<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, 1999
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.
6,099,296 shares of common stock outstanding as of December 31, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTONE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 June 30
1999 1999
ASSETS (Unaudited)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
Current assets
Cash and cash equivalents ................................... $ 206,551 $ 780,590
Trade accounts receivable (net of allowance for
doubtful accounts of $28,368 (unaudited) and $35,260) .... 1,609,267 1,583,099
Inventories
Raw materials ............................................ 585,825 413,326
Work in process .......................................... 131,919 61,818
Finished goods ........................................... 427,979 430,054
----------- -----------
Total inventories ...................... 1,145,723 905,198
Other current assets ........................................ 117,257 76,873
----------- -----------
Total current assets ................... 3,078,798 3,345,760
----------- -----------
Property, plant and equipment - at cost ........................... 2,831,139 2,702,764
Less accumulated depreciation ............................... (2,376,996) (2,319,958)
----------- -----------
Property, plant and equipment - net .... 454,143 382,806
----------- -----------
TOTAL ............................................................. $ 3,532,941 $ 3,728,566
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------
Current liabilities
Accounts payable - trade .................................... $ 295,691 $ 420,313
Accrued compensation and benefits ........................... 491,638 562,682
Accrued warranty expense .................................... 43,768 52,483
Other accrued expenses ...................................... 41,299 64,830
Note payable - current portion .............................. 30,558 29,384
----------- -----------
Total current liabilities .............. 902,954 1,129,692
----------- -----------
Note payable - long-term portion .................................. 21,730 37,311
Stockholders' equity
Convertible preferred stock - no par value; authorized
6,000,000 shares; 1,069,641 (unaudited) 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 (unaudited) and 6,006,796
shares issued and outstanding ............................ 3,243,230 3,208,685
Accumulated deficit ......................................... (2,686,122) (2,704,271)
----------- -----------
Stockholders' equity ..................................... 2,608,257 2,561,563
----------- -----------
TOTAL ............................................................. $ 3,532,941 $ 3,728,566
=========== ===========
</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
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ................................. $2,986,891 $2,462,746 $5,658,328 $5,094,842
Cost of goods sold ........................ 1,373,216 1,247,897 2,633,368 2,588,044
---------- ---------- ---------- ----------
Gross margin on sales ..................... 1,613,675 1,214,849 3,024,960 2,506,798
---------- ---------- ---------- ----------
Operating expenses
Selling, general and administrative . 1,285,782 858,939 2,383,205 1,765,177
Engineering and development ......... 319,948 238,199 628,554 513,179
---------- ---------- ---------- ----------
Total operating expenses 1,605,730 1,097,138 3,011,759 2,278,356
---------- ---------- ---------- ----------
Income from operations .................... 7,945 117,711 13,201 228,442
Other income .............................. 2,518 3,346 4,948 2,808
---------- ---------- ---------- ----------
Income before tax ......................... 10,463 121,057 18,149 231,250
---------- ---------- ---------- ----------
Income tax provision ......................
---------- ---------- ---------- ----------
Net income ................................ $ 10,463 $ 121,057 $ 18,149 $ 231,250
========== ========== ========== ==========
Basic net income per common share ......... $ .00 $ .02 $ .00 $ .03
========== ========== ========== ==========
Average common shares (including preferred)
outstanding .......................... 7,171,937 7,082,410 7,140,730 7,006,410
Diluted net income per common and
common equivalent share .............. $ .00 $ .02 $ .00 $ .03
========== ========== ========== ==========
Average common and common
equivalent shares outstanding ......... 7,613,310 7,173,559 7,603,323 7,144,180
</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
1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 18,149 $ 231,250
Adjustments to reconcile net income to net cash used
for operating activities:
Depreciation ............................................. 57,038 70,431
Changes in:
Trade accounts receivable ................................ (26,168) (106,529)
Inventories .............................................. (240,525) (147,962)
Accounts payable and accrued liabilities ................. (227,912) (123,389)
Other current assets ..................................... (40,384) (23,568)
--------- ---------
Cash used for operating activities ....... (459,802) (99,767)
Cash flows from investing activities:
Investment in property, plant and equipment .............. (128,375) (67,765)
--------- ---------
Cash used for investing activities ....... (128,375) (67,765)
Cash flows from financing activities:
Net repayment of note payable ............................ (14,407)
Employee stock sales, net ................................ 28,545 204,000
--------- ---------
Cash provided by financing activities..... 14,138 204,000
--------- ---------
(Decrease) increase in cash .................................... (574,039) 36,468
Beginning of period ............................................ 780,590 304,875
--------- ---------
Cash and cash equivalents, end of period ....................... $ 206,551 $ 341,343
========= =========
</TABLE>
See Notes to Financial Statements. 4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS SEGMENT INFORMATION
The Company has three business segments: Remote Voice, Telecom Equipment, and
ASICs (Application Specific Integrated Circuits).
