<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, 1999
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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 ___________________
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
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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)
(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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
6,099,296 shares of common stock outstanding as of September 30, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 June 30
1999 1999
ASSETS (Unaudited)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash ................................................................... $ 584,184 $ 780,590
Trade accounts receivable (net of allowance for
doubtful accounts of $9,997 (unaudited) and $35,260)................. 1,692,412 1,583,099
Inventories
Raw materials........................................................ 542,808 413,326
Work in process...................................................... 89,249 61,818
Finished goods....................................................... 366,191 430,054
---------- ----------
Total inventories.................................. 998,248 905,198
Other current assets ................................................... 79,106 76,873
----------- -----------
Total current assets............................... 3,353,950 3,345,760
Property, plant and equipment - at cost....................................... 2,760,045 2,702,764
Less accumulated depreciation........................................ (2,348,584) (2,319,958)
----------- ----------
Property, plant and equipment - net................ 411,461 382,806
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TOTAL......................................................................... $ 3,765,411 $ 3,728,566
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
Current liabilities
Accounts payable - trade................................................ $ 517,976 $ 420,313
Accrued compensation and benefits....................................... 502,977 562,682
Accrued warranty expense................................................ 47,185 52,483
Other accrued expenses.................................................. 39,918 64,830
Note payable - current portion.......................................... 29,966 29,384
----------- ------------
Total current liabilities.......................... 1,138,022 1,129,692
Note payable - long-term portion.............................................. 29,595 37,311
Stockholders' equity
Convertible preferred stock - no par value; authorized
6,000,000 shares; 1,069,641 and 1,072,641 shares issued and outstanding 2,051,149 2,057,149
Common stock - no par value; authorized 20,000,000 shares;
6,099,296 and 6,006,796 shares issued and outstanding ................. 3,243,230 3,208,685
Accumulated deficit..................................................... (2,696,585) (2,704,271)
------------ ------------
Stockholders' equity................................................ 2,597,794 2,561,563
------------ ------------
TOTAL......................................................................... $ 3,765,411 $ 3,728,566
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30
1999 1998
<S> <C> <C>
Net sales..................................................................... $2,671,438 $2,632,096
Cost of goods sold............................................................ 1,260,153 1,340,147
----------- ----------
Gross margin on sales......................................................... 1,411,285 1,291,949
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Operating expenses
Selling, general and administrative..................................... 1,097,422 906,238
Engineering and development............................................. 308,607 274,980
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Total operating expenses................................................ 1,406,029 1,181,218
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Income from operations........................................................ 5,256 110,731
Other income (expense) - net.................................................. 2,430 (538)
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Income before tax............................................................. 7,686 10,193
Income tax provision.......................................................... - -
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Net income.................................................................... $ 7,686 $ 110,193
=========== ===========
Basic net income per common share............................................. $ .00 $ .02
=========== ===========
Average common shares (including preferred) outstanding ...................... 7,112,712 6,930,410
Diluted net income per common and
common equivalent share................................................... $ .00 $ .02
=========== ===========
Average common and common
equivalent shares outstanding ............................................ 7,597,033 7,192,352
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................... $ 7,686 $ 110,193
Adjustments to reconcile net income to net cash used for
operating activities:
Depreciation ........................................................... 28,626 37,500
Changes in:
Accounts receivable..................................................... (109,313) (86,581)
Inventories............................................................. (93,050) 14,109
Accounts payable and accrued items...................................... 7,748 (120,754)
Other assets............................................................ (2,233) (13,852)
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Cash used for operating activities...................... (160,536) (59,385)
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Cash flows from investing activities:
Investment in property, plant and equipment............................. (57,281) (25,988)
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Cash used for investing activities...................... (57,281) (25,988)
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Cash flows from financing activities:
Net repayment of note payable........................................... (7,134)
Employee stock sales, net............................................... 28,545 204,000
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Cash provided by financing activities................... 21,411 204,000
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(Decrease) increase in cash .................................................. (196,406) 118,627
Beginning of period........................................................... 780,590 304,875
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End of period................................................................. $ 584,184 $ 423,502
=========== =========
The accompanying notes are an integral part of these financial statements.
