<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, 1998
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
(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.
6,006,769 shares of common stock outstanding as of December 31, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 June 30
1998 1998
ASSETS (Unaudited)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash and cash equivalents ......................................... $ 341,343 $ 304,875
Trade accounts receivable (net of allowance for
doubtful accounts of $46,212 and $34,289 ....................... 1,497,533 1,391,004
Inventories
Raw materials .................................................. 653,700 489,133
Work in process ................................................ 172,669 157,168
Finished goods ................................................. 369,954 402,060
----------- -----------
Total inventories ............................ 1,196,323 1.048,361
Other current assets .............................................. 38,142 14,574
----------- -----------
Total current assets ......................... 3,073,341 2,758,814
----------- -----------
Property, plant and equipment - at cost ................................. 2,516,411 2,448,646
Less accumulated depreciation .................................. (2,268,017) (2,197,586)
----------- -----------
Property, plant and equipment - net .......... 248,394 251,060
----------- -----------
TOTAL ................................................................... $ 3,321,735 $ 3,009,874
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities
Accounts payable - trade .......................................... $ 482,565 $ 587,199
Accrued compensation and benefits ................................. 366,521 369,696
Accrued warranty expense .......................................... 55,342 35,510
Other accrued expenses ............................................ 66,208 101,620
----------- -----------
Total current liabilities .................... 970,636 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
($2,151,282 liquidation preference; or $2,00 per share) .... 2,063,149 2,063,149
Common stock - no par value; authorized 20,000,000 shares;
6,006,796 and 5,606,796shares issued and
outstanding, respectively .................................. 3,202,685 2,998,685
Accumulated deficit ............................................... (2,914,735) (3,145,985)
----------- -----------
Stockholders' equity .......................................... 2,351,099 1,915,849
----------- -----------
TOTAL ................................................................... $ 3,321,735 $ 3,009,874
=========== ===========
</TABLE>
See Notes to Financial Statements. 2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31 Ended December 31
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 2,462,746 $ 2,122,406 $ 5,094,842 $ 4,361,875
Cost of goods sold ............................... 1,247,897 1,216,085 2,588,044 2,507,250
----------- ----------- ----------- -----------
Gross margin on sales ............................ 1,214,849 906,321 2,506,798 1,854,625
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative ........ 858,939 724,274 1,765,177 1,415,985
Engineering and development ................ 238,199 322,317 513,179 748,333
----------- ----------- ----------- -----------
Total operating expenses ....... 1,097,138 1,046,591 2,278,356 2,164,318
----------- ----------- ----------- -----------
Income (loss) from operations .................... 117,711 (140,270) 228,442 (309,693)
Other income (expense)-net ....................... 3,346 2,039 2,808 (16,907)
----------- ----------- ----------- -----------
Income (loss) before tax ......................... 121,057 (138,231) 231,250 (326,600)
----------- ----------- ----------- -----------
Income (loss) tax provision ...................... -
----------- ----------- ----------- -----------
Net income (loss) ................................ $ 121,057 $ (138,231) $ 231,250 $ (326,600)
=========== =========== =========== ===========
Basic net (loss) income per common share......... $ .02 $ (.02) $ .03 $ (.05)
=========== =========== =========== ===========
Diluted net income (loss) per common and
common equivalent share..................... $ .02 $ (.02) $ .03 $ (.05)
=========== =========== =========== ===========
Average common shares (including preferred)
Outstanding ................................. 7,082,410 6,682,437 7,006,410 6,682,437
Average common and common
equivalent shares outstanding ................ 7,173,559 6,682,437 7,144,180 6,682,437
</TABLE>
See Notes to Financial Statements. 3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended December 31
1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net income (loss) ......................................................... $ 231,250 $(326,600)
Adjustments to reconcile net income (loss) to net cash used
by operating activities:
Depreciation ........................................................ 70,431 70,100
Changes in:
Trade accounts receivable ........................................... (106,529) 120,248
Inventories ......................................................... (147,962) 303,031
Accounts payable and accrued liabilities ............................ (123,389) (163,887)
Other ............................................................... (23,568) (46,218)
--------- ---------
Cash used for operating activities ............. (99,767) (43,326)
Cash flows investing activities:
Investment in property, plant and equipment ......................... (67,765) (52,016)
--------- ---------
Cash used by investing activities .............. (67,765) (52,016)
Cash flows from financing activities:
Note payable to bank ................................................ (200,000)
Employee stock purchases ............................................ 204,000 -
--------- ---------
Cash provided by (used for) financing activities 204,000 (200,000)
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Increase (decrease) in cash and equivalents ............................... 36,468 (295,342)
Cash and cash equivalents, beginning of period ............................ 304,875 530,074
--------- ---------
Cash and cash equivalents, end of period .................................. $ 341,343 $ 234,732
========= =========
</TABLE>
See Notes to Financial Statements. 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 this total, options to
purchase 651,000 shares of common stock are outstanding and 399,000 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.