The Remote Voice segment includes the OfficeLink family of remote voice
offerings which enable call center agents and other telecommuters to remotely
access an enterprise phone without the need for proprietary hardware at the
remote site.
The Telecom Equipment segment includes a line of telephone line simulators
and emulators which provide extensive PBX and central office functionality
for testing, training, and demonstration of telecommunications equipment, as
well as a recently announced simulator for digital subscriber lines called
the Telecom Simulation Platform (TSP). Also included in this segment is a
family of industrial grade line sharing products.
The ASIC segment includes a wide selection of proprietary ASIC solutions for
telecom equipment manufacturers.
The following table sets forth the net sales and net income (loss) by
segment.
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------------
NET SALES BY SEGMENT
Three Months Ended December 31
Telecom Company
Fiscal Year Remote Voice Equipment ASICs Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 613 1,667 707 2,987
1999 123 1,568 772 2,463
Six Months Ended December 31
Telecom Company
Fiscal Year Remote Voice Equipment ASICs Total
- -------------------------------------------------------------------------------------
2000 1,231 3,144 1,283 5,658
1999 427 3,213 1,455 5,095
- -------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
NET INCOME (LOSS) BY SEGMENT
Three Months Ended December 31
Telecom Company
Fiscal Year Remote Voice Equipment ASICs Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 (634) 553 91 10
1999 (433) 402 152 121
Six Months Ended December 31
Telecom Company
Fiscal Year Remote Voice Equipment ASICs Total
- -------------------------------------------------------------------------------------
2000 (1,163) 1,022 159 18
1999 (810) 830 211 231
- -------------------------------------------------------------------------------------
</TABLE>
2. 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 this total, options to
purchase 1,176,500 shares of common stock are outstanding and 29,750 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.
3. FEDERAL INCOME TAX
At December 31, 1999, approximately $12,200,000 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.
6
<PAGE>
4. 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.
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>
Three Months Six Months
Ended December 31 Ended December 31
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Average common shares (including
preferred) outstanding 7,171,937 7,082,410 7,140,730 7,006,410
Dilutive effect of warrants and
stock options 441,373 91,149 462,593 137,770
-------- ------- -------- --------
Average common and common
equivalent shares outstanding 7,613,310 7,173,559 7,603,323 7,144,180
</TABLE>
The unaudited Interim Financial Statements reflect all adjustments that 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 December 31, 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.
7
<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.
Second fiscal quarter profits were $10,000 on sales of $2,987,000, compared
to profits of $121,000 on sales of $2,463,000 for the second quarter of 1999.
Net sales increased 21% due to increasing sales of remote voice products.
Gross margins increased from 49% to 54% due to increasing sales of
software-based products both in the remote voice products as well as in the
test and demonstration tools. Second quarter operating expenses increased 46%
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 and marketing, resulting in an increase in the total
number of employees to 75 from 64 at June 30, 1999.
For the six months ended December 31, 1999 and 1998, net sales were
$5,658,000 and $5,095,000, respectively. This increase was due to growing
acceptance of the Company's remote voice products in an expanding market for
telecommuting solutions. The Company's gross margin increased to 53% from 49%
in the prior year due to the shift in sales to software based products.
Operating expenses increased 32% over the first six months of the prior year.
