<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 September 30, 1998
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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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(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)
(206) 487-1515
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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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.
6,006,796 shares of common stock outstanding as of September 30, 1998.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 June 30
1998 1998
ASSET (Unaudited)
- ------------------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash . . . . . . . . . . . . . . . . . . $ 423,502 $ 304,875
Trade accounts receivable (net of
allowance for doubtful accounts of
$40,212 (unaudited) and $34,289) . . . 1,477,585 1,391,004
Inventories
Raw materials. . . . . . . . . . . . . 506,028 489,133
Work in process. . . . . . . . . . . . 212,761 157,168
Finished goods . . . . . . . . . . . . 315,462 402,060
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Total inventories . . . . . . . . . 1,034,252 1,048,361
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Other current assets. . . . . . . . . . . 28,426 14,574
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Total current assets. . . . . . . . 2,963,765 2,758,814
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Property, plant and equipment - at cost. . . 2,474,634 2,448,646
Less accumulated depreciation . . . . . . (2,235,086) (2,197,586)
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Property, plant and equipment - net 239,548 251,060
TOTAL . . . . . . . . . . . . . . . . . . $ 3,203,313 $ 3,009,874
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Current liabilities
Accounts payable - trade. . . . . . . . . $ 460,889 $ 587,199
Accrued compensation and benefits . . . . 418,930 369,696
Accrued warranty expense. . . . . . . . . 52,174 35,510
Other accrued expenses. . . . . . . . . . 41,278 101,620
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Total current liabilities. . . . . . . 973,271 1,094,025
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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; 6,606,796 and
5,606,796 shares issued at outstanding 3,202,685 2,998,685
Deficit . . . . . . . . . . . . . . . . . (3,035,792) (3,145,985)
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Stockholders' equity. . . . . . . . . 2,230,042 1,915,849
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TOTAL . . . . . . . . . . . . . . . . . . $ 3,203,313 $ 3,009,874
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</TABLE>
See Notes to Financial Statements
2
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ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended September 30
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . $2,632,096 $2,239,469
Cost of goods sold . . . . . . . . . . . . . 1,340,147 1,291,165
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Gross margin on sales. . . . . . . . . . . . 1,291,949 948,304
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Operating expenses
Selling, general and administrative . . . 906,238 691,711
Engineering and development . . . . . . . 274,980 426,016
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Total operating expenses. . . . . . . 1,181,218 1,117,727
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Income (loss) from operations. . . . . . . . 110,731 (169,423)
Other expense - net. . . . . . . . . . . . . 538 18,946
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Income (loss) before tax . . . . . . . . . . 110,193 (188,369)
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Income tax provision . . . . . . . . . . . . - -
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Net income (loss). . . . . . . . . . . . . . $ 110,193 $ (188,369)
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Basic net income (loss) per common share . . $ .02 $ (.03)
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Diluted net income (loss) per common and
common equivalent share. . . . . . . . . $ .02 $ (.03)
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Average common shares
(including preferred) outstanding. . . . 6,930,410 6,682,437
Average common and common
equivalent shares outstanding . . . . . 7,192,352 6,682,437
</TABLE>
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended September 30
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . $ 110,193 $(188,369)
Adjustments to reconcile net income (loss)
to net cash (used for) provided by
operating activities:
Depreciation. . . . . . . . . . . . . . 37,500 34,853
Changes in:
Accounts receivable . . . . . . . . . . . (86,581) (69,600)
Inventories . . . . . . . . . . . . . . . 14,109 237,690
Accounts payable and accrued items. . . . (120,754) 31,555
Other . . . . . . . . . . . . . . . . . . (13,852) (12,095)
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Cash (used for) provided by operating
activities. . . . . . . . . . . . . . (59,385) 34,034
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Cash flows from investing activities:
Investment in property, plant and
equipment . . . . . . . . . . . . . . . (25,988) (17,460)
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Cash used for investing activities. . . (25,988) (17,460)
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Cash flows from financing activities:
Note payable to bank. . . . . . . . . . . (200,000)
Employee stock purchase . . . . . . . . . 204,000 -
--------- ---------
Cash provided by (used for) financing
activities. . . . . . . . . . . . . . 204,000 (200,000)
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Increase (decrease) in cash and equivalents. 118,627 (183,426)
Cash and cash equivalents, beginning of
period. . . . . . . . . . . . . . . . . . 304,875 530,074
--------- ---------
Cash and cash equivalents, end of period . . $ 423,502 $ 346,648
--------- ---------
--------- ---------
</TABLE>
4
<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 1992 Employees Stock
Option Plan provides for the grant of options to purchase up to 1,050,000
common shares to key employees of the Company, of which 250,000 shares are
subject to shareholder approval at the October 29, 1998, regularly
scheduled shareholders' meeting. Of this total, options to purchase
662,000 shares of common stock are outstanding and 388,000 shares remain
available for grant. 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. Of this total, options to purchase 200,000
shares of common stock are outstanding and 120,000 shares remain available
for grant. All 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.
In August 1998 Richard Soshea, Chief Executive Officer of the Company,
exercised options to purchase 400,000 shares of common stock at $.51 per
share.
