<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, 1997
---------------------------------------------
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
- --------------------------------------------------------------------------------
(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)
(425) 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
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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 December 31, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 June 30
1997 1997
ASSET (Unaudited)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 234,732 $ 530,074
Trade accounts receivable (net of allowance for
doubtful accounts of ($33,228 and $35,024) . . . . . . . . . 1,195,571 1,315,819
Inventories
Raw materials. . . . . . . . . . . . . . . . . . . . . . . . 537,201 699,414
Work in process. . . . . . . . . . . . . . . . . . . . . . . 115,899 74,405
Finished goods . . . . . . . . . . . . . . . . . . . . . . . 392,962 575,274
----------- -----------
Total inventories . . . . . . . . . . . . . . . . . . . 1,046,062 1,349,093
----------- -----------
Other current assets. . . . . . . . . . . . . . . . . . . . . . . 80,140 33,922
----------- -----------
Total current assets. . . . . . . . . . . . . . . . . . 2,556,505 3,228,908
----------- -----------
Property, plant and equipment - at cost. . . . . . . . . . . . . . . . 2,398,044 2,346,028
Less accumulated depreciation . . . . . . . . . . . . . . . . . . (2,122,026) (2,051,926)
----------- -----------
Property, plant and equipment - net . . . . . . . . . . 276,018 294,102
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,832,523 $ 3,523,010
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements. 2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 June 30
1997 1997
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities
Accounts payable - trade . . . . . . . . . . . . . . . . . . $ 544,060 $ 548,599
Accrued compensation and benefits. . . . . . . . . . . . . . 252,482 406,714
Accrued warranty expense . . . . . . . . . . . . . . . . . . 32,812 33,373
Notes payable to bank. . . . . . . . . . . . . . . . . . . . 200,000 400,000
Other accrued expenses . . . . . . . . . . . . . . . . . . . 59,025 63,580
----------- -----------
Total current liabilities. . . . . . . . . . . . . 1,088,379 1,452,266
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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; 5,606,796 shares issued
and outstanding. . . . . . . . . . . . . . . . . . . . . 2,998,685 2,998,685
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . (3,317,690) (2,991,090)
----------- -----------
Stockholders' equity . . . . . . . . . . . . . . . . . . 1,744,144 2,070,744
----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,832,523 $ 3,523,010
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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 Six Months
Ended December 31 Ended December 31
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . $2,122,406 $2,640,450 $4,361,875 $5,025,734
Cost of goods sold. . . . . . . . . . . . . . 1,216,085 1,571,652 2,507,250 2,954,512
---------- ---------- ---------- ----------
Gross margin on sales . . . . . . . . . . . . 906,321 1,068,798 1,854,625 2,071,222
---------- ---------- ---------- ----------
Operating expenses
Selling, general and administrative. . . 724,274 742,256 1,415,985 1,468,093
Engineering and development. . . . . . . 322,317 196,655 748,333 401,231
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . 1,046,591 938,911 2,164,318 1,869,324
---------- ---------- ---------- ----------
(Loss) income from operations . . . . . . . (140,270) 129,887 (309,693) 201,898
Other income (expense). . . . . . . . . . . . 2,039 (27,834) (16,907) (58,537)
---------- ---------- ---------- ----------
(Loss) income before tax. . . . . . . . . . . (138,231) 102,053 (326,600) 143,361
---------- ---------- ---------- ----------
(Loss) income tax provision . . . . . . . . . - - - -
---------- ---------- ---------- ----------
Net (loss) income . . . . . . . . . . . . . . $ (138,231) $ 102,053 $ (326,600) $ 143,361
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net (loss) income per common and
common equivalent share . . . . . . . . . $ (.02) $ .02 $ (.05) $ .02
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average common and common
equivalent shares outstanding . . . . . . 6,682,437 6,710,956 6,682,437 6,718,539
</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
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (326,600) $ 143,361
Adjustments to reconcile net (loss) income to net cash (used by) provided
by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,100 60,478
Changes in:
Trade accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,248 (305,876)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303,031 (14,776)
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . (163,887) (611,194)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (46,218) (56,039)
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Cash (used for) provided by operating activities . . . . . . . . (43,326) 438,342
Investing activities:
Investment in property, plant and equipment . . . . . . . . . . . . . . . . . . (52,016) (34,682)
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Cash used by investing activities . . . . . . . . . . . . . . . . (52,016) (34,682)
Financing activities:
Note payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (200,000) (150,000)
Employee stock purchases, net. . . . . . . . . . . . . . . . . . . . . . . . . . - 10,410
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Cash used for financing activities . . . . . . . . . . . . . . . (200,000) (139,590)
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(Decrease) increase in cash and equivalents. . . . . . . . . . . . . . . . . . . . . (295,342) 264,070
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . 530,074 147,896
---------- ----------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . $ 234,732 $ 411,966
---------- ----------
---------- ----------
</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 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 753,000 shares of common stock are
outstanding and 39,750 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 December 31, 1997, the Company had net operating loss carryforwards
of approximately $12,608,000. 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 six months of fiscal 1998 or 1997.
