) (223,999)
Inventories . . . . . . . . . . . . . . . . . . . . . . 305,456 168,120
Accounts payable and accrued liabilities. . . . . . . . (87,450) 433,597
Other . . . . . . . . . . . . . . . . . . . . . . . . . (39,453) (31,437)
----------- -----------
Cash provided by operating activities . . . . 46,911 390,130
Investing activities:
Investment in property, plant and equipment . . . . . . (84,766) (110,717)
----------- -----------
Cash used by investing activities . . . . . . (84,766) (110,717)
Financing activities:
Note payable to bank. . . . . . . . . . . . . . . . . . (200,000) (150,000)
Employee stock purchases, net . . . . . . . . . . . . . - 10,410
----------- -----------
Cash used for financing activities. . . . . . . . . . . (200,000) (139,590)
----------- -----------
(Decrease) increase in cash and equivalents. . . . . . . . . (237,855) 139,823
Cash and cash equivalents, beginning of period . . . . . . . 530,074 147,896
----------- -----------
Cash and cash equivalents, end of period . . . . . . . . . . $ 292,219 $ 287,719
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements. 5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
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 200,000 shares of common stock
are outstanding and 120,000 shares remain available for grant.
The Employees Stock Option Plan provides for the grant of options to
purchase up to 900,000 common shares (100,000 of which are pending final
shareholder approval) 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 666,000 shares of common stock are
outstanding and 126,750 shares remain available for grant. In addition,
options to purchase 400,000 shares of common stock are outstanding under
certain of the Company's predecessor stock option plans.
2. FEDERAL INCOME TAX
As of March 31, 1998, the Company had net operating loss carryforwards of
approximately $12,476,000. The carryforwards expire from 2000 to 2012.
The Company also has investment tax credit as well as research and
development tax credit carryforwards of approximately $290,000 and
$752,000, respectively, available to offset future income tax liabilities
through 2001. 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 nine months of fiscal 1998 or 1997.
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, 1998, 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, 1997, 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 MARCH 31, 1998 AND 1997
Sales for the third quarter of fiscal 1998 were $2,417,000, which represents a
6% decrease from the $2,567,000 for the same period last year. This decrease
was primarily driven by the decline in integrated circuit shipments for the
quarters ended March 31, 1998 and 1997, which were $649,000 and $801,000,
respectively.
Gross margin percentage increased from 36% in the third quarter of fiscal 1997
to 46% for the same period in the current year. The prior period margin was
adversely affected by the Company establishing an additional allowance of
$99,269 as a result of a decision to discontinue certain of the Company's older
products. Exclusive of this additional allowance, the Company's gross margin
would have been 39%. The majority of the remaining shortfall in gross margin
percentage in the prior period was due to a large custom order which began
shipping in the quarter ended December 31, 1996, and completed shipping in the
quarter ended March 31, 1997, that was given special volume pricing. Gross
margin percentage for the current period ended March 31, 1998, is representative
of historical margins subject to product mix variations which are normal
occurrences for the Company.
Operating expenses decreased from $1,073,000 in the third quarter of fiscal 1997
to $962,000 in fiscal 1998. The decrease is primarily due to a reduction in
engineering and development costs.
The more favorable gross margin, coupled with the decrease in operating expenses
over the same period last year, resulted in net income of $132,000 in the third
quarter this year versus a net loss of $193,000 for the third quarter last
year.
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
For the nine months ended March 31, 1998 and 1997, net sales were $6,779,000 and
$7,593,000, respectively. The decrease of 11% was driven by a 24% decrease in
integrated circuit shipments and a 3% decrease in CPE (customer premise
equipment) products. Gross margin percentage increased from 39% to 44% for the
nine months ended March 31, 1997 and 1998, respectively. The lower margin
percentage in the prior period was driven by the additional allowance on
discontinued products and the special volume pricing arrangements discussed
above.
The most significant change between the first nine months of fiscal 1998 and
1997 was the Company's expenditures on engineering and development. Engineering
and development costs increased 33% to $953,000 for the nine months ended March
31, 1998. This increase reflects increased development and design work on the
OfficeLink 2000 product and on new lower cost IC chip families planned to be
introduced later in fiscal 1998 and early fiscal 1999. The Company does not
expect this level of engineering and development efforts to continue throughout
the year as evidenced by the lower spending levels in the current quarter ended
March 31, 1998.
7
<PAGE>
The significant increase in engineering and development costs contributed to a
net loss of $195,000 for the nine months ended March 31, 1998, as compared to a
net loss of $50,000 for the same period last year.
At March 31, 1998, approximately $12,476,000 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 approximately $290,000 and $752,000, respectively, available to
offset future income tax liabilities through 2001. 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.
LIQUIDITY AND CAPITAL RESOURCES
During the prior year the Company instituted new policies regarding the
manufacturing and assembly process and its payment of trade payables. These
changes have resulted in lower inventory levels and improved management of
trade accounts payable, thus mitigating the effects of the net loss for the
first nine months of fiscal 1998 on cash flow.
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 March 31, 1998, borrowings under this line
totaled $200,000.
The Company anticipates continued spending on the development of new products
and thus expects to continue to utilize its lines of credit. Cash on hand, cash
generated from operations, as well as the lines of credit, should enable the
Company to meet its operating and working capital needs during the next twelve
months.
8
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None
9
<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 May 6, 1998 By /s/ RICHARD W. SOSHEA
------------------------ -------------------------------------
Richard W. Soshea
President & Chief Executive Officer
Date May 6, 1998 By /s/ JEFFREY B. deCILLIA
------------------------ -------------------------------------
Jeffrey B. deCillia
Vice President Finance & Chief
Financial Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 292,219
<SECURITIES> 0
<RECEIVABLES> 1,360,228
<ALLOWANCES> 35,091
<INVENTORY> 1,043,637
<CURRENT-ASSETS> 2,769,459
<PP&E> 2,430,794
<DEPRECIATION> (2,159,561)
<TOTAL-ASSETS> 3,040,692
<CURRENT-LIABILITIES> 1,164,816
<BONDS> 0
0
2,063,149
<COMMON> 2,998,685
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,040,692
<SALES> 6,779,132
<TOTAL-REVENUES> 6,779,132
<CGS> 3,816,515
<TOTAL-COSTS> 3,816,515
<OTHER-EXPENSES> 3,125,920
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,169
<INCOME-PRETAX> (194,868)
<INCOME-TAX> 0
<INCOME-CONTINUING> (194,868)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (194,868)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