This reflects a 22% increase in engineering and an increase of 35% in sales,
and general and administrative expenses in support of the introduction of
these newer products to the marketplace.
The Company has three business segments; Remote Voice, Telecom Equipment and
ASICs (Application Specific Integrated Circuits). Each business segment has
unique strategic considerations, and as a result, the Company has engaged the
services of Alliant Partners to assist in the evaluation of strategic
alternatives for these business segments. Alliant Partners has headquarters
in Silicon Valley and provides financial advisory services for technology
companies. (See footnote #1 for Company business segment financial
information).
The Remote Voice segment includes the OfficeLink family of remote voice
offerings which enable call center agents and other telecommuters to remotely
access an enterprise phone without the need for proprietary hardware at the
remote site. OfficeLink 2000 is an IP-based remote voice solution that
provides digital phone emulation for Lucent, Siemens and Nortel PBX/ACDs
through an easy-to-use Windows PC interface.
The Telecom Equipment segment includes a line of telephone line simulators
and emulators which provide extensive PBX and central office functionality
for testing, training, and demonstration of telecommunications equipment, as
well as a recently announced simulator for digital subscriber lines called
the Telecom Simulation Platform (TSP). Also included in this segment is a
family of industrial grade line sharing products.
The ASIC segment includes a wide selection of proprietary ASIC solutions for
telecom equipment manufacturers.
8
<PAGE>
At December 31, 1999, approximately $12,200,000 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 December 31, 1999, there were no borrowings outstanding under
this line. The Company had cash on hand at December 31, 1999, of $207,000.
During the first fiscal half of fiscal 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.
During the first five weeks of calendar 2000, the Company did not encounter any
disruption to its business operations due to Year 2000 issues in its internal
systems and so far considers the transition to calendar year 2000 to be smooth.
While still too early to determine the effects of the Year 2000 issues on its
transactions with customers and suppliers, so far the Company has not
encountered any significant disruptions to its business operations. The Company
is continuing to monitor closely both its internal systems and transactions with
customers and suppliers for any indication of Year 2000 related problems.
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.
9
<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
November 4, 1999. Out of 6,099,296 shares of common stock
entitled to vote at the meeting, there were present in person
or by proxy 4,765,344 shares. Out of 1,069,641 shares of
preferred stock entitled to vote at the meeting, there were
present in person or by proxy 612,227 shares.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
a) To elect directors:
For Against Abstain Not Voted
----------------------------------------------------
Common 4,743,235 22,109 0 1,333,952
Preferred 612,227 0 0 457,414
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.
For Against Abstain Not Voted
----------------------------------------------------
Common 3,471,072 165,990 19,847 2,442,387
Preferred 442,408 5,759 0 624,474
c) To ratify the appointment of PricewaterhouseCoopers
LLP as auditors for the current fiscal year.
For Against Abstain Not Voted
----------------------------------------------------
Common 4,725,113 4,400 35,831 1,333,952
Preferred 612,227 0 0 457,414
</TABLE>
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None
10
<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 February 14, 2000 By /s/ RICHARD W. SOSHEA
------------------------- -------------------------------------
Richard W. Soshea
President & Chief Executive Officer
Date February 14, 2000 By /s/ DEBRA L. GRIFFITH
------------------------- -------------------------------------
Debra L. Griffith
Vice President Finance & Chief
Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 206,551
<SECURITIES> 0
<RECEIVABLES> 1,609,267
<ALLOWANCES> 28,368
<INVENTORY> 1,145,723
<CURRENT-ASSETS> 3,078,798
<PP&E> 2,831,139
<DEPRECIATION> 2,376,996
<TOTAL-ASSETS> 3,532,941
<CURRENT-LIABILITIES> 902,954
<BONDS> 0
0
2,051,149
<COMMON> 3,243,230
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,532,941
<SALES> 5,658,328
<TOTAL-REVENUES> 5,658,328
<CGS> 2,633,368
<TOTAL-COSTS> 2,633,368
<OTHER-EXPENSES> 3,011,759
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,948
<INCOME-PRETAX> 18,149
<INCOME-TAX> 0
<INCOME-CONTINUING> 18,149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,149
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
