<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 March 31, 2000
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
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(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.
6,284,553 shares of common stock outstanding as of March 31, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELTONE CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31 June 30
ASSETS 2000 1999
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets
Cash and cash equivalents ............................................. $ 217,589 $ 780,590
Trade accounts receivable (net of allowance for
doubtful accounts of $22,255 and $35,260) ......................... 1,868,196 1,583,099
Inventories
Raw materials ...................................................... 630,007 413,326
Work in process .................................................... 157,874 61,818
Finished goods ..................................................... 337,144 430,054
----------- -----------
Total inventories ................................ 1,125,025 905,198
Other current assets .................................................. 101,995 76,873
----------- -----------
Total current assets ............................. 3,312,805 3,345,760
----------- -----------
Property, plant and equipment - at cost ..................................... 2,193,881 2,702,764
Less accumulated depreciation ...................................... (1,708,451) (2,319,958)
----------- -----------
Property, plant and equipment - net .............. 485,430 382,806
----------- -----------
TOTAL ....................................................................... $ 3,798,235 $ 3,728,566
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities
Accounts payable - trade .............................................. $ 439,273 $ 420,313
Accrued compensation and benefits ..................................... 611,559 562,682
Accrued warranty expense .............................................. 46,754 52,483
Other accrued expenses ................................................ 109,819 64,830
Note payable - current portion ........................................ 31,163 29,384
----------- -----------
Total current liabilities ........................ 1,238,568 1,129,692
----------- -----------
Note payable - long-term portion ............................................ 13,709 37,311
Stockholders' equity
Convertible preferred stock - no par value; authorized
6,000,000 shares; 915,134 and 1,072,641
shares issued and outstanding .................................. 1,742,136 2,057,149
Common stock - no par value; authorized 20,000,000 shares;
6,284,553 and 6,006,796
shares issued and outstanding .................................. 3,571,200 3,208,685
Accumulated deficit ................................................ (2,767,378) (2,704,271)
----------- -----------
Stockholders' equity ........................................... 2,545,958 2,561,563
----------- -----------
TOTAL ....................................................................... $ 3,798,235 $ 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 Nine Months
Ended March 31 Ended March 31
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ................................ $ 2,889,273 $ 2,542,529 $ 8,547,602 $ 7,637,370
Cost of goods sold ....................... 1,372,199 1,261,754 4,005,568 3,849,797
----------- ----------- ----------- -----------
Gross margin on sales .................... 1,517,074 1,280,775 4,542,034 3,787,573
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative 1,252,638 982,108 3,635,843 2,747,287
Engineering and development ........ 345,093 249,731 973,647 762,910
----------- ----------- ----------- -----------
Total operating expenses 1,597,731 1,231,839 4,609,490 3,510,197
----------- ----------- ----------- -----------
(Loss) income from operations ............ (80,657) 48,936 (67,456) 277,376
Other income (expense) ................... (599) (1,121) 4,349 1,689
----------- ----------- ----------- -----------
(Loss) income before tax ................. (81,256) 47,815 (63,107) 279,065
----------- ----------- ----------- -----------
Income tax provision ..................... ----------- ----------- ----------- -----------
Net (loss) income ........................ $ (81,256) $ 47,815 $ (63,107) $ 279,065
=========== =========== =========== ===========
Basic net income (loss) per common share . $ (.01) $ .01 $ (.01) $ .04
=========== =========== =========== ===========
Diluted net income (loss) per share ...... $ (.01) $ .01 $ (.01) $ .04
=========== =========== =========== ===========
Weighted average common shares
(including preferred) outstanding .. 7,187,312 7,082,410 7,164,512 7,082,410
Weighted average common and potential
common shares outstanding .......... 7,187,312 7,163,955 7,164,512 7,110,540
</TABLE>
See Notes to Financial Statements. 3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
<TABLE>
TELTONE CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended March 31
- --------------------------------------------------------------------------------------------------
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income .............................................. $ (63,107) $ 279,065
Adjustments to reconcile net income (loss) to net cash used
for operating activities:
Depreciation ............................................. 93,221 95,978
Changes in:
Trade accounts receivable ................................ (285,097) (349,153)
Inventories .............................................. (219,827) 16,174
Accounts payable and accrued liabilities ................. 107,097 (116,475)
Other current assets ..................................... (25,122) (93,225)
---------- ---------
Cash used for operating activities .. (392,835) (167,636)
Cash flows from investing activities:
Investment in property, plant and equipment .............. (195,845) (119,864)
---------- ---------
Cash used for investing activities .. (195,845) (119,864)
Cash flows from financing activities:
Net repayment of note payable ............................ (21,823)
Employee stock sales, net ................................ 47,502 204,000
---------- ---------
Cash provided by financing activities 25,679 204,000
---------- ---------
(Decrease) in cash and cash equivalents ........................ (563,001) (83,500)
Beginning of period ............................................ 780,590 304,875
---------- ---------
Cash and cash equivalents, end of period ....................... $ 217,589 $ 221,375
========== =========
</TABLE>
See Notes to Financial Statements. 4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (continued)
TELTONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
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 March 31, 2000, 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. Portions of the accompanying financial
statements are derived from the audited financial statements of the Company
for the year ended June 30, 1999.