2. FEDERAL INCOME TAX
At September 30, 1998, approximately $12,348,000 in net operating loss
carryforwards were available to offset future taxable income and expire
from 2000 through 2013. 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
$753,000, respectively, available to offset future income tax liabilities
through 2000. Of this amount, $860,000 expires (to the extent not
utilized) at June 30, 1999. 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 unaudited Interim Financial Statements reflect all adjustments which are,
in the opinion of management, necessary to present a fair statement of the
results for the interim periods. The results of operations for the period
ending September 30, 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, 1998, audited
financial statements filed on form 10-KSB.
5
<PAGE>
TELTONE CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Statements in this report covering future performance, developments,
expectations or events, including the discussion of the Company's product
development and introduction plans, and resulting expectations for its
growth, constitute forward-looking statements which are subject to a number
of known or unknown risks and uncertainties that might cause actual results
to differ materially from those expressed or implied by such statements. All
forward-looking statements reflect management's expectations at the time of
this report, and the Company disclaims any responsibility to revise or update
any such forward-looking statement except as may be required by law.
RESULTS OF OPERATIONS
In the first quarter of fiscal 1999, ending September 30, 1998, Teltone
maintained profitability for the third consecutive quarter. First quarter
profits were $110,000 on sales of $2,632,000, compared to a loss of $188,000
on sales of $2,239,000 for the first quarter of 1998. Net sales increased 18%
over the first quarter of fiscal year 1998. Gross margins increased from 42%
to 49% due to increasing sales of recently introduced software-based
products.
Sales increased in all major product areas except semiconductors, which
Management expects may decline in the future. (The Company is, however,
introducing a new line of lower-cost call progress detectors, which is
expected to contribute higher gross margins on the reduced sales of
semiconductor products.) Market acceptance of OfficeLink 2000, the Company's
latest telecommuting product, also increased.
First quarter operating expenses increased 6% over the same quarter in the
prior year. However, engineering and development expense decreased 35% in the
first quarter of fiscal 1999 due to unusually high expenditures last year on
the development of a new line of call progress detectors and the OfficeLink
2000 project. Sales and marketing expenses increased in the first quarter as
the Company shifted resources to the growing markets for telecommuting and
remote agent solutions for call centers.
At September 30, 1998, approximately $12,348,000 in net operating loss
carryforwards were available to offset future taxable income and expire from
2000 through 2013. 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 $753,000,
respectively, available to offset future income tax liabilities through 2000.
Of this amount, $860,000 expires (to the extent not utilized) at June 30,
1999. 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 has implemented a Year 2000 project to address potential problems
arising from the use of two digits rather than four to define the year in
some computer programs. This is an issue which substantially all users of
automated data processing and information systems are faced. Management has
completed its review of the Company's products and has determined them to be
Year 2000 compliant. In addition, a section of the Company's website
(www.teltone.com) contains detailed information about each product and the
Company's compliance program. The evaluation and testing of the Company's
internal systems is underway and approximately 40% complete with a goal of
completion by the end of fiscal 1999. Management does not expect that the
cost of its Year 2000 compliance program will be material to its financial
condition or results of
6
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operations or that its business will be adversely affected in any material
respect. Nevertheless, achieving Year 2000 compliance is dependent on many
factors, some of which are not completely within the Company's control.
Should either the Company's internal systems or the systems of one or more
significant suppliers fail, the Company's business and its results of
operations could be adversely affected and, as a result, a contingency plan
is being prepared.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash on hand of $424,000 and no
borrowings outstanding on its line of credit agreement described below. The
Company's working capital position has increased to $1,990,000, a 24%
increase over the prior year.
In August 1998 Richard Soshea, Chief Executive Officer of the Company,
exercised options to purchase 400,000 shares of common stock at $.51 per
share, which provided the Company with $204,000 in cash for use in its
operations.
Management has renewed it's lease agreement on its headquarters facility in
Bothell, Washington, through February 2004. The lease renewal provides for
the elimination of excess square footage in the factory and results in lower
rent expense. This change will contribute to reduced overhead costs
beginning in February 1999. Management plans to enhance the Company's
telecommunications and internal networking systems which will require an
increase in capital spending during fiscal 1999 compared to fiscal 1998.
The Company has a line of credit agreement for $1,500,000, renewable in July
of 1999. 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.
Cash on hand, cash generated from operations, as well as the line of credit
should enable the Company to meet its operating and working capital needs
during the next twelve months.
7
<PAGE>
PART II. OTHER INFORMATION
Item 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
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELTONE CORPORATION
(Registrant)
Date October 26, 1998 By /s/ RICHARD W. SOSHEA
-----------------------------------
Richard W. Soshea
President & Chief Executive Officer
Date October 26, 1998 By /s/ DEBRA L. GRIFFITH
------------------------------------
Debra L. Griffith
Vice President Finance &
Chief Financial Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 423,502
<SECURITIES> 0
<RECEIVABLES> 1,477,585
<ALLOWANCES> 40,212
<INVENTORY> 1,034,252
<CURRENT-ASSETS> 2,963,765
<PP&E> 2,474,634
<DEPRECIATION> 2,235,086
<TOTAL-ASSETS> 3,203,313
<CURRENT-LIABILITIES> 973,271
<BONDS> 0
0
2,063,149
<COMMON> 3,202,685
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,203,313
<SALES> 2,632,096
<TOTAL-REVENUES> 2,632,096
<CGS> 1,340,147
<TOTAL-COSTS> 1,340,147
<OTHER-EXPENSES> 1,181,218
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 538
<INCOME-PRETAX> 110,731
<INCOME-TAX> 0
<INCOME-CONTINUING> 110,193
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 110,193
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