2. FEDERAL INCOME TAX
At December 31, 1998, approximately $12,227,000 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 a fair statement of the results for the
interim periods presented. The results of operations for the period ending
December 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, 1998, audited financial statements.
5
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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.
RESULTS OF OPERATIONS
The second fiscal quarter ending December 31, 1998, resulted in profits of
$121,000 on sales of $2,463,000, compared to a loss of $138,000 on sales of
$2,122,000 for the same quarter of the prior year. Net sales increased 16% over
the second quarter of fiscal year 1998 and the increases were in all major
product families. Gross margins increased from 43% to 49% due to increasing
sales of software-based products as well as proprietary semiconductors. Second
quarter operating expenses increased 5% over the same quarter in the prior year.
However, engineering and development expense decreased 26% in the second quarter
of fiscal 1999 due to unusually high expenditures in the prior year on the
OfficeLink2000 project. Sales and marketing expenses increased in the current
year as the Company shifted resources to the growing markets for telecommuting
and remote access.
For the six months ended December 31, 1998 and 1997, net sales were $5,095,000
and $4,362,000, respectively. Increased sales in all product areas contributed
to the overall increase in net sales of 17%. These increases are due to growing
acceptance of OfficeLink2000, new applications for the Company's line sharing
products, and increasing sales of the Company's proprietary semiconductors.
Each of these areas had increased gross margins as well as increased sales,
which resulted in an improvement in the Company's overall gross margin to 49%
from 43% in the prior year. Operating expenses increased 5% over the first six
months of the prior year. This reflects a 31% decrease in engineering as
development projects were completed and an increase of 25% in sales, and general
and administrative expenses in support of the introduction of these new products
to the marketplace.
At December 31, 1998, approximately $12,227,000 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 approximately $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
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 are faced.
Management has completed its review of the Company's products and has
determined them to be Year 2000 ready. The evaluation and testing of the
Company's internal systems is underway and approximately 60% complete with a
goal of completion by the end of fiscal 1999. 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.
6
<PAGE>
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
The Company had $341,000 of cash on hand at December 31, 1998, and no borrowings
outstanding on its line of credit. The Company's working capital position is
$2,103,000 an improvement over the prior year of 43%.
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 its 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. The change will contribute to reduced overhead costs beginning
February 1999.
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
The Company's Annual Meeting of Shareholders was held on October
29, 1998. Out of 6,006,796 shares of common stock entitled to
vote at the meeting, there were present in person or by proxy
3,814,954 shares. Out of 1,075,641 shares of preferred stock
entitled to vote at the meeting, there were present in person
or by proxy 548,481 shares.
(a) To elect directors:
<TABLE>
<CAPTION>
For Against Abstain Not Voted
-----------------------------------------------------
<S> <C> <C> <C> <C>
Common 3,756,771 58,183 0 2,191,842
Preferred 548,481 0 0 527,160
</TABLE>
(b) To approve an amendment to the Corporation's 1992 Stock
Option Plan increasing the number of shares of common stock
upon the exercise of stock options granted thereunder.
<TABLE>
<CAPTION>
For Against Abstain Not Voted
-----------------------------------------------------
<S> <C> <C> <C> <C>
Common 3,643,235 112,517 59,202 2,191,842
Preferred 542,826 1,398 4,257 527,160
</TABLE>
(c) To ratify the appointment of PricewaterhouseCoopers LLP as
auditors for the current fiscal year.
<TABLE>
<CAPTION>
For Against Abstain Not Voted
-----------------------------------------------------
<S> <C> <C> <C> <C>
Common 3,750,363 4,000 60,591 2,191,842
Preferred 547,885 596 0 527,160
</TABLE>
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 January 28, 1999 By /s/ RICHARD W. SOSHEA
--------------------------- --------------------------
Richard W. Soshea
President & Chief Executive
Officer
Date January 28, 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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 341,343
<SECURITIES> 0
<RECEIVABLES> 1,497,533
<ALLOWANCES> 46,212
<INVENTORY> 1,196,323
<CURRENT-ASSETS> 3,073,341
<PP&E> 2,516,411
<DEPRECIATION> 2,268,017
<TOTAL-ASSETS> 3,321,735
<CURRENT-LIABILITIES> 970,636
<BONDS> 0
0
2,063,149
<COMMON> 3,202,685
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,321,735
<SALES> 5,094,842
<TOTAL-REVENUES> 5,094,842
<CGS> 2,506,798
<TOTAL-COSTS> 2,506,798
<OTHER-EXPENSES> 2,278,356
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,808
<INCOME-PRETAX> 231,250
<INCOME-TAX> 0
<INCOME-CONTINUING> 231,250
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 231,250
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