</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 1,400,000
common shares to key employees of the Company, of which 350,000 shares are
subject to shareholder approval at the November 4, 1999, regularly scheduled
shareholders' meeting. Of this total, options to purchase 834,500 shares of
common stock are outstanding and 371,750 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.
2. FEDERAL INCOME TAX
At September 30, 1999, approximately $12,222,000 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 $183,000 available to
offset future income tax liabilities through 2000. 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.
3. NET INCOME PER SHARE
Basic net income per common share is based on the weighted average number
of common shares and convertible preferred shares outstanding during the
year. Common equivalent shares, including warrants and stock options, are
included in the calculation of diluted earnings per common and common
equivalent shares to the extent that they are dilutive and are excluded to
the extent they are antidilutive. During the year ended June 30, 1998, the
Company had stock options and warrants which were not included in the
computation of net loss per share because the impact would have been
antidilutive.
A reconciliation of the number of average common shares outstanding to the
number of average common and common equivalent shares outstanding is as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Average common shares (including preferred) outstanding 7,112,712 6,930,410
Dilutive effect of warrants and stock options 3,442 61,942
------------ -------------
Average common and common equivalent shares outstanding 7,597,033 7,192,352
</TABLE>
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, 1999, 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, 1999, 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 contained in this report reflect the Company'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.
First quarter profits were $8,000 on sales of $2,671,000, compared to profits of
$110,000 on sales of $2,632,000 for the first quarter of 1999. Net sales were
flat in total but included increasing sales of Remote Voice products offset by
expected decreases in the Company's semi-conductor and equipment sales. Gross
margins increased from 49% to 53% due to increasing sales of software-based
products both in the Remote Voice products as well as in the Test and
Demonstration tools.
First quarter operating expenses increased 19% over the same quarter in the
prior year as a result of increasing investment in the Remote Voice product
offering. This investment was made both in Engineering and in Sales & Marketing
which resulted in an increase in the total number of employees to 72 from 64 at
June 30, 1999.
At September 30, 1999, approximately $12,222,000 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 had investment tax credit as well as research and development
tax credit carryforwards of approximately $183,000 available to offset future
income tax liabilities through 2000. 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 there is uncertainty
regarding future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a line of credit agreement for $1,500,000, renewable in July
2000. 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 September 30, 1999, there were no borrowings outstanding under
this line. The Company had cash on hand at September 30, 1999, of $584,000.
During the first fiscal quarter of 2000 options to purchase 86,500 shares of
common stock were exercised at $.33 per share, which provided the Company with
$29,000 in cash for use in its operations.
Cash on hand, and cash generated from operations, sale of common shares, as well
as the line of credit should enable the Company to meet its operating and
working capital needs during the next twelve months.
6
<PAGE>
MANAGEMENT'S DISCUSSION continued
The Company has implemented a Year 2000 project to address potential problems
which may arise 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 face. Management has completed
its review of the Company's products and has determined them to be Year 2000
ready. In addition, Management has completed the evaluation and testing of the
Company's internal systems and is in the process of making the necessary
adjustments to become Year 2000 ready. Management does not expect that the cost
of its Year 2000 project will be material to its financial condition or results
of operations or that its business will be adversely affected in any material
respect. Nevertheless, becoming Year 2000 ready is dependent upon 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 in place which includes the
purchase of certain safety stock of inventory should production delays be
experienced.
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 NOVEMBER 1, 1999 By /s/ RICHARD W. SOSHEA
--------------------------------- -------------------------------------
Richard W. Soshea
President & Chief Executive Officer
Date NOVEMBER 1, 1999 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-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 584,184
<SECURITIES> 0
<RECEIVABLES> 1,692,412
<ALLOWANCES> 9,997
<INVENTORY> 998,248
<CURRENT-ASSETS> 3,353,950
<PP&E> 2,760,045
<DEPRECIATION> 2,348,584
<TOTAL-ASSETS> 3,765,411
<CURRENT-LIABILITIES> 1,138,022
<BONDS> 0
0
2,051,149
<COMMON> 3,243,230
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,765,411
<SALES> 2,671,438
<TOTAL-REVENUES> 2,671,438
<CGS> 1,260,153
<TOTAL-COSTS> 1,260,153
<OTHER-EXPENSES> 1,406,029
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,430
<INCOME-PRETAX> 7,686
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,686
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,686
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