The Securities and Exchange Commission issued Staff Accounting Bulletin (SAB)
No. 101 "Revenue Recognition in Financial Statements" in December 1999. The
SAB summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in the financial statements.
Adoption is required by the first quarter of fiscal 2001 and early adoption
is permitted. The Company has adopted the provisions of SAB No. 101. Such
adoption had no effect on the financial statements.
2. 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 (Private Branch Exchange) 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.
5
<PAGE>
The ASIC segment includes a wide selection of proprietary ASIC solutions for
telecom equipment manufacturers.
The following tables set forth the net sales and net income (loss) by
segment.
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------------------------------------------
NET SALES BY SEGMENT
(unaudited)
Three Months Ended March 31
Remote Telecom Company
Fiscal Year Voice Equipment ASICs Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 738 1,543 608 2,889
1999 311 1,593 639 2,543
<CAPTION>
Nine Months Ended March 31
Remote Telecom Company
Fiscal Year Voice Equipment ASICs Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 1,969 4,688 1,891 8,548
1999 738 4,806 2,093 7,637
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<CAPTION>
NET INCOME (LOSS) BY SEGMENT
(unaudited)
Three Months Ended March 31
Remote Telecom Company
Fiscal Year Voice Equipment ASICs Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 (574) 396 97 (81)
1999 (411) 395 64 48
<CAPTION>
Nine Months Ended March 31
Remote Telecom Company
Fiscal Year Voice Equipment ASICs Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 (1,737) 1,418 256 (63)
1999 (1,223) 1,225 277 279
----------------------------------------------------------------------------
</TABLE>
6
<PAGE>
3. STOCK OPTION PLANS
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 1,143,000 shares of common stock are outstanding and 32,500
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.
4. FEDERAL INCOME TAX
At March 31, 2000, approximately $12,100,000 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.
5. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is based on the weighted average
number of common shares and convertible preferred shares outstanding
during the period. Diluted earnings per share is computed using the
weighted average number of common shares outstanding and potential common
shares outstanding. Potential shares result from the assumed exercise of
outstanding stock options. Diluted earnings per share excludes the effect
of antidilutive stock options, aggregating 1,343,000 for the periods
ending March 31, 2000, and 1,123,455 for the periods ending March 31, 1999.
A reconciliation of the number of average common shares outstanding to the
number of average common and potential common shares outstanding is as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31 Ended March 31
2000 1999 2000 1999
------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average common shares
(including preferred)
outstanding - basic 7,187,312 7,082,410 7,164,512 7,082,410
Dilutive effect of warrants and
stock option 81,545 28,130
Weighted average common and
potential common shares
shares outstanding -diluted 7,187,312 7,163,955 7,164,512 7,110,540
</TABLE>
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.
In the third fiscal quarter ending March 31, 2000, the Company generated a net
loss of $81,000 on sales of $2,889,000 compared to profits of $48,000 on sales
of $2,542,500 in the same quarter of the prior year. While sales increased 14%
which was due to increasing sales in the Remote Voice segment, operating
expenses increased 30% due to continued investment in this expanding market for
remote access to headquarters PBX features. Sales for Remote Voice products more
than doubled over the prior year while each of the other product segments
decreased slightly. Gross Margin increased from 50% to 53% due to the higher
software content in the Remote Voice products.
In the nine months ending March 31, 2000, net sales increased 12% from
$7,637,000 to $8,548,000 due entirely to growth in the Remote Voice segment.
Gross margins increased to 53% from 50% due to the shift in product mix to
software. Operating expenses increased 31% due to increased expenses associated
with the addition of personnel to support the Remote Voice segment.