3. RECENT ACCOUNTING ANNOUNCEMENT
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" (FAS 128). The
pronouncement impacts the way the Company calculates its earnings per share
and is effective for the year ended June 30, 1998. Management does not
expect FAS 128 to have a material effect on the Company's earnings per
share calculation.
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, 1997, 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 DECEMBER 31, 1997 AND 1996
Sales for the second quarter of fiscal 1998 were $2,122,000 which represents a
20% decrease from the $2,640,000 for the same period last year. This decrease
was primarily driven by the decline in integrated circuit shipments for the
quarters ended December 31, 1997 and 1996 which were $461,000 and $849,000,
respectively.
As a result, gross margin decreased approximately $160,000 when compared to the
same period last year. This decrease, combined with a significant increase in
engineering and development expenditure (see further discussion regarding
engineering and development costs below) resulted in a loss of $138,000 for the
second quarter of fiscal 1998 as compared to a profit of $102,000 for the same
period last year.
SIX MONTHS ENDED DECEMBER 31, 1997, 1996
For the six months ended December 31, 1997 and 1996, net sales were $4,362,000
and $5,026,000, respectively. The decrease of 13% was driven by a 27% decrease
in integrated circuit shipments and a 4% decrease in CPE (customer premise
equipment) products. Gross margin was $217,000 less than the same period last
year as a result of the decrease in shipments.
The most significant change between the first six months of fiscal 1998 and 1997
was the Company's expenditures on engineering and development. Engineering and
development costs increased 87% to $748,000 for the six months ended December
31, 1997. 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. The Company does not expect this level of
engineering and development efforts to continue throughout the year.
The decrease in net sales and gross margin, combined with the significant
increase in engineering and development costs resulted in a loss of $327,000 for
the six months ended December 31, 1997, as compared to a gain of $143,000 for
the same period last year.
At December 31, 1997, approximately $12,608,000 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.
7
<PAGE>
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 loss for the fist six
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 December 31, 1997, 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 January 27, 1998 By /s/ RICHARD W. SOSHEA
----------------------------------- --------------------------------
Richard W. Soshea
President & Chief Executive
Officer
Date January 27, 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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 234,732
<SECURITIES> 0
<RECEIVABLES> 1,195,571
<ALLOWANCES> 33,228
<INVENTORY> 1,046,062
<CURRENT-ASSETS> 2,556,505
<PP&E> 2,398,044
<DEPRECIATION> 2,122,026
<TOTAL-ASSETS> 2,832,523
<CURRENT-LIABILITIES> 1,088,379
<BONDS> 0
0
2,063,149
<COMMON> 2,998,685
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,832,523
<SALES> 4,361,875
<TOTAL-REVENUES> 4,361,875
<CGS> 2,507,250
<TOTAL-COSTS> 2,507,250
<OTHER-EXPENSES> 2,164,318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,907
<INCOME-PRETAX> (326,600)
<INCOME-TAX> 0
<INCOME-CONTINUING> (326,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (326,600)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