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 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 "NOTES TO FINANCIAL STATEMENTS - 2. BUSINESS SEGMENT
INFORMATION" for additional 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 segment has more than doubled its net
sales in both the quarter and the nine month period ending March 31, 2000. The
growth in this segment is expected to continue, though growth at the rates seen
in recent quarters cannot be assured. The loss in the segment has also grown
over the prior periods due to the increased investment in R&D as well and Sales
and Marketing in an effort to maximize the potential of this product line.
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. While Net Sales have decreased slightly
(approximately 2% over the prior year in both the quarter and the nine month
period). Income has remained constant due to improving margins as the product
mix shifts towards higher end test equipment with software content.
8
<PAGE>
The ASIC segment includes a wide selection of proprietary ASIC solutions for
telecom equipment manufacturers. Net Sales in this segment have decreased 5% in
the last quarter and 10% in the nine month period ending March 31, 2000, due to
declining sales of the Company's lower margin semi-conductors This decline in
sales of low-margin semi-conductors has resulted in an increase in gross margins
for this segment to 44% for the nine month period ending March 31, 2000,
compared to 40% in the same period of the prior year and an increase to 45% for
the quarter compared to 42% in the same quarter of the prior year.
The Company has approximately $12,100,000 in net operating loss carryforwards
available to offset future taxable income which expire from 2001 to 2013. If
substantial changes in the Company's ownership should occur, there may be annual
limitations on the utilization of such carryforwards. 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 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 March 31, 2000, there were no borrowings outstanding under
this line. The Company had cash on hand at March 31, 2000, of $218,000.
During the first nine months of fiscal 2000 options to purchase 117,250 shares
of common stock were exercised at prices ranging from $.33 to $.63, which
provided the Company with $48,000 in cash for use in its operations.
During the first quarter 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.
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
<TABLE>
<S> <C>
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
</TABLE>
A. Exhibits filed herewith:
3 Articles of Incorporation and bylaws(3)
10.1 Teltone Corporation 1983 Stock Option Plan, as amended(1)
10.2 Teltone Corporation 1989 Employees' Stock Purchase Plan(2)
10.5 building lease covering Bothell, Washington, property(6)
10.6 Teltone Corporation 1992 Stock Option Plan(7)
27 Financial Data Schedules
28 Building lease covering Bothell, Washington, property (8)
(1) Incorporated herein by reference to the Corporation's
Registration Statement on Form S-8,
Commission file 33-29304.
(2) Incorporated herein by reference to the Corporation's
Registration Statement on Form S-8,
Commission file No. 33-28779.
(3) Incorporated herein by reference to the Corporation's Annual
Report on Form 10-K for the fiscal
year ended June 30, 1983, Commission file No. 0-11275.
(4) Incorporated herein by reference to the Corporation's
Registration Statement on Form S-1,
Commission file No. 33-1703.
(5) Incorporated herein by reference to the Corporation's Annual
Report on Form 10-K for the fiscal
year ended June 30, 1987, Commission file No. 0-11275.
(6) Incorporated herein by reference to the Corporation's Annual
Report on Form 10-K for the fiscal
year ended June 30, 1991, Commission file No. 0-11275.
(7) Incorporated herein by reference to the Corporation's Annual
Report on Form 10-K for the fiscal
year ended June 30, 1992, Commission file No. 0-11275.
(8) Incorporated herein by reference to the Corporation's Annual
Report on Form 10-KSB for the fiscal
year ended June 30, 1998, Commission file No. 0-11275.
B. 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 MAY 11, 2000 By /S/ RICHARD W. SOSHEA
-------------------- ------------------------------------
Richard W. Soshea
President & Chief Executive Officer
Date MAY 11, 2000 By /S/ DEBRA L. GRIFFITH
-------------------- ------------------------------------
Debra L. Griffith
Vice President Finance & Chief
Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000096890
<NAME> TELTONE CORP.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 217,589
<SECURITIES> 0
<RECEIVABLES> 1,868,196
<ALLOWANCES> 22,255
<INVENTORY> 1,125,025
<CURRENT-ASSETS> 3,312,805
<PP&E> 2,193,881
<DEPRECIATION> 1,708,451
<TOTAL-ASSETS> 3,798,235
<CURRENT-LIABILITIES> 1,238,568
<BONDS> 0
0
1,742,136
<COMMON> 3,571,200
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,798,235
<SALES> 8,547,602
<TOTAL-REVENUES> 8,547,602
<CGS> 4,005,568
<TOTAL-COSTS> 4,005,568
<OTHER-EXPENSES> 4,609,490
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,349
<INCOME-PRETAX> (63,107)
<INCOME-TAX> 0
<INCOME-CONTINUING> (63,107)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (63,107)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
